Cognizant Technology Solutions India Private Limited, CHENNAI V. ITO, CHENNAI

ITA 689/CHNY/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1562 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 06-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G N RAGHAVENDRA RAO
• Assessee Lawyers: N V BALAJI
• Keywords: Double taxation relief
• Section: 201(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, B BENCH : CHENNAI . , !' # $! # % . &' , ) + , [BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBE R AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ] ./I.T.A. NO.689/CHNY/2015. / ASSESSMENT YEAR : 2012-2013. COGNIZANT TECHNOLOGY SOLUTIONS INDIA PRIVATE LIMITED, 165/110, 6 TH FLOOR, MENON ETERNITY BUILDING, ST. MARYS ROAD, ALWARPET, CHENNAI 600 018. VS. THE INCOME TAX OFFICER, INTERNATIONAL TAXATION II(1) CHENNAI. [PAN AAACD 3312M] ( -. / APPELLANT) ( /0-. /RESPONDENT) / APPELLANT BY : SHRI. N.V. BALAJI, ADVOCATE /RESPONDENT BY : SHRI. G.N. RAGHAVENDRA RAO, JCIT. /DATE OF HEARING : 15-11-2018 ! /DATE OF PRONOUNCEMENT : 20-11-2018 1 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IN THIS APPEAL FILED BY THE ASSESSEE, WHICH IS D IRECTED AGAINST AN ORDER DATED 22.01.2015 OF LD. COMMISSION ER OF INCOME TAX (APPEALS)-16, CHENNAI, IT IS AGGRIEVED ON BEING TRE ATED AS AN ASSESSEE IN DEFAULT U/S.201(1) OF THE INCOME TAX ACT, 1961 ( IN SHORT THE ACT) ITA NO.689/2015 :- 2 -: AND LEVYING INTEREST ON IT U/S.201(1A) OF THE ACT, ON PAYMENTS MADE FOR SOFTWARE ANNUAL MAINTENANCE CHARGES AND PAYMENT S MADE FOR WHAT IS CLAIMED AS SOFTWARE LICENSE FEES. 2. ARGUING ON THE GROUNDS RELATING TO ANNUAL MAINTENA NCE CHARGES (IN SHORT AMC), LD. COUNSEL FOR THE ASSESSEE SU BMITTED THAT ASSESSEE WAS PRIMARILY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. ACCORDING TO HIM, DURING THE RELEVANT PREVIOUS YEAR , ASSESSEE HAD PAID ANNUAL MAINTENANCE CHARGES AGGREGATING TO B7,9 1,76,107/- TO VARIOUS NON RESIDENT COMPANIES, LISTED HEREUNDER:- SL.NO NAME OF THE PARTY COUNTRY AMOUNT (B) 1 ALTOVA GMBH AUSTRALIA 4,85,179 2 CORE SECURITY TECHNOLOGIES USA 5,00,738 3 SPARX SYSTEMS PTY. LTD AUSTRALIA 1,47,984 4 RIVERBED TECHNOLOGY PTE LTD SINGAPORE 5,42,901 5 XENOX GROUP INC CANADA 8,97,686 6 ORACLE AMERICA INC USA 7,66,01,619 AS PER THE LD. AUTHORISED REPRESENTATIVE, SUCH PAYM ENTS WERE CONSIDERED BY THE LOWER AUTHORITIES AS FEES FOR TE CHNICAL SERVICES. ITA NO.689/2015 :- 3 -: ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE, AS SESSEE HAD DEDUCTED TAX AT SOURCE ON PAYMENT OF B7,66,01,619/- TO M/S. ORACLE AMERICA INC, USA, AND ACCORDINGLY, LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD DIRECTED THE LD. ASSESSING OFFICER TO GIVE APPROPRIATE RELIEF TO THE ASSESSEE AFTER VERIFICATION OF SUCH C LAIM. HOWEVER, WITH REGARD TO OTHER PAYMENTS, AS PER THE LD. AUTHORIS ED REPRESENTATIVE, LD.CIT (APPEALS) UPHELD THE ORDER OF THE LD. COMMIS SIONER OF INCOME TAX (APPEALS), AND TREATED SUCH PAYMENTS AS FEES FO R TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, MADE AVAIL ABLE TO ASSESSEE BY THESE COMPANIES THROUGH SUCH AMCS. 3. . CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE, W AS THAT LOWER AUTHORITIES HAD FAILED TO CONSIDER DOUBLE TAXATION AVOIDANCE AGREEMENTS (IN SHORT DTAA) WITH USA, AUSTRALIA, SINGAPORE AND CANADA, WHERE THE TERM ROYALTY AND FEES FOR INCL UDED SERVICES WERE GIVEN NARROWER DEFINITION THAN WHAT WAS GIVEN IN T HE ACT. AS FOR THE PAYMENTS MADE TO M/S.ALTOVA GMBH, CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT SUCH PAYMENTS WERE EFFECTED OUT OF THE PROCEEDS FROM THE EXPORT OF SOFTWARE AND PAYMENTS. THUS, ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE, SOURCE FOR S UCH PAYMENTS WERE SALES MADE BY THE ASSESSEE OUTSIDE INDIA AND THE S OURCE BEING SITUATED OUTSIDE INDIA, IT COULD NOT BE TAXED IN I NDIA. FURTHER, AS PER ITA NO.689/2015 :- 4 -: THE LD. AUTHORISED REPRESENTATIVE, LD. COMMISSIONER OF INCOME TAX (APPEALS) THOUGH HE CONSIDERED DTAA, DID NOT STATE HOW THE ASSESSEE SATISFIED THE TEST OF MAKING AVAILABLE THE TE CHNICAL KNOWLEDGE SO AS TO CONSIDER THE AMC PAYMENTS AS FEES FOR INCLUDED SERVICES. CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WA S THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD APPLIED C ERTAIN POSITIVE AND NEGATIVE TESTS WITHOUT APPRECIATING THE CONTENT ION OF THE ASSESSEE THAT MAKING AVAILABLE IN ARTICLE 12 OF RESPECTIVE DTAAS WAS NOT SATISFIED IN RESPECT OF THE PAYMENTS MADE FOR AMC TO NON RESIDENTS IN COUNTRIES, WITH WHICH INDIA WAS HAVING DTAA WITH MAKING AVAILABLE CLAUSE. AS PER THE LD. AUTHORISED REPRESENTATIVE, LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD ERRONEOUSL Y HELD THAT PAYMENTS MADE FOR AMC WERE IN THE NATURE OF FEES F OR TECHNICAL SERVICES AS DEFINED IN SECTION 9(1) (VII) OF THE AC T. RELIANCE WAS PLACED ON THE INVOICES RAISED BY THE NON RESIDENTS ON THE ASSESSEE PLACED AT PAPER BOOK PAGES 1 TO 61. RELIANCE WAS AL SO PLACED ON A DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN CAS E FOR ASSESSMENT YEAR 2008-09 IN ITA NO.1202/MDS/2013, DATED11.03.20 14. 4. . PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S). ITA NO.689/2015 :- 5 -: 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. MAIN CONTENTION RAISED BY THE LD. AUTHORISED REPRESENTATIVE BEFORE US IS THAT INDIA HAD DTAAS WITH USA, AUSTRALIA, SINGAPORE AND CANADA, WHERE THERE WAS AS SPECIFIC D EFINITION FOR ROYALTY AND FEES FOR INCLUDED SERVICES. ACCORDING TO HIM, SUCH DEFINITION GAVE A MUCH NARROWER MEANING THAN THE D EFINITION FOR THE TERMS ROYALTY AND FEES FOR TECHNICAL SERVICES GIVEN IN THE ACT. IMPORTANT DIFFERENCE AS PER LD. AUTHORISED REPRESEN TATIVE, WAS THAT FOR A PAYMENT TO BE CONSIDERED AS FEES FOR INCLUDED SE RVICES, TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL AND KNOW-HOW OR PROCES SES HAS TO BE MADE AVAILABLE TO THE ASSESSEE. CONTENTION WAS THA T AMC PAYMENTS MADE TO THE COMPANIES LISTED AT PARA 2 ABOVE, DID N OT MAKE AVAILABLE ANY SUCH TECHNICAL KNOWLEDGE TO THE ASSESSEE. ASSES SEE HAS PLACED SPECIFIC RELIANCE ON THE DTAA WITH THE RESPECTIVE C OUNTRIES. WHAT WE FIND IS THAT LD. COMMISSIONER OF INCOME TAX (APPEA LS) DID NOT GO INTO THE QUESTION WHETHER THE TECHNICAL SERVICES WERE M ADE AVAILABLE TO THE ASSESSEE BY COMPANIES LISTED AT PARA 2 ABOVE, THROUGH THE AMCS. HE HELD THAT THE PAYMENTS MADE, FELL WITHIN THE MEA NING OF FEES FOR TECHNICAL SERVICES, APPLYING CERTAIN TESTS LIKE NAT URE OF SERVICES, REQUIREMENT OF PROFESSIONAL EXPERTISE FOR RUNNING THE SERVICES, ELEMENT OF HUMAN INTERFACE WHILE PROVIDING SERV ICES, WHETHER THE NON RESIDENT COMPANIES HAD PROVIDED STANDARD FACIL ITIES OR SOMETHING ITA NO.689/2015 :- 6 -: MORE INCLUDING ANY USE OF SPECIAL MACHINERY, ETC. LD. COMMISSIONER OF INCOME TAX (APPEALS) HOWEVER DID NOT TEST THE TRAN SACTIONS WITH THE RELEVANT ARTICLES IN RESPECTIVE DTAAS, WITH REGAR D TO DEFINITION OF ROYALTY AND FEES FOR INCLUDED SERVICES. ASSESSEE C AN ALWAYS OPT FOR THE PROVISION IN THE DTAA, IF IT FINDS SUCH PROVISIONS TO BE MORE BENEFICIAL THAN THE ACT. EVEN IN THE ORDERS PASSED BY THE LD . ASSESSING OFFICER U/S.201(1) AND 201(1A) OF THE ACT, APPLICATION OF MAKING AVAILABLE CLAUSE IN THE ARTICLE DEFINING ROYALTY AND FEES FOR INCLUDED SERVICES, IN THE RESPECTIVE DTAAS HAVE NOT BEEN CONSIDERED. NO DOUBT, ASSESSEE HAS RELIED ON AN ORDER DATED 11.03.2014 OF A CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 20 08-09 (ITA NO.1202/MDS/2013) FOR ITS SUBMISSION THAT TAX WAS NOT REQUIRED TO BE DEDUCTED ON AMC CHARGES PAID TO THE NON RESIDENT CO MPANIES. HOWEVER, WHAT WE FIND FROM THE SAID CASE IS THAT T HE TWO COMPANIES TO WHICH ASSESSEE HAD PAID AMC CHARGES FOR PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2008-09 WERE COGNOS PTE LTD AND EP ICORE (ASIA) LTD. AS AGAINST THIS, PAYMENTS MADE FOR THE IMPUGNED AS SESSMENT YEAR WERE NOT TO THESE TWO COMPANIES AND HENCE THE DECI SION MAY NOT HELP THE ASSESSEES CASE. NEVERTHELESS, CONSIDERIN G THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION TH AT THE QUESTION WHETHER ASSESSEE WAS LIABLE TO DEDUCT TAX ON AMC C HARGES TO NON RESIDENTS REQUIRES A FRESH LOOK BY THE LD. ASSESSIN G OFFICER. WE SET ITA NO.689/2015 :- 7 -: ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS I SSUE REMIT IT BACK TO THE FILE OF THE LD. ASSESSING OFFICER FOR CONSIDERA TION AFRESH IN ACCORDANCE WITH LAW. 6. ADVERTING TO THE GROUNDS RELATING TO PAYMENTS MA DE TO LICENSE FOR SOFTWARE, WITHOUT DEDUCTING TAX AT SOURCE. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DISPUTE WAS LIMITED TO PAYM ENTS MADE BY THE ASSESSEE TO ONE M/S.JQ NETWORK PTE LTD, SINGAPORE ( IN SHORT JQ NETWORK, SINGAPORE). AS PER THE LD. AUTHORISED R EPRESENTATIVE, AGGREGATE AMOUNTS PAID BY THE ASSESSEE TO THE ABOV E COMPANY CAME TO B54,86,734/-. ACCORDING TO LD. AUTHORISED REPRES ENTATIVE, LD. ASSESSING OFFICER HAD TREATED ASSESSEE AS ONE IN DE FAULT CONSIDERING PAYMENT TO M/S.JQ NETWORK PTE LTD, SINGAPORE AS WE LL AS TWO OTHER COMPANIES TO BE ROYALTY AS DEFINED IN SECTION 9(1) (VI) OF THE ACT. AS PER THE LD. AUTHORISED REPRESENTATIVE, LD. ASSESSIN G OFFICER TOOK A VIEW THAT SOFTWARE LICENSE FEES PAID BY THE ASSESSEE WAS ROYALTY. THIS VIEW TAKEN BY THE LD. ASSESSING OFFICER, AS PER LD. AUTH ORISED REPRESENTATIVE WAS CONFIRMED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS), ON THE PAYMENTS EFFECTED TO JQ NETWORK, PTE SINGAPORE , OBSERVING THAT SUCH PAYMENTS WERE NOTHING BUT ROYALTY COMING WITHI N THE MEANING OF ARTICLE 12(3) OF THE DTAA BETWEEN INDIA AND SINGAPO RE AS WELL AS ITA NO.689/2015 :- 8 -: SECTION 9(1) (VI) OF THE ACT. AS PER THE LD. AUTH ORISED REPRESENTATIVE, LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS OF A M ISTAKEN IMPRESSION THAT ASSESSEE WAS GRANTED A LICENSE BY THE PAYEE FOR USING LATTERS SOFTWARE AND THEREFORE PAYMENTS CON STITUTED ROYALTY. FURTHER, AS PER THE LD. AUTHORISED REPRESENTATIVE, LD. COMMISSIONER OF INCOME TAX (APPEALS) RELIED ON SECTION 14(B) OF COP YRIGHT ACT, 1957. ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE, LD. COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO ANALYZE THE NATURE O F THE SUPPLIES MADE BY JQ NETWORK, PTE, SINGAPORE AND ERRONEOUSLY HELD THAT THEY HAD GIVEN SOFTWARE WHICH WAS HIGHLY SOPHISTICATED A ND COMPLEX, REQUIRING INVESTMENTS IN MILLIONS OF DOLLAR AND HUN DREDS OF MAN-HOURS FOR DEVELOPMENT. FURTHER, AS PER THE LD. AUTHORISE D REPRESENTATIVE, LD. COMMISSIONER OF INCOME TAX (APPEALS) ALSO CAME TO A N ERRONEOUS CONCLUSION THAT ASSESSEE WAS USING A SOFTWARE WHICH WAS PATENTED BY JQ NETWORK, SINGAPORE. RELYING ON PAPER BOOK PAGES 9 TO 109, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT MANY OF TH E INVOICES RAISED BY JQ NETWORK, SINGAPORE CLEARLY INDICATED THAT SUP PLY WAS FOR NETWORKING EQUIPMENT AND ACCESSORIES. ACCORDING TO HIM, NETWORKING EQUIPMENT SUPPLIED BY JQ NETWORK, SINGAPORE HAD EMB EDDED SOFTWARE IN IT AND THE HARDWARE WOULD NOT WORK WIT HOUT SUCH SOFTWARE. FURTHER, AS PER THE LD. AUTHORISED REPRES ENTATIVE, THE EMBEDDED SOFTWARE WERE NOT A STANDALONE ITEM BUT A PART OF THE ITA NO.689/2015 :- 9 -: HARDWARE. THUS, ACCORDING TO HIM, WHAT ASSESSEE AC QUIRED FROM JQ NETWORK, SINGAPORE WAS NETWORKING EQUIPMENT WITH EM BEDDED SOFTWARE AND THE QUESTION OF BIFURCATATION THEREOF DID NOT ARISE. RELIANCE WAS PLACED ON THE PURCHASE ORDERS ISSUED BY THE ASSESSEE TO JQ NETWORK, SINGAPORE, AT PAPER BOOK PAGES 24 TO 84 . ACCORDING TO HIM, SUCH PURCHASE ORDERS CLEARLY INDICATED THAT W HAT WERE TO BE SUPPLIED WERE EQUIPMENT WITH EMBEDDED SOFTWARE. A S PER THE LD. AUTHORISED REPRESENTATIVE, ASSESSEE HAD NO RIGHT NO R THE ABILITY TO MAKE ANY CHANGES IN THE EMBEDDED SOFTWARE WHICH W AS NOTHING BUT FIRMWARE. THUS, ACCORDING TO HIM, THERE WAS NO QU ESTION OF ANY ROYALTY ELEMENT IN THE PAYMENTS TO JQ NETWORK, FO R APPLICATION OF SECTION 201(1) AND OR SECTION 201(1A) OF THE ACT. 7. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE S TRONGLY SUPPORTED THE ORDER OF THE COMMISSIONER OF INCOME T AX (APPEALS). 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. LOWER AUTHORITIES HAD TREATED THE PAYMENTS MADE BY THE ASSESSEE TO M/S.JQ NETWORK PTE AS ROYALTY FOR SOFTWARE. INVOICES RAISED BY JQ NETWORK ON THE ASS ESSEE HAS BEEN PLACED AT PAPER BOOK PAGE 9 ONWARDS. A READING OF THE INVOICES CLEARLY INDICATE THAT MANY OF THE SUPPLIED ITEMS WE RE HARDWARE WITH ITA NO.689/2015 :- 10 -: EMBEDDED SOFTWARE. THERE IS MUCH STRENGTH IN THE A RGUMENT OF THE LD. AUTHORISED REPRESENTATIVE THAT EMBEDDED SOFTWAR E USED IN NETWORKING EQUIPMENTS WITHOUT WHICH THE NETWORKING EQUIPMENT COULD NOT BE USED, WERE NOT STAND ALONE SOFTWARE. LD. CO MMISSIONER OF INCOME TAX (APPEALS) HAD CONSIDERED THE PAYMENTS MA DE BY THE ASSESSEE TO BE ROYALTY FOR THE LICENSE GRANTED BY THE PAYEES TO THE ASSESSEE FOR USING THE SOFTWARE. NO EXAMINATION HA S BEEN DONE ON THE REAL NATURE SOFTWARE, WHETHER IT WAS FIRMWARE O R EMBEDDED SOFTWARE OR STANDALONE SOFTWARE. THE QUESTION WHETH ER THE PAYMENTS WERE ROYALTY OR NOT HINGES UPON THE NATURE OF SOFT WARE SUPPLIED. UNLESS A CLOSE ANALYSIS IS DONE ON THE PURCHASES O RDERS AND INVOICES RELATING TO THE SUPPLIES MADE BY M/S. JQ NETWORK ON THE ASSESSEE, IT IS NOT LOGICALLY POSSIBLE TO COME TO A CONCLUSION ON T HE NATURE OF PAYMENTS EFFECTED BY THE ASSESSEE. IN THE CIRCUMSTA NCES, THE QUESTION WHETHER THE PAYMENTS EFFECTED BY THE ASSESSEE TO JQ NETWORK WOULD CONSTITUTE ROYALTY IN OUR OPINION ALSO REQUIRES A F RESH LOOK BY THE LD. ASSESSING OFFICER. WE THEREFORE SET ASIDE THE ORDER S OF THE LOWER AUTHORITIES ON THIS ISSUE ALSO AND REVERT IT BACK TO THE FILE OF THE LD. ASSESSING OFFICER FOR CONSIDERATION AFRESH IN ACCOR DANCE WITH LAW. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. ITA NO.689/2015 :- 11 -: ORDER PRONOUNCED ON TUESDAY, THE 20TH DAY OF NOVE MBER, 2018, AT CHENNAI. SD/- SD/- ( # $! # % . &' ) ( DUVVURU RL REDDY ) ) / JUDICIAL MEMBER ( . ) (ABRAHAM P. GEORGE) / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED: 20TH NOVEMBER, 2018. KV %& '()( / COPY TO: 1 . / APPELLANT 3. *+, / CIT(A) 5. (-. / / DR 2. / RESPONDENT 4. * / CIT 6. .01 / GF