I.A.R. SYSTEMS AKTIEBOLAG , MUMBAI V. DCIT(IT)-2(2)(1), MUMBAI, MUMBAI

ITA 598/MUM/2022

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The case involves I.A.R. System Aktiebolag, a foreign company incorporated in Sweden, which appealed against the directions of the Learned Commissioner of Income Tax (DRP) and the subsequent assessment orders by the Deputy Commissioner of Income Tax (International Taxation). The primary contention was regarding the taxability of income from software licenses and support services provided by the assessee to Indian companies, which were taxed as royalty under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-Sweden Tax Treaty. The assessee argued that these incomes should not be classified as royalty or fees for technical services (FTS) under the treaty provisions and cited various case laws and treaties, including the Most Favored Nation (MFN) clause in the India-Portugal Tax Treaty. The Tribunal's decision emphasized the need for the Assessing Officer to adhere to the DRP's directions and the legal framework provided under Section 144C(13) of the Act.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123722 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 01-02-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 30-03-2022
• Other Referred Cases: Engineering Analysis Centre of Excellence Private Limited vs. DCIT, Software Paradigms Infotech (P.) Ltd. vs. ACIT, Yokogawa India Ltd. vs. ACIT, Vodafone India Services (P) Ltd. vs. Union of India, Pathikonda Balasubba Setty vs. CIT
• Laws Referred To: Income-tax Act, 1961, India-Sweden Tax Treaty
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Period of limitation; Additional evidence; Set aside
• Section: 244A; 142(1); 234B; 274; 143(2); 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “I”, MUMBAI BEFORE SHRI AMIT SHUKLA, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Deloitte 1 st Floor Lotus Corporate Park Jay Coach, Goregaon Mumbai- 400063 PAN: AADCI6050N v. DCIT (International Taxation) - 2(2)(1) Room No. 1722, 17 th Floor Air India Building, Nariman Point Mumbai- 400021 (Appellant) (Respondent) Assessee Represented by : Shri P. J. Pardiwala Shri Harsh Kothari & Ms. Niti Shah Department Represented by Shri Soumendu Kumar Dash Date of conclusion of Hearing : 02.02.2023 Date of Pronouncement : 02.05.2023 O R D E R PER S. RIFAUR RAHMAN (AM) 1. These appeals are filed by the assessee against different directions passed by Learned Commissioner of Income Tax (DRP-1), Mumbai -2 [hereinafter in short “Ld. Ld. DRP”] dated 27.01.2022 and 11.05.2022 ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 2 for the A.Y. 2018-19 and 2019-20 respectively, u/s. 144C(5) of Income- tax Act, 1961 (in short “Act”). 2. Since the issues raised in both these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 598//MUM/2022 for Assessment Year 2018-19 as a lead year. 3. Assessee has raised following grounds in its appeal: - “Addition of income from distribution of software licenses and providing support services as royalty 1. The order passed by the learned Deputy Commissioner, on aspects agitated in the appeal, is void, bad in law, ultra vires and contrary to the provisions of law and facts as the same is passed without considering the ruling of the Supreme Court as well as the directions issued by the Hon'ble DRP. 2. The learned Deputy Commissioner erred in taxing income of Rs. 2,88,87,790 as royalty under section 9(1)(vi) of the Act as well as Article 12 of the India-Sweden Tax Treaty. 3. The learned Deputy Commissioner erred in not appreciating the fact that the amount of Rs. 2,88,87,790 comprises of four components which is tabulated as under: Sr. No. Nature of Income Amount (in Rs.) 1. Software licenses 2,44,86,771 2. Support Services 36,37,596 3. Hardware 7,43,728 4. Freight expenses 19,693 Total 2,88,87,787 4. The learned Deputy Commissioner erred in not appreciating the fact that the income earned by the appellant towards software ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 3 license amounting to Rs. 2,44,86,771 is not taxable as royalty under Article 12 of the India-Sweden Tax Treaty. 5. The learned Deputy Commissioner erred in not appreciating the fact that the income earned by the appellant towards provision of support services amounting to Rs. 36,37,596 is not taxable as fees for technical services (FTS) as per Article 12 of the India-Sweden Tax Treaty r.w. the Most Favored Nation (MFN) clause as contained in the India-Portugal Tax Treaty (i.e. protocol under the India- Sweden Tax Treaty read with India-Portugal Tax Treaty). 6. The learned Deputy Commissioner erred in not appreciating the fact that income from sale of hardware of Rs. 7,43,728 is akin to sale of goods and therefore not taxable. 7. The learned Deputy Commissioner erred in not appreciating the fact that the freight charges is the payment made towards actual expenses for delivery of software/ hardware and therefore is not in the nature of income and hence not taxable. 8. The learned Deputy Commissioner erred in holding that the software is a secret process and therefore taxable as royalty. 9. The learned Deputy Commissioner erred in holding that the software is a scientific equipment and therefore taxable as royalty. 10. The learned Deputy Commissioner erred in not considering the ruling of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited pronounced in relation to taxability of software imported from foreign non-resident supplier. 11. The Hon'ble DRP erred in directing that the income of Rs. 2,88,87,757 in the form of software licenses and support services are technical services. Therefore, the income earned by the appellant is taxable as FTS under Article 12(2) r.w. Article 12(3)(b) of the India-Sweden Tax Treaty. 12. The Hon'ble DRP erred in not granting the benefit of the MFN clause as contained in the India-Portugal Tax Treaty on the premise that no notification has been issued by the Government of India and therefore the restrictive definition of FTS as contained in India-Portugal Tax Treaty cannot be imported into the India- Sweden Tax Treaty. 13. The Hon'ble DRP erred in making the following observation amongst others which is contrary to the facts of the present case: (i) The assessee forces all its clients to avail support services in respect of all the user licenses. ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 4 (ii) Even on facts, this panel is of the view that the so- called support services are not limited to simple maintenance instead, in the totality of circumstances, availing the services are absolutely vital for the buyer to use the software. There does not appear to be any case where a buyer has purchased the software without the services to be offered by the assessee under the guise of support services. 14. The observation of the Hon'ble DRP is purely surmise and conjecture and is not based on any material on record. Levy of surcharge and education cess 15. The learned Deputy Commissioner erred in levying surcharge and education cess on the tax payable on income chargeable to tax at the rate of 10% as per Article 12(2) of the India-Sweden Tax Treaty. Interest under section 234B 16. The learned Deputy Commissioner erred in levying interest of Rs. 1,84,460 under section 234B of the Act. Interest under section 234D 17. The learned AO erred in levying interest under section 234D of the Act. Interest under section 244A 18. The learned AO erred in not correctly granting the interest under section 244A of the Act. Penalty Proceedings 19. The learned Deputy Commissioner erred in initiating penalty proceedings under section 274 read with section 270A of the Act. General 20. Each of the above grounds of appeal is independent and without prejudice to the other grounds of appeal preferred by the appellant. 21. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal.” ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 5 4. At the time of hearing, Ld. AR of the assessee brought to our notice relevant facts, assessee filed its return of income on 24.09.2018 declaring total income of ₹.NIL. The case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response assessee filed its detailed submissions through ITBA portal on 25.11.2020 and 24.12.2020. 5. The assessee is a foreign company incorporated in Sweden and is a tax resident of Sweden. Assessee has stated that company has engaged in the business of providing software for programming of processors and has appointed third party distributor in India to distribute the software license to the Indian customers. Further, IAR also directly procures orders from the end-users and provides software directly to the end-user. Further, assessee has stated that the software provided by the company is used mainly in the areas of industrial automation, medical devices, consumer electronics and the automotive industry. The assessee has entered into software license agreement and providing support services agreement with Encardio Rite Electronics Pvt. Ltd., GPIL Genus Power Infrastructures Limited, Cypress Semi-conductors Pvt. Ltd, Altiux, Ametek Instruments India Pvt. Ltd, Mantra Softec, Robert Bosch Engineering & Business Solutions Ltd Analog Devices India Pvt Ltd, FTD ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 6 Infocom Ltd, Emerson Innovation Center-Pune, Valeo India Private Limited, Knorr-Bremse Technology Center India Pvt. Ltd and Xylem Water Solutions India Pvt. Ltd. The income earned by the assessee under these agreements has not been offered to tax in the return of income as Royalty. 6. During the assessment proceedings, Assessing Officer observed that assessee has supplied software to the companies mentioned in Para No.3.1 of Assessment Order, and earned income to the tune of ₹.2,88,87,787/-. Assessing Officer observed that based on the submission made by the Assessee, it was noticed that the Assessee has not offered the above said receipts to tax. Accordingly, show-cause notice was issued to the assessee. 7. In response assessee by relying on various case laws of various courts submitted that Hon'ble Supreme Court held by deciding the issue of taxability of software into four different categories i.e., 1. Computer software directly purchased by Indian end-users from foreign suppliers/ manufacturers; 2. Computer software purchased by Indian distributors/ resellers from foreign suppliers; ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 7 3. Computer software purchased by foreign distributors/ resellers from foreign suppliers for resale/distribution in India to Indian distributors/ end-users; and 4. Computer software, embedded in the hardware and sold by foreign suppliers to Indian distributors/ end users as a bundled software. 8. The assessee submitted that IAR Systems holds the copyright, trade secrets, and any other intellectual property rights which subsist in the Licensed Product and all copies thereof. No title or other rights in the Licensed Product shall pass to the Licensee and further submitted that IAR is only providing support services, error analysis, error resolution, updates to newer releases. Therefore, the assessee submits that the support services provided by it do not make available any technology or technical skills to third party distributors and / or end users. In view of this, the services provided by IAR do not fall within the ambit of FTS under the Article 12 of the India-Sweden Tax Treaty and further, assessee submitted that protocol under India-Sweden Tax Treaty read with India-Portugal Tax Treaty is applicable. 9. The Assessing Officer after considering the detailed submissions of the assessee he analysed the issue under consideration whether payment received by the assessee attract taxability under Royalty provisions of Income-tax Act read with relevant Article of Double Tax ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 8 Treaty. He analysed the issue in detail in his order from Page Nos. 13 to 30 of the draft Assessment Order by relying on various decisions of the various Hon'ble High Courts in terms of copy right, literary work, royalty, copy of copy righted work versus copyright. After analyzing all the above concepts, finally, he came to the conclusion in his draft Assessment Order dated 22.04.2021 that Assessee's receipts from Indian customers, is held to be taxable in India as Royalty as per amended definition of Royalty as per section 9(1)(vi) of the Act, amended by the Financial Act, 2012 as well as Article 12 of India- Sweden DTAA. Accordingly, he brought to tax receipts of ₹.2,88,87,790/-. 10. Aggrieved assessee preferred objection before Ld. DRP and filed detailed submissions, which is reproduced by the Ld. DRP at Page No. 5 to 19 of the Ld. DRP order. Further, assessee vide letter dated 04.12.2021 filed additional evidences as under: -  Ground of Objection No. 2 inter-alia challenges the action of the Assessing Officer of not dealing with the argument made by the assessee during the course of the assessment proceedings that a part of the income of Rs. 2,88,87,787/- earned by it during the year under consideration was receipt for provision of support services rendered by it which income is not taxable in India but has been erroneously taxed as 'royalty' income by the Assessing Officer under the India-Sweden Tax Treaty. During the previous year relevant to assessment year (AY) 2018-19, the assessee had ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 9 earned income from distribution of software licenses and provision of support services. This fact was submitted before the learned Assessing Officer during the course of the assessment proceedings by letter dated 25 November 2020 and 22 March 2021. A copy of the letter dated 22 March 2021 has been submitted in the paperbook filed with the Hon'ble Panel (refer page No. 61 to 67 of the DRP set filed). However, inadvertently the assessee had not submitted the letter dated 25 November 2020 in the paperbook filed before the Hon'ble Panel. The assessee now encloses the said letter dated 25 November 2020 as Annexure 1.  Further, while passing the Draft Assessment Order dated 22 April 2021 for the captioned AY 2018-19. the learned Assessing Officer has inter-alia reproduced the submission dated 22 March 2021 filed by the assessee (on page 02 to 13 of the DRP set filed) but has not given any finding with respect to the income earned by the assessee from "provision of support services" and instead taxed the entire receipts receipt of Rs. 2,88,87,787/- earned during the year as "Royalty" without appreciating the fact the "provision for support services" can by no stretch of imagination be taxable as "Royalty".  In this connection, the assessee submits a statement giving details of the breakup of the income earned by the assessee during the previous year relevant to AY 2018-19 and the copy of the support and update agreement at Annexure 2 and Annexure 3 respectively to enable the Hon'ble Panel to appreciate the facts of the case and decide the matter.” 11. After accepting the above additional evidences, Ld. DRP remitted the matter to the Assessing Officer and after considering the remand report and rejoinder from the assessee, Ld. DRP came to the conclusion that services provided by the assessee which contain sale of software licenses, support services, sale of hardware and fright charges, collected from various parties, for the sake of clarity it is reproduced below: - ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 10 AR SYSTEMS AKTIEBOLAG Financial Year: 2017-18 Assessment Year: 2018-19 Party-wise details of income earned during the financial year 2017-18 Sr. no. Party name Software Licenses (Amt in lNR Support services (Amt in lNR) Hardware (Amt in INR) Freight (Amt in INR) Total Amount (in INR) 1 Encardio Rite Electronics Pvt. Ltd. 144,937 144,937 2 GPIL Genus Power Infrastructures Limited - 909,006 909,006 3 Cypress Semiconducttors Pvt Ltd - 89,763 89,763 4 Altiux 17,329 - 4,963 22,292 5 Ametek Instruments India Pvt Ltd 407,832 220,753 8,035 636,619 6 Mantra Softec (India) Pvt Ltd 374,158 - - 6,695 380,853 7 Robert Bosch Engineering & Business Solutions Ltd 265,849 - - - 265,849 8 Analog Devices India Pvt Ltd 109,963 - - 109,963 9 FTD Infocom Ltd. 17,861,436 1,490,741 433,212 19,785,390 10 Emerson Innovation Center - Pune - 397,811 - - 397,811 11 Robert Bosch Engineering & Business Solutions Ltd 4,905,223 158,147 - - 5,063,370 12 Analog Devices India Pvt Ltd 61,455 - 61,455 13 Valeo India Pravate Limited 319,202 244,778 563,980 14 Knorr-Bremse Technology Center India Private Ltd 230,720 - 230,720 15 Xylem Water Solutions India Pvt. Ltd. 225,780 - 225,780 Total income 24,486,771 3,637,596 743,728 19,693 28,887,787 12. By analyzing the above chart, Ld. DRP held that the above receipts are chargeable to tax under Fee for Technical Services (in short “FTS”) as per section 9(1)(vii) of the Act and as per India-Sweden DTAA article 12(3)(b). ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 11 13. Further, Ld. DRP rejected the submissions of the assessee for extension of India-Portugal DTAA in view of protocol of India-Sweden DTAA and MFN status granted thereon, the restrictive definition of FTS is found in India-Portugal DTAA with the observation that as per section 90(1) above said protocol is not being notified in the official gazette by the Parliament of India. 14. Subsequent to the order of the Ld. DRP, Assessing Officer passed the final Assessment Order dated 31.01.2022 and Ld. AR submitted that Assessing Officer while passing the final Assessment Order reproduced his finding in draft Assessment Order and finally at Page No. 31 of the final Assessment Order he mentioned in Para No. 11 that this order is passed as per the directions of the Ld. DRP and observed that after considering submissions made by the assessee before the panel has dismissed all the assessee’s objections and directed the Assessing Officer to give effect to the directions in accordance with the provisions of section 144C(13) of the Act. However, Ld. AR submitted that finally Assessing Officer has taxed the income earned by the assessee as royalty even though it is not the direction of the Ld. DRP. It clearly shows that Assessing Officer has not followed the directions of Ld. DRP as per Section 144C(13) of the Act. Therefore, the final Assessment ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 12 Order passed by the Assessing Officer is bad in law and should be set- aside. In this regard assessee has relied on the decision of Software Paradigms Infotech (P.) Ltd., v. ACIT [2018] 89 taxmann.com 339 (Bangalore – Trib.). 15. On the other hand, Ld. DR filed response from the Assessing Officer, in this regard. For the sake of clarity, it is reproduced below: - “10.1 It is to be mentioned that while the Ld. DRP in its directions dated 27.01.2022 has nowhere refuted the findings of the Assessing Officer as made in the Draft Assessment Order that the receipts are taxable as Royalty but has also provided another view that the receipts of the assessee can be considered as Fees for Technical Services. A reading of the Directions of the DRP dated 27.01.2022 establishes that the Ld. DRP has upheld the findings of the Assessing Officer and has categorically rejected all the objections of the Assessee. 10.2 Further, the Assessing Officer in the final Assessment Order dated 31.01.2022 has noted the findings of the Ld. DRP in the directions dated 27.01.2022 in which the Ld. DRP has rejected all the four objections of the assessee. The Assessing Officer has noted that he is passing the Final Assessment Order on the directions of the Ld. DRP and has nowhere refuted the findings of the Ld. DRP. Therefore, it cannot be said that the Assessing Officer has not followed the directions of the Ld. DRP 10.3 Therefore, it is to be seen that the Assessing Officer has taken three views in the Draft Assessment Order. He has discussed his primary view that software copy obtained on license is for use for the copy right and therefore the consideration for the use of software has to be taxed as Royalty in detail. The Assessing Officer has also mentioned a "Without prejudice view" that the software is a secret process which is used in the data processing and the payment is made for using the secret process and hence the payment should be considered as Royalty. Further, the Assessing Officer provided another "Without prejudice view" stating that the software can also be considered as a scientific equipment and the payment made for the use of the scientific equipment is taxable as ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 13 Royalty. The Ld. DRP in its observations has also discussed another view stating that the entire bundle of software and subsequent or concurrent maintenance is an extended exercise of providing technical services and therefore the payment is taxable as Fee for Technical Services (FTS). While giving this view of holding the payment as FTS, the Ld. DRP did not discard the previous three views including the primary view of the Assessing Officer noted in detail in the Draft Assessment Order. Rather, the Ld. DRP categorically rejected the Objections of the Ld. DRP. 10.4 Further, it is to be mentioned that the section 144C(11) of the Act states that "No direction under sub-section (5) shall be issued unless an Assessing Officer on such directions which are opportunity of being heard is given to the assessee and the prejudicial to the interest of the assessee or the interest of the revenue, respectively." Therefore, if the Ld. DRP were to discard the findings of the Assessing Officer then it would have given an opportunity of being heard to the Assessing Officer as per the mandate of the Section 144C(11) of the Act. The fact that the Ld. DRP did not give any such opportunity to the Assessing Officer also strengthens the understanding that the Ld. DRP has not refuted the findings of the Assessing Officer made in the Draft Assessment Order that the receipts are taxable as Royalty but has provided another view in which it is held that the receipts are also taxable as Fees for Technical Services. The view taken by the Ld. DRP complements the three views taken by the Assessing Officer and does not exclude them. There is no mention whatsoever in the Directions of the DRP dated 27.01.2022 stating that any of the three views taken by the Assessing Officer are wrong. These views are not set aside but the Ld. DRP while giving its own observations and therefore, the views of the Assessing Officer and the Ld. DRP are complementary to each other. 10.5 Further, it is mentionable that in the directions dated 27.01.2022, the Ld. DRP has refuted the arguments of the assessee with respect to both the types of income - FTS and Royalty income. For instance, in Para 10.14 Ld. DRP has noted that, "Thus, issuance of notification is part of legislative requirement to implement a DTAA, which has not been done so far to import restrictive scope of FTS/FIS (from other DTAAS) or to apply a lower rate of taxation for royalty." ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 14 Similarly in Para 10.16, the Ld. DRP has observed that "It is thus important to issue notification to make the provision of FTS (Fees for Technical Services) clear or to import a lower rate of taxation of royalty if the Government intends to import the provision relating to FTS/FIS of other treaties or the lower rate of taxation of royalty in other treaties" Therefore, it can be seen that the Ld. DRP has taken both the views in parallel and not mutually exclusive to each other. 10.6 Additionally, it is to be mentioned that the Hon'ble Bombay High Court, in Vodafone India Services (P) Ltd., Vs. Union of India (361 ITR 531), paragraph 47, states that "the process before the DRP is a continuation of assessment proceedings" and in view of the same, it is to be seen that the views taken by the Assessing Officer and the Ld. DRP are to be read in conjunction with each other as neither have contradicted nor discarded the view of the other authority. 10.7 Since, the facts for the A.Y.2019-20 in the assessee's case are similar to A.Y.2018-19, it is hereby requested that the above factual report and submissions may be considered for the both the assessment years, while presenting the view of the Department before the Hon'ble ITAT.” 16. Further, Ld. DR brought to our notice order passed by ITAT Bangalore bench in the case of Yokogawa India Ltd., v. ACIT in ITA.No. 1715/Bang/2016 dated 08.03.2021 in which bench has remitted the issue back to the file of the Assessing Officer to consider the findings of the Ld. DRP and passed the order, accordingly, he relied on the above order and prayed that even in this case the issue may be remitted back to the Assessing Officer for passing the proper order as per law. ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 15 17. In the rejoinder, Ld. AR submitted that it is fact on record that Ld.DRP has given a categorical finding that the case laws relied by the Assessing Officer in the draft Assessment Order are over-ruled by the Hon'ble Supreme Court. In this regard, he brought to our notice Page No. 9 and 10 of the Tribunal order of ITAT Bangalore Bench in the case of Yokogawa India Ltd., v. ACIT (supra) and submitted that by setting aside the issue back to the file of the Assessing Officer will end up extending the period of limitation, it cannot be done. In this regard he relied on the decision in the case of Pathikonda Balasubba Setty v. CIT [65 ITR 252] and finally prayed that the order passed by the Assessing Officer is bad in law. 18. Considered the rival submissions and material placed on record, we observe from the record that assessee has received certain funds by supplying software through intermediaries in India and the various Companies are listed in Para No 3.1 of the Assessment Order. It is also fact on record that assessee has received the receipts as categorized by the Ld. DRP in their order at Page No. 32 as per which assessee has received income from sale of software licence, hardware, support services to those parties who are intended to purchase the latest software from IAR and certain freight charges. Which are part and ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 16 parcel of the total services rendered by the assessee during the current Assessment Year. The Assessing Officer after considering the detailed submissions of the assessee and after detailed analyses of the issue on record and also relying on various case laws held that the receipts of income by the assessee are taxable under the head “Royalty” and in objection filed by the assessee before Ld. DRP and Ld. DRP has held that the above receipts received by the assessee is involvement of support services to the extent of ₹.36,37,596/- and other portion of the income includes sale of software and hardware. Without going into merits of the findings of the Ld. DRP, we observe that Ld. DRP has come to the conclusion on their own analysis that the case of the assessee falls under FTS. We observe that while passing the final Assessment Order Assessing Officer has not followed the directions of the Ld. DRP and passed his own Assessment Order by merely reproducing his analysis in draft Assessment Order. 19. From the record we observe that the final Assessment Order passed by the Assessing Officer is not as per section 144C(13) of the Act. However, Assessing Officer has filed a note in support of his final Assessment Order in which he has made submissions that the order passed by him is analyzing the various issue which are without prejudice ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 17 views which Ld. DRP has not rejected. He is of the view that the final Assessment Order passed by him is as per section 144C(13) of the Act. After considering the submissions of both the parties, we are of the view that Assessing Officer has not followed the directions of the Ld. DRP and the directions of the Ld. DRP are very clear and Assessing Officer has not bothered to atleast classify the income earned by the assessee under the head FTS as per the directions of the Ld. DRP and royalty. He proceeded to complete the final Assessment Order based on his own analysis made by him in draft Assessment Order which is clearly a violation of not following the directions of the higher authorities and also the provisions of section 144C(13) of the Act. At the time of hearing, Ld. DR heavily relied on the decision of the ITAT Bangalore in the case of Yokogawa India Ltd., v. ACIT (supra) in which the bench has remitted the issue back to the file of the Assessing Officer/TPO to redo the assessment by following the directions of the Ld.DRP. We observe that in that case there is an issue of determination of arm’s length price of payment towards management fees, global sales and marketing activities fees. We do not intend to follow this decision of the ITAT Bengaluru bench for the simple reason that the Assessing Officer will get extended period of time by passing such orders which are clearly ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 18 violation of the specific direction specified u/s. 144C(13) of the Act. Therefore, such violation cannot be ignored and in the given case under consideration we observe that Ld. DRP has given clear cut finding that income earned by the assessee will fall under FTS and Assessing Officer by following his own analysis and applied and completed the final Assessment Order under the head Royalty and not even he has bothered to follow the directions of the Ld. DRP and he could have atleast followed the directions of the Ld. DRP to the extent of support services under the head FTS and balance he could have brought to tax under the head Royalty. Further, we observe that the majority of the receipts received by the assessee are for sale of software licence and hardware and portion of the receipt which are received towards support services to the extent of ₹.36,37,596/- out of total receipt of ₹.2,88,87,787/-. In our view, Assessing Officer and Ld. DRP has taken a divergent view and without going into merits of the issues raised, we are inclined to treat the Assessment Order passed by the Assessing Officer as bad in law and against the directions specified u/s.144(13) of the Act. Accordingly, we quash the assessment order passed by the Assessing Officer and grounds raised by the assessee are allowed in this regard. ITA NO.598 & 1850/MUM/2022 (A.Y: 2018-19 & 2019-20) I.A.R. System Aktiebolag Page No. | 19 ITA.No. 1850/MUM/2022 (A.Y. 2019-20) 20. Coming to the appeal relating to A.Y. 2019-20, since facts in this case are mutatis mutandis, therefore the decision taken in A.Y. 2018-19 is applicable to this assessment year also. Accordingly, this appeal is allowed. 21. In the result, appeals filed by the assessee are allowed. Order pronounced in the open court on 02 nd May, 2023 Sd/- Sd/- (AMIT SHUKLA) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 02/05/2023 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum