Energy Solutions International Inc. Texas USA, Chennai V. DCIT-1, International Taxation, Hyderabad, Hyderabad

ITA 506/HYD/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6329 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 12-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MOHAN KUMAR SINGHANIA
• Assessee Lawyers: SHARAT RAO
• Keywords: Double taxation relief
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 506/HYD/2016 ASSESSMENT YEAR: 2012-13 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 MOHAN KUMAR SINGHANIA DATE OF HEARING 26-07-2016 DATE OF PRONOUNCEMENT 29-07-2016 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 ASSESSEE IS A LEADING GLOBAL SUPPLIER OF INNOVATIVE DECISION SUPPORT SOFTWARE PRODUCTS SUCH AS PIPE LINE STUDIO ('PLS'), PIPE LINE MANAGER ('PLM') AND PIPE LINE TRANSPORTER ('PLT') T HAT ENHANCE AND INTEGRATE OPERATIONAL EFFICIENCY, COMMERCIAL PROFIT ABILITY AND SAFETY ACROSS PIPELINES AS WELL AS THE ENERGY TRANSPORTATI ON, STORAGE, MARKETING AND DELIVERY FUNCTIONS. 2 ITA NO. 506 /HYD/2016 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. 506 /HYD/2016 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') 2012-13, ON AUGUST 29, 2013 DECLARING 'NIL' TAXABLE INCOME UNDER THE ACT. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS. THE DRAFT ASSESSMENT ORDER WAS PASSED B Y THE LEARNED ASSESSING OFFICER ('AO') UNDER SECTION 144C OF THE ACT ON MARCH 31, 2015, TREATING THE PAYMENT TOWARDS THE SALE OF SOFT WARE IN THE NATURE OF ROYALTY TAXABLE AT THE RATE OF 10 PERCENT AS APP LICABLE UNDER THE AMBIT OF THE PROVISIONS OF DTAA BETWEEN INDIA AND USA AND APPLIED SURCHARGE AT THE RATE OF 2.5 PERCENT ON THE INCOME SO COMPUTED. BASED ON THE SAME AN UPWARD ADJUSTMENT TO THE TUNE OF RS 1,30,79,367 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 1 0, 2015, WITHOUT APPRECIATING THE FACTS OF THE ASSESSEE, FAVOURABLE ITAT RULING IN THE ASSESSEES OWN CASE FOR EARLIER YEAR WITH SAME FACT S AND ISSUES, FAVOURABLE RULING IN THE CASE OF ESI INDIA FOR AY 2 007-08 AND AY 2008-09 ON A SIMILAR ISSUE RELATING TO WHETHER PAYM ENTS TO THE ASSESSEE TOWARDS PURCHASE OF SOFTWARE COULD AMOUNT TO ROYALTY AND OTHER FAVOURABLE JURISDICTIONAL ITAT RULING, PASSED DIRECTION IN FAVOUR OF THE AO. FURTHER DRP DIRECTED THE AO TO GIVE AN OPPORTUNITY TO THE 4 ITA NO. 506 /HYD/2016 ENERGY SOLUTIONS INTERNATIONAL INC., ASSESSEE TO SUBSTANTIATE THE LOWER ATE OF SURCHARGE AS APPLICABLE UNDER LAW. 3.1 CONSEQUENT TO THE DIRECTIONS OF THE HON'BLE DR P, THE LEARNED AO PASSED THE FINAL ASSESSMENT ORDER DATED JANUARY 29, 2016 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 PERCENT AS P ER 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 13 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. 1,30,79, 367 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 THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2011-12 IN I TA NO. 456/HYD/2015 VIDE ORDER DATED 27/11/2015 WHEREIN TH E TRIBUNAL HAS HELD AS UNDER: 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS POINTED OUT BY THE LD. AR, THE ORDERS PASSED BY AO IN 2007-08 AND 2008-09 HAVE BEEN PLACED IN THE PAPER BOOK VIDE PAGES 114 TO 122, WHE REIN THE AO 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) O F THE ACT. THE ASSESSEE ESI US SOLD THE SOFTWARE TO ESI INDIA AND IN THE ASSESSMENT OF ESI INDIA, IT IS THE PAYMENTS ARE T REATED AS TOWARDS THE PURCHASE OF SOFTWARE AND NOT AS PAYMENT TOWARDS 5 ITA NO. 506 /HYD/2016 ENERGY SOLUTIONS INTERNATIONAL INC., ROYALTY. THE PRINCIPLE NEEDS TO BE APPLIED CONSISTE NTLY. IN OUR VIEW, IN THE HANDS OF THE INDIAN COMPANY, WHEN IT I S NOT TREATED AS ROYALTY, THEN, THE SAME CONSIDERATION SHOULD ALS O BE EXTENDED TO THE SAME TRANSACTION IN THE CASE OF AE I.E. ESI US. IN THE PRESENT CASE, INCOME TOWARDS SALE OF SO FTWARE TO THE INDIAN AE CANNOT BE TREATED AS ROYALTY. HENCE, THE ADDITION MADE BY THE AO TOWARDS ROYALTY IS DELETED. 7. THE LD. DR NEITHER CONTROVERTED THE SUBMISSIONS OF THE LD. AR NOR BROUGHT ANY CONTRARY DECISION IN SUPPORT OF REV ENUES CASE. 8. CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PE RUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. AS THE ISSUE IN DISPUTE SQUARELY COVERED BY THE DEC ISION OF THE COORDINATE BENCH IN AY 2011-12, RESPECTFULLY FOLLOW ING THE CONCLUSIONS DRAWN THEREIN WE DELETE THE ADDITION OF RS. 1,30,79,367/- MADE BY THE AO TOWARDS ROYALTY. 9. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 29 TH JULY, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER AC COUNTANT MEMBER HYDERABAD, DATED: 29 TH JULY, 2016 KV 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. 6 ITA NO. 506 /HYD/2016 ENERGY SOLUTIONS INTERNATIONAL INC., S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./ P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER