M/s. Samsung R & D Institute India _ Bangalore Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, (International Taxation), Circle -2(1), Bangalore

ITA 2656/BANG/2019

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 0009 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 20-07-2021
• Assessment Year: 2019-2020
• Appeal Filed On: 27-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Double taxation relief; TDS; Set aside
• Section: 195; 250; 201; 9(1); 9(1); 9(1); 195A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI , JUDICIAL MEMBER IT (IT) A NO S . 2652 TO 2656/BANG/2019 ASSESSMENT YEAR S : 2018 - 19 & 20 19 - 20 SAMSUNG R&D INSTITUTE INDIA BANGALORE PRIVATE LTD., # 2870, PHOENIX BUILDING, BAGMANE CONSTELLATION BUSINESS PARK, OUTER RING ROAD, DODDANEKUDI CIRCLE, MARATHAHALLI POST, BANGALORE 560 095. PAN: AAICS 6290F VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI T. SURYANARAYANA, ADVOCATE RESPONDENT BY : SHRI KANNAN NARAYANAN, JT.C IT(DR)(ITAT), BENGALURU. DATE OF HEARING : 2 0 . 07 .202 1 DATE OF PRONOUNCEMENT : 20 .07 .202 1 O R D E R PER BENCH THESE APPEALS ARE BY THE ASSESSEE DIRECTED AGAIN ST THE COMMON ORDER DATED 28.10.2019 OF THE CIT(APPEALS), BENGALU RU-12, BENGALURU FOR THE ASSESSMENT YEARS 2018-19 & 2019-20. 2. THE ASSESSEE HAS RAISED THE FOLLOWING COMMON GR OUNDS IN ALL THESE APPEALS. THE GROUNDS RAISED FOR AY 2018-19 ARE AS FOLLOWS:- IT(IT)A NOS. 2652 TO 2656/BANG/2019 PAGE 2 OF 6 THE GROUNDS MENTIONED HEREINAFTER ARE WITHOUT PREJ UDICE TO ONE ANOTHER: S. NO. RELEVANT SECTION (S) OF THE ACT ISSUE GROUND OF APPEAL 1 SECTION 250 OF THE INCOME-TAX ACT, 1961 (`THE ACT') ORDER IS BAD IN LAW THA T THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)- 12, BENGALURU [`CIT(A)'] IS BAD IN LAW AND LIABLE TO BE QUASHED. 2A SECTION 195 OF THE ACT TAX IS NOT DEDUCTIBLE THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT ON PAYMENT OF SOFTWARE LICENSE FEE OF INR 45,325,644 MADE TO CADENCE DESIGN SYSTEMS (IRELAND) LTD (`CADENCE') IN TERMS OF THE SOFTWARE LICENSE AND MAINTENANCE AGREEMEN T (`SLMA'). 2B SECTION 195 OF THE ACT TAX IS NOT DEDUCTIBLE THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT TAX DEDUCTION TAX AT SOURCE IS REQUIRED TO BE ENFORCED EVEN IN RESPECT OF GROSS SUMS, THE WHOLE OF WHICH DO NOT REPRESENT INCOME CHARGEABLE TO TAX UN DER THE ACT. 3 ARTICLE 12 OF INDIA IRELAND TAX TREATY (`THE TREATY' OR ' DTAA') SOFTWARE PAYMENT IS NOT IN THE NATURE OF ROYALTY' THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN HOLDING THAT THE SOFTWARE LICENSE FEE OF INR 45,325,644 PAID TO CADENCE IS IN THE NATURE OF 'ROYALTY' AS DEFINED UNDER ARTICLE 12 OF THE TREATY. 4 SECTION 248 OF THE ACT REFUND OF TAXES PAID THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, CIT(A) ERRED IN NOT DIRECTING THE JURISDICTIONAL ASSESSING OFFICER TO REFUND THE TAXES DEDUCTED AT SOURCE OF INR 5,036,182 DEPOSITED BY THE APPELLANT. THE APPELLANT CRAVES LEAVE TO ADD TO AND / OR TO ALTER, AMEND, RESCIND, MODIFY, THE GROUNDS HEREIN ABOVE OR PRODUC E FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 3. THE ASSESSEE IS AN INDIAN COMPANY AND HAS MADE P AYMENTS TO NON-RESIDENT ENTITY VIZ., CADENCE DESIGN SYSTEMS (I RELAND) DEDUCTING TAX AT SOURCE AS PER THE RATES APPLICABLE U/S. 195 R.W.S. 195A OF THE INCOME-TAX ACT, 1961 [THE ACT]. THE ASSESSEE CLAIMED THAT THE PAYMENTS TO NON- RESIDENTS WERE NOT CHARGEABLE TO TAX UNDER THE ACT AND INDIA-IRELAND DTAA IT(IT)A NOS. 2652 TO 2656/BANG/2019 PAGE 3 OF 6 WHICH WAS REJECTED BY THE LOWER AUTHORITIES AND HEN CE THESE APPEALS BY THE ASSESSEE BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THE ISSUE IN DISPUTE IN ALL THESE APPEALS IS ISSUE IS SETTLED BY THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSION ER OF INCOME TAX & ANOTHER AIR 2021 SC 124 / 432 ITR 471 (SC). THE APEX COURT IN THE AFORESAID CASE HAS HELD IN PA RAGRAPHS 27, 47, 52, 168 & 169 AS UNDER: 27. THE MACHINERY PROVISION CONTAINED IN SECTION 1 95 OF THE INCOME TAX ACT IS INEXTRICABLY LINKED WITH THE CHARGING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE INCOME TAX ACT, AS A RESULT OF WHI CH, A PERSON RESIDENT IN INDIA, RESPONSIBLE FOR PAYING A SUM OF MONEY, CHARGEABLE UNDER THE PROVISIONS OF [THE] AC T, TO A NON-RESIDENT, SHALL AT THE TIME OF CREDIT OF SUCH AMOUNT TO THE ACCOUNT OF THE PAYEE IN ANY MODE, DEDUCT TAX AT SOURCE AT THE RATE IN FORCE WHICH, UNDER SECTION 2( 37A)(III) OF THE INCOME TAX ACT, IS THE RATE IN FORCE PRESCRI BED BY THE DTAA. IMPORTANTLY, SUCH DEDUCTION IS ONLY TO BE MADE IF THE NON-RESIDENT IS LIABLE TO PAY TAX UNDER THE CHARGING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE INCOME TAX ACT, READ WITH THE DTAA. THUS, IT IS ONL Y WHEN THE NON-RESIDENT IS LIABLE TO PAY INCOME TAX I N INDIA ON INCOME DEEMED TO ARISE IN INDIA AND NO DEDUCTION OF TDS IS MADE UNDER SECTION 195(1) OF THE INCOME TAX ACT, OR SUCH PERSON HAS, AFTER APPLYING SECTION 195(2) O F THE INCOME TAX ACT, NOT DEDUCTED SUCH PROPORTION OF TAX AS IS REQUIRED, THAT THE CONSEQUENCES OF A FAILURE TO DED UCT AND PAY, REFLECTED IN SECTION 201 OF THE INCOME TAX ACT , FOLLOW, BY VIRTUE OF WHICH THE RESIDENT-PAYEE IS DEEMED AN ASSESSEE IN DEFAULT, AND THUS, IS MADE LIABLE TO PAY TAX, INTEREST AND PENALTY THEREON. THIS POSITION IS ALSO MADE AMPLY CLEAR BY THE REFERRAL ORDER IN THE CONCERNED APPEALS FROM THE HIGH COURT OF KARNATAKA, NAMELY, THE JUDGM ENT OF THIS COURT IN GE TECHNOLOGY (SUPRA). IT(IT)A NOS. 2652 TO 2656/BANG/2019 PAGE 4 OF 6 47. IN ALL THESE CASES, THE LICENCE THAT IS G RANTED VIDE THE EULA, IS NOT A LICENCE IN TERMS OF SECTION 30 O F THE COPYRIGHT ACT, WHICH TRANSFERS AN INTEREST IN ALL O R ANY OF THE RIGHTS CONTAINED IN SECTIONS 14(A) AND 14(B) OF THE COPYRIGHT ACT, BUT IS A LICENCE WHICH IMPOSES RESTRICTIONS OR CONDITIONS FOR THE USE OF COMPUTER SOFTWARE. THUS, IT CANNOT BE SAID THAT ANY OF THE E ULAS THAT WE ARE CONCERNED WITH ARE REFERRED TO SECTION 30 OF THE COPYRIGHT ACT, INASMUCH AS SECTION 30 OF THE COPYRIGHT ACT SPEAKS OF GRANTING AN INTEREST IN ANY OF THE RIGHTS MENTIONED IN SECTIONS 14(A) AND 14(B) OF THE COPYRIGHT ACT. THE EULAS IN ALL THE APPEALS BEFORE US DO NOT GRANT ANY SUCH RIGHT OR INTEREST, LEAST OF ALL, A RIGHT OR INTEREST TO REPRODUCE THE COMPUTER SOFTWARE. IN POI NT OF FACT, SUCH REPRODUCTION IS EXPRESSLY INTERDICTED, A ND IT IS ALSO EXPRESSLY STATED THAT NO VESTIGE OF COPYRIGHT IS AT ALL TRANSFERRED, EITHER TO THE DISTRIBUTOR OR TO THE EN D-USER. A SIMPLE ILLUSTRATION TO EXPLAIN THE AFORESAID POSITI ON WILL SUFFICE. IF AN ENGLISH PUBLISHER SELLS 2000 COPIES OF A PARTICULAR BOOK TO AN INDIAN DISTRIBUTOR, WHO THEN RESELLS THE SAME AT A PROFIT, NO COPYRIGHT IN THE AFORESAID BOOK IS TRANSFERRED TO THE INDIAN DISTRIBUTOR, EITHER BY WA Y OF LICENCE OR OTHERWISE, INASMUCH AS THE INDIAN DISTRI BUTOR ONLY MAKES A PROFIT ON THE SALE OF EACH BOOK. IMPOR TANTLY, THERE IS NO RIGHT IN THE INDIAN DISTRIBUTOR TO REPR ODUCE THE AFORESAID BOOK AND THEN SELL COPIES OF THE SAME. ON THE OTHER HAND, IF AN ENGLISH PUBLISHER WERE TO SELL TH E SAME BOOK TO AN INDIAN PUBLISHER, THIS TIME WITH THE RIG HT TO REPRODUCE AND MAKE COPIES OF THE AFORESAID BOOK WIT H THE PERMISSION OF THE AUTHOR IT CAN BE SAID THAT COPYRI GHT IN THE BOOK HAS BEEN TRANSFERRED BY WAY OF LICENCE OR OTHERWISE, AND WHAT THE INDIAN PUBLISHER WILL PAY F OR, IS THE RIGHT TO REPRODUCE THE BOOK, WHICH CAN THEN BE CHARACTERIZED AS ROYALTY FOR THE EXCLUSIVE RIGHT TO REPRODUCE THE BOOK IN THE TERRITORY MENTIONED BY TH E LICENCE. 52. THERE CAN BE NO DOUBT AS TO THE REAL NATURE OF THE TRANSACTIONS IN THE APPEALS BEFORE US. WHAT IS LIC ENSED BY THE FOREIGN, NON-RESIDENT SUPPLIER TO THE DISTRI BUTOR AND RESOLD TO THE RESIDENT END-USER, OR DIRECTLY SU PPLIED TO THE RESIDENT END-USER, IS IN FACT THE SALE OF A PHY SICAL OBJECT WHICH CONTAINS AN EMBEDDED COMPUTER PROGRAMME, AND IS THEREFORE, A SALE OF GOODS, WHICH , AS HAS BEEN CORRECTLY POINTED OUT BY THE LEARNED COUNS EL FOR IT(IT)A NOS. 2652 TO 2656/BANG/2019 PAGE 5 OF 6 THE ASSESSEES, IS THE LAW DECLARED BY THIS COURT IN THE CONTEXT OF A SALES TAX STATUTE IN TATA CONSULTANCY SERVICES V. STATE OF A.P., 2005(1) SCC 308 (SEE PARAGRAPH 27 ). 168. GIVEN THE DEFINITION OF ROYALTIES CONTAINED IN ARTICLE 12 OF THE DTAAS MENTIONED IN PARAGRAPH 41 O F THIS JUDGMENT, IT IS CLEAR THAT THERE IS NO OBLIGATION O N THE PERSONS MENTIONED IN S.195 OF THE INCOME TAX ACT TO DEDUCT TAX AT SOURCE, AS THE DISTRIBUTION AGREEMENT S/ EULAS IN THE FACTS OF THESE CASES DO NOT CREATE ANY INTEREST OR RIGHT IN SUCH DISTRIBUTORS/END-USERS, W HICH WOULD AMOUNT TO THE USE OF OR RIGHT TO USE ANY COPY RIGHT. THE PROVISIONS CONTAINED IN THE INCOME TAX ACT (S. 9(1) (VI), ALONG WITH EXPLANATIONS 2 AND 4 THEREOF), WHI CH DEAL WITH ROYALTY, NOT BEING MORE BENEFICIAL TO THE ASSE SSEES, HAVE NO APPLICATION IN THE FACTS OF THESE CASES. 169. OUR ANSWER TO THE QUESTION POSED BEFORE US, IS THAT THE AMOUNTS PAID BY RESIDENT INDIAN END- USERS/DISTRIBUTORS TO NON-RESIDENT COMPUTER SOFTWAR E MANUFACTURE/SUPPLIERS, AS CONSIDERATION FOR THE RESALE/USE OF THE COMPUTER SOFTWARE THROUGH EULAS/ DISTRIBUTION AGREEMENTS, IS NOT THE PAYMENT OF ROYA LTY FOR THE USE OF COPYRIGHT IN THE COMPUTER SOFTWARE, AND THAT THE SAME DOES NOT GIVE RISE TO ANY INCOME TAXABLE I N INDIA, AS A RESULT OF WHICH THE PERSONS REFERRED TO IN SEC TION 195 OF THE INCOME TAX ACT WERE NOT LIABLE TO DEDUCT ANY TDS UNDER SECTION 195 OF THE INCOME TAX ACT. THE ANSWER TO THIS QUESTION WILL APPLY TO ALL FOUR CATEGORIES OF CASES ENUMERATED BY US IN PARAGRAPH-4 OF THIS JUDGMENT. 170. THE APPEALS FROM THE IMPUGNED JUDGMENTS OF THE HIGH COURT OF KARNATAKA ARE ALLOWED, AND THE AFORES AID JUDGMENTS ARE SET ASIDE. THE RULING OF THE AAR IN C ITRIX SYSTEMS (AAR) (SUPRA) IS SET ASIDE. THE APPEALS FRO M THE IMPUGNED JUDGMENTS OF THE HIGH COURT OF DELHI ARE DISMISSED. 5. BEING SO, THE ISSUE OF RENDERING SOFTWARE SERVIC ES INCLUDING THE ANCILLARY SUPPORT SERVICES BY THE ASSESSEE TO NON-R ESIDENTS IS SQUARELY COVERED BY THE ABOVE JUDGMENT OF HONBLE SUPREME CO URT. ACCORDINGLY, ALL THE APPEALS ARE ALLOWED. IT(IT)A NOS. 2652 TO 2656/BANG/2019 PAGE 6 OF 6 6. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE A RE ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF JULY, 2021. SD/- SD/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 20 TH JULY, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.