Energy Solutions Internation Inc, Texas, U.S.A, Chennai V. DCIT-1, International Taxation, Hyderabad, Hyderabad

ITA 456/HYD/2015

• Counselvise Citation: 45622514 RSA 2015
• Duration Of Justice: 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-10-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 22-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SIRI KUMAR
• Assessee Lawyers: SHARAT RAO
• Keywords: Double taxation relief; Non-deduction of tax
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 456/HYD/2015 ASSESSMENT YEAR: 2011-12 ENERGY SOLUTIONS INTERNATIONAL INC., TEXAS, USA. PAN AACCE 6415G VS. DY. COMMISSIONER OF INCOME- TAX 1, INTERNATIONAL TAXATION, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SHARAT RAO REVENUE BY : SHRI SIRI KUMAR DATE OF HEARING 13-10-2015 DATE OF PRONOUNCEMENT 27-11-2015 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST ASSE SSMENT ORDER PASSED U/S 143(3) READ WITH SECTION 144C OF THE INC OME-TAX ACT (ACT) FOR THE AY 2011-12. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT ENERGY S OLUTIONS INTERNATIONAL INC, THE ASSESSEE, IS A COMPANY INCOR PORATED IN THE UNITED STATES OF AMERICA ('USA') AND A TAX RESIDENT OF USA. THE ASSEESSEE IS A LEADING GLOBAL SUPPLIER OF INNOVATIV E DECISION SUPPORT SOFTWARE PRODUCTS SUCH AS PIPE LINE STUDIO ('PLS'), PIPE LINE MANAGER ('PLM') AND PIPE LINE TRANSPORTER ('PL T') THAT ENHANCE AND INTEGRATE OPERATIONAL EFFICIENCY, COMMERCIAL PR OFITABILITY AND SAFETY ACROSS PIPELINES AS WELL AS THE ENERGY TRANS PORTATION, STORAGE, MARKETING AND DELIVERY FUNCTIONS. 2 ITA NO. 456 /HYD/2015 ENERGY SOLUTIONS INTERNATIONAL INC., 2.1 THE ASSESSEE HAS, DURING THE YEAR UNDER CONSIDE RATION, SOLD THE ABOVE MENTIONED SOFTWARE PRODUCTS TO ENERGY SOL UTIONS INTERNATIONAL (INDIA) PRIVATE LIMITED ['ESI INDIA'] , A GROUP ENTITY INCORPORATED IN INDIA, WHO IN TURN SELLS THE SAME T O ITS CUSTOMERS IN INDIA. THE CUSTOMERS, BASED IN INDIA, PLACE A PURCHASE ORDER WITH ESI INDIA, WHICH INTER ALIA CONSISTS OF: A) SUPPLY OF SOFTWARE (EITHER PLS/PLM/PL T), GENER ALLY USED BY OIL/GAS MANUFACTURING/DISTRIBUTION COMPANIES TO TR ACK THE OIL FLOW, LEAK DETECTION, AND MANAGEMENT OF INVENTORY ACROSS THEIR DISTRIBUTION NETWORK FROM A CENTRAL LOCATION; AND B) OTHER SERVICES COMPRISING OF: - INSTALLATION/COMMISSIONING/TRAINING OF SUCH SOFT WARE; - SUPPORT SERVICES, POST IMPLEMENTATION; AND - PARAMETERS AND SPECIFICATIONS REQUIRED IN THE SO FTWARE. * ESI INDIA, IN TURN, BASED ON ABOVE ORDER FROM TH E CUSTOMER ('END USERS'), PLACES BACK-TO-BACK PURCHASE ORDERS ON THE ASSESSEE. * ESI INDIA EITHER IMPORTS SOFTWARE CDS, OR DOWNLO ADS THE SOFTWARE; AND SUBSEQUENTLY INSTALLS IT ON THE CUST OMER'S MACHINE. THE HARDWARE KEY OR THE SOFT KEY IN RELATION TO THE ABOVE SOFTWARE IS DIRECTLY PROVIDED BY THE APPELLANT TO THE USERS/ CLIENTS IN INDIA. 3 ITA NO. 456 /HYD/2015 ENERGY SOLUTIONS INTERNATIONAL INC., FURTHER, THE END USER LICENSE AGREEMENT ('EULA') , NEEDS TO BE ACCEPTED BY THE CUSTOMER DIRECTLY BEFORE INSTAL LING THE SOFTWARE ON ITS MACHINE. ESI INDIA DOES NOT HAVE ANY ACCESS TO EITHER THE SOURCE CODE OR INTO THE ACTUAL PROGRAMMING CODES PRESENT IN TH E SOFTWARE PRODUCT. NEITHER ESI INDIA NOR THE END USER CUSTOMERS IN INDIA OBTAIN ANY RIGHT TO USE OR MAKE COPIES OF THE SOFTWARE. THE ASSESSEE IS A DISTRIBUTOR SIMPLICITOR, DISTR IBUTING SOFTWARE FOR MARGIN. 2.2 THE ASSESSEE FILED ITS RETURN OF INCOME, RELE VANT TO THE ASSESSMENT YEAR ('AY') 2011-12, ON DECEMBER 18, 201 2 DECLARING 'NIL' TAXABLE INCOME UNDER THE ACT. THE CASE WAS SE LECTED FOR SCRUTINY UNDER CASS. THE DRAFT ASSESSMENT ORDER WAS PASSED BY THE LEARNED ASSESSING OFFICER ('AO') UNDER SECTION 144C OF THE ACT ON MARCH 7, 2014, TREATING THE PAYMENT TOWARDS THE SAL E OF SOFTWARE IN THE NATURE OF ROYALTY TAXABLE AT THE RATE OF 10 PER CENT AS APPLICABLE UNDER THE AMBIT OF THE PROVISIONS OF DTM AND APPLIE D SURCHARGE AT THE RATE OF 7.5 PERCENT ON THE INCOME SO COMPUTED. BASE D ON THE SAME AN UPWARD ADJUSTMENT TO THE TUNE OF RS 1,46,05,511 WAS MADE TO THE INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE AS SESSEE APPROACHED THE HON'BLE DISPUTE RESOLUTION PANEL ('D RP'). THE HON'BLE DRP HAD, IN ITS DIRECTIONS DATED DECEMBER 8 , 2014, OBSERVED THAT IN THE CASE OF ESI INDIA IN AY 2007-08 AND AY 2008-09, THE HONBLE ITAT, HYDERABAD VIDE ITA NO. 1736/HYD/2012, DTD. 06/01/2012 RESTORED THE APPEAL BACK TO THE FILE OF THE AO TO DECIDE THE SAME IN ACCORDANCE WITH LAW ON THE ISSUE OF PAY MENT TO THE ESI US AS ROYALTY AND WHETHER ESI INDIA IS LIABLE TO DEDUCT TAX AT SOURCE U/S 195. THE AO HAS NOT DECIDED THE MATTER Y ET. DRP OBSERVED THAT IT WILL HAVE IMPACT ON THE PRESENT CA SE IN HAND. SINCE 4 ITA NO. 456 /HYD/2015 ENERGY SOLUTIONS INTERNATIONAL INC., THE MATTER HAS NOT REACHED THE FINALITY, DRP REJECT ED THE OBJECTIONS OF THE ASSESSEE. 3.1 CONSEQUENT TO THE DIRECTIONS OF THE HON'BLE DR P, THE LEARNED AO PASSED THE FINAL ASSESSMENT ORDER DATED FEBRUARY 19, 2015 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT, T REATING THE PAYMENT TOWARDS SALE OF SOFTWARE AS ROYALTY. HOWEVER, THE R ATE OF SURCHARGE ON THE APPLICABLE TAX WAS REDUCED TO 2.5 PERCENT AS PER THE DIRECTIONS OF THE DRP. 4. AGGRIEVED BY THE FINAL ASSESSMENT ORDER, THE ASS ESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 5. VIDE ANNEXURE 2, THE ASSESSEE HAS RAISED 10 GROU NDS OF APPEAL AND IN ANNEXURE 3, ASSESSEE HAS FILED CONCISE GROUN DS, WHICH ARE AS FOLLOWS: 1. TO DELETE THE ADDITION AMOUNTING TO RS. 1,46,05, 511 MADE TO THE INCOME OF THE ASSESSEE. 2. TO HOLD THAT THE INCOME OF THE ASSESSEE TOWARDS THE SALE OF SOFTWARE PRODUCTS IS NOT IN THE NATURE OF ROYALTY UNDER THE PROVISIONS OF SECTION 9(1)(VI) OF THE INCOME-TAX A CT, 1961 (THE ACT) AS WELL AS UNDER THE PROVISIONS OF THE DTAA B ETWEEN INDIA AND USA. 6. BEFORE US, THE LD. AR SUBMITTED THAT IN THE CAS E OF ESL LNDIA FOR AY 2007-08 AND AY 2008-09, THE LEARNED AO HAS VIDE ORDER DATED FEBRUARY 23, 2015, AFTER CONSIDERING THE FACTS INVO LVED WITH RESPECT TO THE PAYMENTS TO THE ASSESSEE TOWARDS PURCHASE OF SO FTWARE PRODUCTS, ACCEPTED THE CONTENTIONS OF ESI INDIA THAT SUCH PAY MENTS CANNOT BE TREATED AS ROYALTY AND DELETED THE DISALLOWANCE FOR NON-DEDUCTION OF TAX AT SOURCE UNDER SECTION 40(A)(I) OF THE ACT. TH E LEARNED AO HAD, WHILE HOLDING SO, TOOK INTO ACCOUNT THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF DYNAMIC VERTICAL SO FTWARE INDIA PRIVATE LIMITED (332 ITR 222) AS PER THE DIRECTIONS OF THE HON'BLE TRIBUNAL. LD. AR, THEREFORE, CONTENDED THAT SINCE T HE FACTS IN THE AY 5 ITA NO. 456 /HYD/2015 ENERGY SOLUTIONS INTERNATIONAL INC., UNDER CONSIDERATION ARE IDENTICAL TO THAT AY 2007-0 8 AND 2008-09, THE AO WAS WRONG IN TREATING THE PAYMENTS AS ROYALTY. 7. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE O RDERS OF REVENUE AUTHORITIES. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND PERUSED THE MATERIAL ON RECORD. AS POINTED OUT BY T HE LD. AR, THE ORDERS PASSED BY AO IN 2007-08 AND 2008-09 HAVE BEE N PLACED IN THE PAPER BOOK VIDE PAGES 114 TO 122, WHEREIN THE AO AC CEPTED THE CONTENTIONS OF ESI INDIA THAT SUCH PAYMENTS CANNOT BE TREATED AS ROYALTY AND DELETED THE DISALLOWANCE FOR NON-DEDUCT ION OF TAX AT SOURCE UNDER SECTION 40(A)(I) OF THE ACT. THE ASSES SEE ESI US SOLD THE SOFTWARE TO ESI INDIA AND IN THE ASSESSMENT O F ESI INDIA, IT IS THE PAYMENTS ARE TREATED AS TOWARDS THE PURCHASE OF SOFTWARE AND NOT AS PAYMENT TOWARDS ROYALTY. THE PRINCIPLE NEEDS TO BE APPLIED CONSISTENTLY. IN OUR VIEW, IN THE HANDS OF THE INDI AN COMPANY, WHEN IT IS NOT TREATED AS ROYALTY, THEN, THE SAME CONSIDERA TION SHOULD ALSO BE EXTENDED TO THE SAME TRANSACTION IN THE CASE OF AE I.E. ESI US. IN THE PRESENT CASE, INCOME TOWARDS SALE OF SOFTWARE T O THE INDIAN AE CANNOT BE TREATED AS ROYALTY. HENCE, THE ADDITION MADE BY THE AO TOWARDS ROYALTY IS DELETED. 9. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 27 TH NOVEMBER, 2015. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER AC COUNTANT MEMBER HYDERABAD, DATED: 27 TH NOVEMBER, 2015 KV 6 ITA NO. 456 /HYD/2015 ENERGY SOLUTIONS INTERNATIONAL INC., COPY TO:- 1) ENERGY SOLUTIONS INTERNATIONAL INC, C/O BMR & A SSOCIATES LLP 31, SUDHA CENTRE, 2 ND FLOOR, DR. RADHAKRISHNAN SALAI, MYLAPORE, CHENNAI 600 004. 2) DCIT 1 INTERNATIONAL TAXATION, HYDERABAD 3 DRP, HYDERABAD 4) DIT, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.