M/s Informatica LLC , Bangalore V. Deputy Commissioner of Income Tax Circle-1(2), Bangalore

ITA 2867/BANG/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 8921 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-08-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 16-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Question of law; TDS; Set aside
• Section: 195; 201; 9(1); 9(1); 9(1)

Judgement Text

IT(TP)A NO.2867/BANG/2018 M/S. INFORMATICA LLC, BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL ABENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.2867/BANG/2018 ASSESSMENT YEAR: 2015-16 M/S. INFORMATICA LLC C/O INFORMATICA BUSINESS SOLUTIONS PVT. LTD. NO.66/1, BAGMANE COMMEZ 02, BAGMANE TECH PARK C.V. RAMAN NAGAR BANGALORE 560 093 PAN NO :AACCI2354Q VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1(2) BANGALORE APPELLANT RESPONDENT APPELLANT BY : SHRI T. SURYANARAYANA, A.R. RESPONDENT BY : MS. NEERA MALHOTRA, D.R. DATE OF HEARING : 05.08.2021 DATE OF PRONOUNCEMENT : 05.08.2021 O R D E R PERB.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 16.8.2018 PASSED BY THE A.O. FOR ASSESS MENT YEAR 2015-16 IN PURSUANCE OF DIRECTIONS GIVEN BY LD. DIS PUTE RESOLUTION PANEL (DRP). ALL THE GROUNDS URGED BY THE ASSESSEE ARE DIRECTED AGAINST THE ACTION OF THE A.O. IN ASSESSING THE REC EIPTS BY WAY OF SALE VALUE OF SOFTWARE AND PROVISION OF ANCILLARY S UPPORT SERVICES AS ROYALTY RECEIPTS/FTS INCOME. IT(TP)A NO.2867/BANG/2018 M/S. INFORMATICA LLC, BANGALORE PAGE 2 OF 6 2. THE FACTS RELATING TO THE ISSUE ARE STATED IN BR IEF. THE ASSESSEE IS A COMPANY INCORPORATED IN THE UNITED ST ATES OF AMERICA AND IT IS STATED THAT THE ASSESSEE IS ENGAGED IN TH E BUSINESS OF DEVELOPING, MANUFACTURING AND DISTRIBUTION OF SOFTW ARE PRODUCTS FROM OUTSIDE INDIA AND ALSO PROVIDING ANCILLARY SUP PORT SERVICES FROM OUTSIDE INDIA. THE ASSESSEE HAS ENTERED INTO AGREEMENTS WITH DISTRIBUTORS/RESELLERS/CUSTOMERS IN INDIA FOR SUPPL YING SOFTWARE PRODUCTS AND PROVIDING ANCILLARY SUPPORT SERVICES. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN OF I NCOME DECLARING NIL INCOME. THE A.O. NOTICED THAT THE ASSESSEE HAS RECEIVED A SUM OF RS.42,15,77,354/- TOWARDS SALE OF SOFTWARE LICEN SES AND PROVIDING ANCILLARY SUPPORT SERVICES. THE BREAK-UP OF THE SAME ARE GIVEN BELOW:- SALE OF SOFTWARE PRODUCTS - USD 3,615,851 PROVISION OF SUPPORT SERVICES - USD 3,158,777 THE AO HELD THAT THE ABOVE RECEIPTS ARE LIABLE TO T AXED AS ROYALTY/FEE FOR TECHNICAL SERVICES IN THE HANDS OF THE ASSESSEE. IN THIS REGARD, THE A.O. PLACED RELIANCE ON THE DECISI ON RENDERED BY HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS COMPANY LTD. IN ITA NO.2808 OF 2005 DAT ED 15.10.2011. ACCORDINGLY, HE PROPOSED TO ASSESS THE SALE RECEIPTS ON ACCOUNT OF SALE OF SOFTWARE LICENSES AND SUPPORT SE RVICES AMOUNTING TO RS.42,15,17,354/- AS ROYALTY/FTS INCOME IN THE D RAFT ASSESSMENT ORDER. 3. THE ASSESSEE FILED THE PETITION BEFORE LD. DRP, WHICH HELD THAT THE IMPUGNED RECEIPTS ARE RIGHTLY ASSESSABLE A S ROYALTY INCOME FOR USE OF COPY RIGHT. ACCORDINGLY, THE A.O. PASSE D THE FINAL ASSESSMENT ORDER ASSESSING THE ABOVE SAID INCOME AS ROYALTY/FTS. AGGRIEVED, THE ASSESSEE HAS FILED THIS APPEAL BEFOR E US. IT(TP)A NO.2867/BANG/2018 M/S. INFORMATICA LLC, BANGALORE PAGE 3 OF 6 4. THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS SOL D SOFTWARE PRODUCTS AND ALSO RECEIVED INCOME FOR PROVIDING SUP PORT SERVICES. HE SUBMITTED THAT PROVIDING ANCILLARY SUPPORT SERVI CES IS ALSO RELATED TO SALE OF SOFTWARE PRODUCTS ONLY. HE SUBM ITTED THAT THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT I N THE CASE OF SAMSUNG ELECTRONICS COMPANY LTD. (SUPRA), WHICH WAS RELIED UPON BY THE AO, HAS SINCE BEEN REVERSED BY HONBLE SUPRE ME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE FOR EXCELLE NCE PVT. LTD. (432 ITR 471). THE LD. A.R. FURTHER SUBMITTED THAT AN I DENTICAL ISSUE WAS EXAMINED IN THE ASSESSEES OWN CASE BY THE COOR DINATE BENCH IN ASSESSMENT YEAR 2016-17 AND FOLLOWING DECISION R ENDERED BY HONBLE SUPREME COURT IN THE CASE OF ENGINEERING AN ALYSIS CENTRE FOR EXCELLENCE PVT. LTD., THE COORDINATE BENCH HELD THAT THE RECEIPTS BY WAY OF SALE OF SOFTWARE LICENSES AND PROVISION O F ANCILLARY SUPPORT SERVICES CANNOT BE ASSESSED AS ROYALTY INCO ME. 5. WE HEARD LD. D.R. WHO DID NOT CONTRADICT THE SUB MISSION MADE BY LD. A.R. 6. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN EX AMINED BY THE COORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 2 016-17 AND IT HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: 5. SIMILAR ISSUE FOR AY 2011-12 IN THE CASE OF NICE LTD. CAME UP BEFORE THE HONBLE HIGH COURT OF KARNATAKA IN ITA NO.7/2019 AN D VIDE JUDGMENT DATED 26.3.2021 IT WAS HELD AS UNDER:- 7. THE CONTROVERSY INVOLVED IN THE PRESENT CASE, A S INFORMED BY THE LEARNED COUNSEL FOR THE PARTIES STANDS CONCLUDE D ON ACCOUNT OF THE JUDGMENT DELIVERED BY THE HONBLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOME TAX & ANOTHER AIR 2021 SC 124 / 432 ITR 471 (SC). THE A PEX COURT IN THE AFORESAID CASE HAS HELD IN PARAGRAPHS 27, 47, 52, 168 & 169 AS UNDER: IT(TP)A NO.2867/BANG/2018 M/S. INFORMATICA LLC, BANGALORE PAGE 4 OF 6 27. THE MACHINERY PROVISION CONTAINED IN SECTION 1 95 OF THE INCOME TAX ACT IS INEXTRICABLY LINKED WITH THE CHAR GING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE I NCOME TAX ACT, AS A RESULT OF WHICH, A PERSON RESIDENT IN INDIA, R ESPONSIBLE FOR PAYING A SUM OF MONEY, CHARGEABLE UNDER THE PROVIS IONS OF [THE] ACT, TO A NON-RESIDENT, SHALL AT THE TIME OF CREDI T 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 T HE INCOME TAX ACT, IS THE RATE IN FORCE PRESCRIBED BY THE DTAA. I MPORTANTLY, 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 ONLY WHEN THE NON-RESIDENT IS LIABLE TO PAY INCOME TAX IN 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) OF THE INCOME TAX ACT , NOT DEDUCTED SUCH PROPORTION OF TAX AS IS REQUIRED, THAT THE CON SEQUENCES OF A FAILURE TO DEDUCT AND PAY, REFLECTED IN SECTION 201 OF THE INCOME TAX ACT, FOLLOW, BY VIRTUE OF WHICH THE RESIDENT-PA YEE IS DEEMED AN ASSESSEE IN DEFAULT, AND THUS, IS MADE LIABLE TO PAY TAX, INTEREST AND PENALTY THEREON. THIS POSITION IS ALSO MADE AMP LY CLEAR BY THE REFERRAL ORDER IN THE CONCERNED APPEALS FROM THE HI GH COURT OF KARNATAKA, NAMELY, THE JUDGMENT OF THIS COURT IN GE TECHNOLOGY (SUPRA). 47. IN ALL THESE CASES, THE LICENCE THAT IS GRANTED VIDE THE EULA, IS NOT A LICENCE IN TERMS OF SECTION 30 O F THE COPYRIGHT ACT, WHICH TRANSFERS AN INTEREST IN ALL OR ANY OF T HE RIGHTS CONTAINED IN SECTIONS 14(A) AND 14(B) OF THE COPYRIGHT ACT, B UT IS A LICENCE WHICH IMPOSES RESTRICTIONS OR CONDITIONS FOR THE US E 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 CO PYRIGHT 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 POINT OF FAC T, SUCH REPRODUCTION IS EXPRESSLY INTERDICTED, AND IT IS AL SO EXPRESSLY STATED THAT NO VESTIGE OF COPYRIGHT IS AT ALL TRANSFERRED, EITHER TO THE DISTRIBUTOR OR TO THE END-USER. ASIMPLE ILLUSTRATIO N TO EXPLAIN THE AFORESAID POSITION WILL SUFFICE. IF AN ENGLISH PUBL ISHER SELLS 2000 COPIES OF A PARTICULAR BOOK TO AN INDIAN DISTRIBUTO R, WHO THEN RESELLS THE SAME AT A PROFIT, NO COPYRIGHT IN THE A FORESAID BOOK IS TRANSFERRED TO THE INDIAN DISTRIBUTOR, EITHER BY WA Y OF LICENCE OR OTHERWISE, INASMUCH AS THE INDIAN DISTRIBUTOR ONLY MAKES A PROFIT ON THE SALE OF EACH BOOK. IMPORTANTLY, THERE IS NO RIGHT IN THE INDIAN DISTRIBUTOR TO REPRODUCE THE AFORESAID BOOK AND THEN SELL COPIES OF THE SAME. ON THE OTHER HAND, IF AN ENGLIS H PUBLISHER WERE TO SELL THE SAME BOOK TO AN INDIAN PUBLISHER, THIS TIME WITH THE IT(TP)A NO.2867/BANG/2018 M/S. INFORMATICA LLC, BANGALORE PAGE 5 OF 6 RIGHT TO REPRODUCE AND MAKE COPIES OF THE AFORESAID BOOK WITH 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 FOR, IS THE RIGHT TO REPR ODUCE THE BOOK, WHICH CAN THEN BE CHARACTERIZED AS ROYALTY FOR THE EXCLUSIVE RIGHT TO REPRODUCE THE BOOK IN THE TERRITORY MENTIONED BY THE LICENCE. 52. THERE CAN BE NO DOUBT AS TO THE REAL NATURE OF THE TRANSACTIONS IN THE APPEALS BEFORE US. WHAT IS LICENSED BY THE FO REIGN, NON- RESIDENT SUPPLIER TO THE DISTRIBUTOR AND RESOLD TO THE RESIDENT END- USER, OR DIRECTLY SUPPLIED TO THE RESIDENT END-USER , IS IN FACT THE SALE OF A PHYSICAL OBJECT WHICH CONTAINS AN EMBEDDE D COMPUTER PROGRAMME, AND IS THEREFORE, A SALE OF GOODS, WHICH , AS HAS BEEN CORRECTLY POINTED OUT BY THE LEARNED COUNSEL FOR TH E 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 RO YALTIES CONTAINED IN ARTICLE 12 OF THE DTAAS MENTIONED IN P ARAGRAPH 41 OF THIS JUDGMENT, IT IS CLEAR THAT THERE IS NO OBLI GATION ON THE PERSONS MENTIONED IN S.195 OF THE INCOME TAX ACT TO DEDUCT TAX AT SOURCE, AS THE DISTRIBUTION AGREEMENTS/ EULAS IN TH E FACTS OF THESE CASES DO NOT CREATE ANY INTEREST OR RIGHT IN SUCH D ISTRIBUTORS/END- USERS, WHICH WOULD AMOUNT TO THE USE OF OR RIGHT TO USE ANY COPYRIGHT. THE PROVISIONS CONTAINED IN THE INCOME T AX ACT (S. 9(1) (VI), ALONG WITH EXPLANATIONS 2 AND 4 THEREOF), WHI CH DEAL WITH ROYALTY, NOT BEING MORE BENEFICIAL TO THE ASSESSEES , 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 ENDUSERS/DISTRIBUTO RS TO NON- RESIDENT COMPUTER SOFTWARE MANUFACTURE/SUPPLIERS, A S CONSIDERATION FOR THE RESALE/USE OF THE COMPUTER SO FTWARE THROUGH EULAS/ DISTRIBUTION AGREEMENTS, IS NOT THE PAYMENT OF ROYALTY FOR THE USE OF COPYRIGHT IN THE COMPUTER SOFTWARE, AND THAT THE SAME DOES NOT GIVE RISE TO ANY INCOME TAXABLE IN INDIA, AS A RESULT OF WHICH THE PERSONS REFERRED TO IN SECTION 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. 8. IN THE LIGHT OF THE AFORESAID JUDGMENT DELIVERED BY THE HONBLE SUPREME COURT, THE QUESTION OF LAW FRAMED IN THE PR ESENT APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE. 6. FURTHER, THE JUDGMENT RELIED ON BY THE DRP IN TH E CASE OF SAMSUNG ELECTRONICS (SUPRA) WAS REVERSED BY THE HONBLE SUP REME COURT IN CIVIL APPEAL NO.8733-8734/2018 &ORS. IN THE CASE OF ENGIN EERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED V. CIT &ANR. (SUPRA) WHICH HAS BEEN IT(TP)A NO.2867/BANG/2018 M/S. INFORMATICA LLC, BANGALORE PAGE 6 OF 6 EXTRACTED IN THE FOREGOING PARAGRAPH. BEING SO, THE ISSUE BEFORE US IS ALREADY SETTLED BY THE HONBLE SUPREME COURT IN FAV OUR OF ASSESSEE. 7. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS C ENTRE FOR EXCELLENCE PVT. LTD. (SUPRA) AND ALSO FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN AY 2016-17, WE HOLD THA T RECEIPTS BY WAY OF SALE OF SOFTWARE LICENSES AND PROVISION OF A NCILLARY SUPPORT SERVICES CONNECTED WITH THE SALE OF SOFTWARE PRODUC TS CANNOT BE ASSESSED AS ROYALTY/FTS INCOME IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE A O ON THIS ISSUE. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH AUG, 2021. SD/- (N.V. VASUDEVAN) VICE PRESIDENT SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 5 TH AUG, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE