Bently Nevada LLC, Gurgaon V. JDIT, New Delhi

ITA 5817/DEL/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3633 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 26-02-2013
• Assessment Year: 2002-2003
• Appeal Filed On: 28-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G K DHALL
• Keywords: Business income; Retrospective amendment
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SH.R.S.SYAL, VICE PRESIDENT AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER ITA NOS.5817 TO 5821/DEL/2011 (ASSESSMENT YEARS: 2002-03 T O 2006-07) APPELLANT BY SH. SACHIT JOLLY, ADV. RESPONDENT BY SH. G.K.DHALL, CIT DR DATE OF HEARING 31. 0 1 .201 8 DATE OF PRONOUNCEMENT 31 .0 1 .201 8 ORDER PER R.S. SYAL, VICE PRESIDENT THESE FIVE APPEALS RELATE TO THE A.YS. 2002-03 TO 2006-07. SINCE COMMON ISSUE IS RAISED IN THIS BATCH OF APPEA LS, WE ARE THEREFORE, PROCEEDING TO DISPOSE THEM OFF BY THIS C ONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE BACKGROUND OF THESE APPEALS IS THAT THE TRIB UNAL, VIDE ITS COMBINED ORDER DATED 27.01.2017, DISPOSED OF TH ESE FIVE BENTLEY NEVADA LLC, (NOW KNOWN AS BENTLY NEVADA INC.), BUILDING NO.7A, 6 TH FLOOR, DLF CYBER CITY, PHASE-III, GURGAON-122002. PAN-AADCB8118J VS JDIT, CIRCLE-1(2), INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) (RESPONDENT) ITA NOS.5817 TO 5821/DEL/2011 PAGE | 2 APPEALS IN A BATCH OF 138 APPEALS. IN FACT, 139 AP PEALS WERE FIXED. BOTH THE SIDES ELABORATELY ARGUED THE APPEA L IN THE CASE OF GE ENERGY PARTS INC. VS ADIT (ITA NO.671/DEL/2011 F OR THE ASSESSMENT YEAR 2001-02). IT WAS A COMMON SUBMISSI ON THAT THE FACTS AND CIRCUMSTANCES OF THE REMAINING 138 AP PEALS, INCLUDING THE INSTANT FIVE APPEALS, WERE SIMILAR TO THOSE OF GE ENERGY PARTS INC. THE TRIBUNAL DISPOSED OFF THE AP PEAL OF GE ENERGY PARTS INC. BY A LEAD ORDER DATED 27.01.2017. THE REMAINING 138 APPEALS WERE ALSO DISPOSED OFF ON THE SAME DAY BY FOLLOWING THE VIEW TAKEN IN THE LEAD ORDER HOLDING THAT THE INITIATION OF RE-ASSESSMENT WAS VALID; FIXED PLACE AS WELL AS AGENCY PE OF GE OVERSEAS ENTITIES WAS ESTABLISHED IN INDIA ; ATTRIBUTION TO THE INCOME OF PE WAS TO BE DONE AT 2.6% OF THE SALE S MADE BY GE OVERSEAS IN INDIA; AND INTEREST U/S 234B WAS NOT CH ARGEABLE. THE ASSESSEE PREFERRED APPEALS BEFORE THE HON'BLE H IGH COURT IN RESPECT OF THE INSTANT FIVE MATTERS, CONTENDING THA T THE TRIBUNAL HAS NOT RETURNED ANY FINDING WITH REFERENCE TO TAXA TION OF SOFTWARE INCOME AND ATTRIBUTION OF INCOME BETWEEN H ARDWARE AS WELL AS SOFTWARE SALES AND SERVICES. THE HON'BLE HI GH COURT, VIDE ITA NOS.5817 TO 5821/DEL/2011 PAGE | 3 ITS ORDER DATED 25.10.2017, HAS REMITTED THE MATTER TO THE FILE OF THE TRIBUNAL FOR ADJUDICATION ON THE ABOVE ISSUES. 3. DURING THE COURSE OF EXTANT PROCEEDINGS BEFORE THE TRIBUNAL, THE LD. AR FAIRLY CONCEDED THAT THE ISSUE RESTORED BY THE HON'BLE HIGH COURT FOR FRESH ADJUDICATION WAS, IN FACT, NOT ARGUED BY THE ASSESSEE BEFORE THE TRIBUNAL IN THE FIRST ROUND. I T WAS ALSO ADMITTED THAT ONLY THE CASE OF GE ENERGY PARTS INC. WAS ARGUED BY BOTH THE SIDES AND THE FILES OF ALL THE REMAININ G 138 APPEALS, INCLUDING THE FIVE APPEALS UNDER CONSIDERATION, WER E NOT EVEN OPENED ON THE COMMON UNDERSTANDING BETWEEN THE ASSE SSEE AND THE REVENUE THAT THE FACTS AND CIRCUMSTANCES OF THE REMAINING APPEALS WERE SIMILAR. NOW, SINCE THE MATTER HAS BEE N SENT BACK BY THE HONBLE HIGH COURT TO THE TRIBUNAL FOR DECID ING THE ABOVE REFERRED ASPECT, WE PROCEED TO DEAL WITH THE SAME B Y HIGHLIGHTING THE FACT THAT THIS ISSUE WAS NOT ARGUED BY THE LD. AR DURING THE ORIGINAL ROUND OF PROCEEDINGS BEFORE THE TRIBUNAL A S HAS BEEN ADMITTED BY THE LD. AR. 4. WE ESPOUSE THE ISSUE SENT BACK BY HON'BLE HIGH C OURT REGARDING THE TAXATION OF SOFTWARE INCOME AND ATTRI BUTION OF ITA NOS.5817 TO 5821/DEL/2011 PAGE | 4 INCOME BETWEEN HARDWARE AS WELL AS SOFTWARE SALES A ND SERVICES. FACTS FOR THE A.Y. 2002-03 AS RECORDED IN THE ASSE SSMENT ORDER DATED 05.10.2011 ARE THAT THE ASSESSEE IS IN THE BU SINESS OF SUPPLY OF SOPHISTICATED TECHNOLOGY EQUIPMENTS, HARD WARE AND SOFTWARE TO ITS VARIOUS ENERGY CUSTOMERS IN INDIA. THE AO RECORDED IN PARA 11 OF THE ORDER THAT : THESE EQUI PMENTS SEEM TO BE CUSTOMIZED TO THE NEEDS OF THE INDIAN CUSTOMERS, MADE TO ORDER AND CONTAIN HIGH CONTENT OF TECHNOLOGY AND SOFTWARE EMBEDDED IN IT . HE HELD THAT THE ASSESSEE HAS A BUSINESS CONNECTION AND PE IN INDIA AND IN THE ABSENCE OF D ETAILS AND BREAK-UP PROVIDED BY THE ASSESSEE, IT WAS HELD THA T 80% OF THE REVENUES WAS TOWARDS SUPPLY OF EQUIPMENTS AND HARD WARE AND THE BALANCE OF 20% TOWARDS THE SOFTWARE AND RELATED SERVICES. THERE IS NO QUARREL IN THIS APPEAL AGAINST THE ATTR IBUTION OF INCOME FROM SUPPLY OF HARDWARE AS BUSINESS PROFITS. THE ONLY DISPUTE AS RAISED BY THE LD. AR IS AGAINST THE TAXA BILITY OF INCOME ON ACCOUNT OF SOFTWARE, LICENCE AND RELATED SERVICE S, WHICH THE AO ESTIMATED AT 20% AND AFTER ALLOWING DEDUCTION OF 20 % TOWARDS EXPENSES, TAXED IT AS BUSINESS PROFITS AS THE SAME WAS FOUND TO BE EFFECTIVELY CONNECTED WITH THE PE OF THE ASSESSE E. THE LD. AR ITA NOS.5817 TO 5821/DEL/2011 PAGE | 5 CONTENDED THAT SUCH INCOME AT THE RATE OF 20% SHOUL D NOT HAVE BEEN TREATED AS ROYALTY BUT BUSINESS INCOME AT THE FIRST STAGE ITSELF. 5. IT IS FOUND FROM THE ASSESSMENT ORDER ITSELF THAT THE ASSESSEE EARNED GROSS INCOME FROM SUPPLY OF SOFTWARE EMBEDDED IN THE HARDWARE ITSELF. WHEN THE POSITION IS SO, INCOME RELATABLE T O SUPPLY OF SOFTWARE CANNOT BE TREATED AS ROYALTY INC OME. THE HONBLE DELHI HIGH COURT IN CIT VS. ZTE CORPORATION (2017) 392 ITR 890 (DEL) CONSIDERED THE FACTS IN WHICH SOFTWARE WAS SUPPLIE D AS EMBEDDED IN HARDWARE. THE ASSESSEE CONTENDED BEF ORE THE AO THAT THE SOFTWARE EMBEDDED IN THE TELECOM EQUIPMENT S OR PROVIDED TO THE CUSTOMERS SEPARATELY, OR SOFTWARE S UPPLIED TO THE VARIOUS CUSTOMERS IN INDIA SHOULD NOT BE TREATED AS ROYALTY UNDER SECTION 9(1) (VI). THE LD. CIT(A) ACCEPTED THE ASS ESSEES CONTENTIONS THAT SOFTWARE WITHOUT HARDWARE WAS USEL ESS. THE HONBLE HIGH COURT FINALLY HELD THAT SUPPLY OF SOFTWARE WAS IN THE NATURE OF ARTICLES OR GOODS AND HENCE INCOME FROM I TS SALE COULD NOT BE TREATED AS ROYALTY. ITA NOS.5817 TO 5821/DEL/2011 PAGE | 6 6. THE HONBLE JURISDICTIONAL HIGH COURT IN ANO THER DECISION IN CIT VS. ALCATEL LUCENT CANADA (2015) 372 ITR 476 (D EL) CONSIDERED THE FACTS IN WHICH THE ASSESSEE SUPPLIED HARDWARE A ND SOFTWARE TO VARIOUS ENTITIES IN INDIA. THE AO HELD THAT CONS IDERATION FOR SUPPLY OF SOFTWARE EMBEDDED IN HARDWARE EQUIPMENT O R OTHERWISE TO CUSTOMERS IN INDIA AMOUNTED TO ROYALTY U/S 9(1)( VI). THE CIT(A) HELD THAT SUPPLY OF EMBEDDED SOFTWARE DID NOT CONST ITUTE ROYALTY AND, THEREFORE, SECTION 9(1)(VI) WAS NOT ATTRACTED. WHEN THE MATTER CAME UP BEFORE THE HONBLE HIGH COURT, IT WAS HELD THAT WHEN THE ASSESSEE SUPPLIES THE SOFTWARE WHICH IS INCORPORATE D ON A CD, IT HAS SUPPLIED TANGIBLE PROPERTY AND THE PAYMENT MADE BY THE CELLULAR OPERATOR FOR ACQUIRING SUCH PROPERTY CANNO T BE REGARDED AS A PAYMENT BY WAY OF ROYALTY. 7. SIMILAR VIEW HAS BEEN TAKEN IN SEVERAL JUDGM ENTS HOLDING THAT SUPPLY OF SOFTWARE EMBEDDED IN THE HARDWARE DO ES NOT RESULT IN TO ROYALTY INCOME. NO CONTRARY DECISION HAS BEE N BROUGHT TO OUR NOTICE BY THE LD. DR. 8. HERE IT IS RELEVANT TO MENTION THAT EXPLANATI ON 4 TO SECTION 9(1)(VI) HAS BEEN INSERTED BY THE FINANCE ACT, 2012 , W.E.F. ITA NOS.5817 TO 5821/DEL/2011 PAGE | 7 01.06.1976 PROVIDING THAT: `FOR THE REMOVAL OF DOUB TS, IT IS HEREBY CLARIFIED THAT THE TRANSFER OF ALL OR ANY RI GHTS IN RESPECT OF ANY RIGHT, PROPERTY OR INFORMATION INCLUDES AND HAS ALWAYS INCLUDED TRANSFER OF ALL OR ANY RIGHT FOR USE OR RI GHT TO USE A COMPUTER SOFTWARE (INCLUDING GRANTING OF A LICENCE) IRRESPECTIVE OF THE MEDIUM THROUGH WHICH SUCH RIGHT IS TRANSFERRED. THIS INSERTION OF THE EXPLANATION HAS THE EFFECT OF INCL UDING SUPPLY OF COMPUTER SOFTWARE WITHIN THE AMBIT OF `ROYALTY. HO WEVER, WHEN A SOFTWARE IS EMBEDDED IN HARDWARE AND THERE IS ONE C OMPOSITE PRICE, THE ENTIRE AMOUNT REMAINS AS BUSINESS INCOME AND A PART OF THE SAME CANNOT BE CONSIDERED AS ROYALTY WITHIN THE EXPLANATION 4. IT IS, THEREFORE, PALPABLE THAT THE RETROSPECTIVE AMENDMENT HAS NO EFFECT IN THE CURRENT SCENARIO. 9. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, WE HOLD THAT THE PAYMENT RECEIVED FOR SOFTWARE, WHICH IS EMBEDDED IN THE HARDWARE, HAS TO BE TREATED AS BUSINESS PROFITS, WH ICH IS OF THE SAME NATURE AS FROM THE SUPPLY OF HARDWARE. THE IMP UGNED ORDER IS SET ASIDE TO THIS EXTENT AND THE AO IS DIRECTED TO COMPUTE THE ITA NOS.5817 TO 5821/DEL/2011 PAGE | 8 INCOME OF THE ASSESSEE AFRESH BY CONSIDERING INCOME FROM SUPPLY OF SOFTWARE EMBEDDED IN HARDWARE AS BUSINESS PROFIT S. 10. IT IS AN ADMITTED POSITION THAT THE FACTS A ND CIRCUMSTANCES OF THE OTHER YEARS ARE MUTATIS MUTANDIS SIMILAR. EX CONSEQUENTI, OUR DECISION FOR SUCH LATER YEARS UNDER APPEAL ALSO REMAINS THE SAME. 11. IN THE RESULT, ALL THE APPEALS ARE ALLOWED FO R STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2018. SD/- SD/- (BEENA A. PILLAI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT *AMIT KUMAR* DATE:- 31.01.2018 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI