KONY INC., USA V. DCIT, CIRCLE- 2(1)(2), INTL. TAXATION, NEW DELHI

ITA 7462/DEL/2018

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The appeals by KONY INC. challenged the final assessment orders for the assessment years 2015-16 and 2017-18, which were passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961, following the directions of the Dispute Resolution Panel (DRP). The primary issues revolved around the taxability of income received from the sale of software licenses and annual maintenance charges, which the Assessing Officer had classified as royalty and Fee for Included Services (FIS) respectively, under the India-USA DTAA. The Tribunal, referencing a precedent set by the Supreme Court and previous decisions in the assessee's own case, found that such receipts did not constitute royalty or FIS, and thus, were not taxable in India.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300596 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 29-11-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 25-11-2018
• Other Referred Cases: Engineering Analysis Centre of Excellence Private Ltd. vs. The Commission of Income-tax
• Laws Referred To: Income-tax Act, 1961, Indian \\u2013 USA Double Taxation Avoidance Agreement (DTAA)
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Set aside
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.7462/Del/2018 Assessment Year: 2015-16 KONY INC., 9225, Bee Cave Road, Suite 300, Austin, TX 78733, United State of America Vs. Deputy Commissioner of Income Tax, Circle-2(1)(2), International Taxation, New Delhi PAN :AAECK4771D (Appellant) (Respondent) WITH ITA No.616/Del/2021 Assessment Year: 2017-18 KONY INC., C/o- Kony India Pvt. Ltd. SEZ, Unit-2, Office Level-7, Building No. H06, Hitec City, Phoenix Infocity Pvt. Ltd., Gachibowli, Serilingamplally, Hyderabad-500081 Vs. ACIT, Circle-2(1)(2), International Taxation, New Delhi PAN :AAECK4771D (Appellant) (Respondent) Appellant by Sh. R. Sivaraman, Advocate Respondent by Sh. Gangadhar Panda, CIT(DR) Date of hearing 30.11.2022 Date of pronouncement 11.01.2023 ITA No.7462/Del/2018 & 616/Del/2021 2 | P a g e ORDER PER SAKTIJIT DEY, JM: Captioned appeals have been filed by the assessee assailing the final assessment order passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (for short ‘the Act’) pertaining to assessment years 2015-16 and 2017-18 respectively in pursuance to the directions of learned Dispute Resolution Panel (DRP). ITA No.7462/Del/2018 for AY: 2015-16 2. In ground nos. 1 to 5, the assessee has raised the common issue of taxability of an amount of Rs.7,27,33,773/- received from sale of licence to various Indian customers as royalty under Article 12(3) of Indian – USA Double Taxation Avoidance Agreement (DTAA). 3. Briefly the facts are, the assessee, a non-resident corporate entity is a tax resident of United States of America (USA), hence, governed under India – USA DTAA. As observed by Assessing Officer, the assessee is a multi-channel application development platform provider having over 350 customers spread in 45 countries. The assessee provides end to end integrated, cloud- ITA No.7462/Del/2018 & 616/Del/2021 3 | P a g e based platform that enables enterprises to quickly design, build, test, deploy and manage multi-channel application experience. The assessee also provides a suite of customizable, ready-to-run application that lower costs, ensure faster time to market, and provide enterprises the flexibility to evolve at the speed of mobile technology. For this purpose, assessee employs a specialized staff of professionals globally dedicated to development, delivery, and support of mobile solutions and technologies. It provides software and support services to meet the demands of the ever changing mobile landscape and provides customers with innovative solutions. 4. Be that as it may, in the year under consideration, the assessee received an amount of Rs.7,27,33,773/- from sale of licence. However, in course of assessment proceeding, while explaining the reason for not offering such income to tax, the assessee submitted that the receipts are not in the nature of royalty under Article 12(3) of India – USA DTAA, as, the said provision does not cover a mere right to use of a copyrighted product, but they cover only the use of or the right to use of the copyright or embedded in the copyrighted products. The Assessing Officer, however, was not convinced with the ITA No.7462/Del/2018 & 616/Del/2021 4 | P a g e submissions of the assessee and ultimately concluded that the amount received is in the nature of royalty, both under section 9(1)(vi) of the Act as well as under Article 12(3) of India – USA DTAA. Learned DRP, while dealing with assessee’s objections on the issue, upheld the decision of the Assessing Officer. 5. Before us, learned counsel appearing for the assessee submitted that the issue is squarely covered by the decision of the Tribunal in assessee’s own case in assessment year 2014-15. 6. Though, learned Departmental Representative agreed with the aforesaid submission of the assessee, however, he strongly relied upon the observations of the Assessing Officer and learned DRP. 7. We have considered rival submissions and perused materials on record. It is evident, the assessee had entered into End User Licence Agreement (EULA) with customers in India in terms of which the assessee has granted licence to use certain standardized software to the customer. The licences provided to the end users are non-exclusive and non-transferable. The end users of the licnese do not have any access to the source code, nor there was any transfer of right in process or use of any process. The limited right granted to the customers under EULA ITA No.7462/Del/2018 & 616/Del/2021 5 | P a g e is to use the software for their own internal purposes. Notably, while deciding identical issue in assessee’s own case in assessment year 2014-15, the Coordinate Bench in ITA No.6018/Del/2017, dated 01.06.2022 has held as under: “5. We have carefully considered the submissions of both the parties and gone through the record. 6. Ld. counsel of the assessee submitted that the issue is now squarely covered by the decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd. vs. The Commission of Income-tax in Civil Appeal Nos.8733-8734 of 2018. In this case, Hon'ble Apex Court expounded that consideration for the resale of the computer software through End User License Agreement (EULA)/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India. Ld. counsel submitted that the facts in the assessee's case are identical. He further submitted that ITAT in assessee's own case earlier also has decided the issue in favour of the assessee. 7. Ld. DR for the Revenue could not dispute the above proposition. 8. Accordingly, respectfully following the precedent from Hon’ble Apex Court and duly taking note that Revenue has not disputed that the facts in this case are not identical, we set aside the order of the Revenue authorities and decide the issue in favour of the assessee.” 8. There is no dispute that factually the issue stands on the same footing as assessment year 2014-15. Therefore, respectfully following the decision of the Coordinate Bench in assessee’s own case, as referred to above, we hold that the receipt in dispute is not in the nature of royalty, hence, not taxable in India. The Assessing Officer is directed to delete the addition. These grounds are allowed. ITA No.7462/Del/2018 & 616/Del/2021 6 | P a g e 9. In ground no. 6, the assessee has challenged the addition of Rs.1,23,20,383/- by treating it as Fee for Included Services (FIS) under Article 12(4)(a) of Indian – USA DTAA. As discussed earlier, while completing the assessment, the Assessing Officer held that the amount received by the assessee towards granting licence under EULA is in the nature of royalty, hence, taxable in India. In the context of the said reasoning, the Assessing Officer held the view that the receipts from annual maintenance charges of the software are in the nature of FIS/FTS, both under the tax treaty as well as under section 9(1)(vii) of the Act. Accordingly, he brought to tax the amount of Rs.1,23,20,383/-. Learned DRP, while deciding the objections of the assessee, upheld the decision of the Assessing Officer. 10. We have considered rival submissions and perused the materials on record. It is evident, being of the view that annual maintenance charges are ancillary and subsidiary to the grant of licence for right to use software, which is treated as royalty, the Assessing Officer concluded that receipt from annual maintenance charges is in the nature of FIS under Article 12(4)(a) of India – USA DTAA as well as under section 9(1)(vii) of the Act. However, while deciding the issue of taxability of receipts from ITA No.7462/Del/2018 & 616/Del/2021 7 | P a g e granting of licence, we have held that they are not in the nature of royalty under the treaty provisions. That being the case, the receipt from annual maintenance charges being not ancillary or subsidiary to any royalty income cannot be brought to tax under Article 12(4)(a) of the tax treaty. Therefore, it has to be seen, whether it can come within the purview of Article 12(4)(b) of the tax treaty. As could be seen, to be considered as FIS under Article 12(4)(b) under the tax treaty, the make available condition has to be satisfied. In the facts of the present appeal, the Departmental Authorities have failed to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skills, knowhow etc. to the recipient of such services. That being the case, the amount received cannot be treated as FIS under Article 12(4)(b) of the tax treaty. 11. In any case of the matter, the entire case of the revenue is, the amount received falls under Article 12(4)(a) of the treaty. In view of the aforesaid, we hold that the amount received is not taxable in India as it cannot be treated as FIS under Article 12(4) of the tax treaty. Accordingly, we direct the Assessing Officer to delete the addition. ITA No.7462/Del/2018 & 616/Del/2021 8 | P a g e 12. Ground no. 7, being consequential in nature, does not require adjudication. 13. In the result, appeal is allowed, as indicated above. ITA No.616/Del/2021 for AY: 2017-18 14. Ground no. 1, being a general ground, does not required specific adjudication. 15. The issue raised in ground no. 2 is identical to the issue raised in ground nos. 1 to 5 of ITA No. 7462/Del/2018 decided by us in the earlier part of the order. Therefore, our decision therein, will apply mutatis mutandis to this appeal as well. Accordingly, the Assessing Officer is directed to delete the addition. 16. In ground no. 3, the assessee has raised the issue of taxability of receipts from annual software maintenance charges as FIS under Article 12(4)(a) of India – USA DTAA. This ground is identical to ground no. 6 of ITA No. 7462/Del/2018 decided in earlier part of the order. Following our decision therein, we direct the Assessing Officer to delete the addition. 17. In ground no. 4, the assessee has raised the issue of erroneous application of tax at the rate of 40% instead of 10% under section 115(1)(b)(B) of the Act, with regard to the income offered to tax in the return of income. It is an agreed position ITA No.7462/Del/2018 & 616/Del/2021 9 | P a g e before us that the Assessing Officer has not, at all, considered the issue. Therefore, it was submitted before us to restore this issue to the Assessing Officer. 18. Considering the submissions of the parties, we restore this issue to the Assessing Officer with a direction to verify assessee’s claim and decide the issue in accordance with law. This ground is allowed for statistical purposes. 19. Ground no. 5, being a general ground, is dismissed. 20. In the result, the appeal is partly allowed. 21. To sum up, the appeal for assessment year 2015-16 is allowed and the appeal for assessment year 2017-18 is partly allowed. Order pronounced in the open court on 11 th January, 2023 Sd/- Sd/- (G.S PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 11 th January, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi