M/s. Gracemac Corporation, Gurgaon V. ADIT, New Delhi

ITA 945/DEL/2012

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 3229 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-07-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 24-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL GULATI
• Keywords: Business income; Transfer pricing; Double taxation relief; Permanent establishment; Wholly owned subsidiary
• Section: 143(3); 234B; 195; 201; 144C; 10; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI D BEN CH, NEW DELHI [THROUGH VIDEO CONFERENCE] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI K. N CHARY, JUDICIAL MEMBER ITA NO. 5233/DEL/2010 [A.Y 2007-08] ITA NO. 945/DEL/2012 [A .Y 2006-07] ITA NO. 946/DEL/2012 [A .Y 2005-06] ITA NO. 947/DEL/2012 [A.Y 2006-07] GRACEMAC CORPORATION VS. THE DY D.I.T [NOW AMALGATED WITH MOL CORPORATION CIRCLE 1(2) S.R. BATLIBOI & CO. NEW DELHI GOLF VIEW CORPORATE, TOWER B SECTOR 42, SECTOR ROAD, GURGAON, HARYANA PAN: AABCG 8458 N [APPELLANT] [RESPONDENT] ASSESSEE BY : SHRI NAGESHWAR RAO, ADV REVENUE BY : SHRI SATPAL GULATI, CIT-DR DATE OF HEARING : 09.11.2020 DATE OF PRONOUNCEMENT : 16 .11.2020 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THE ABOVE CAPTIONED APPEALS BY THE ASSESSEE IN ITA NO. 5233/DEL/2010, ITA NO. 945/DEL/2012 & ITA NO. 94 6/DEL/2012 ARE PREFERRED AGAINST THREE SEPARATE ORDERS FRAMED U/S 143(3) R.WS. 144C OF THE INCOME TAX ACT, 1961 [HEREINAFTER REFERRED T O AS 'THE ACT' FOR SHORT] FOR A.YS 2005-06, 2006-07 AND 2007-08. SINCE COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS, THEY WERE HEARD TOGET HER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO. 947/DEL/ 2012 IS AGAINST THE ASSESSMENT ORDER FRAMED U/S 154 OF THE ACT RELA TING TO THE CHARGING OF INTEREST U/S 234B OF THE ACT. FOR THE SAKE OF CONVENIENCE AND BREVITY, WE HAVE CONSIDERED THE FACTS OF A.Y 200 5-06. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF MICROSOFT CORPORATION, USA ('MS CORP'). MS CORP ENTERED INTO A PARENT SUBSIDIARY AGREEMENT ('PS A') WITH GRACEMAC ON JANUARY 1, 1999 WHEREIN MS CORP HAS GRAN TED GRACEMAC: 3 THE EXCLUSIVE LICENSE TO MANUFACTURE MICROSOFT PROD UCTS; EXCLUSIVE LICENSE TO DISTRIBUTE THE PRODUCTS SO MANUFACTURED DIRECTLY TO RETAILERS OR TO MS CORP OR TO SUBSIDIARIES OF MS CORP, AND EXCLUSIVE RIGHT TO LICENSE ANY THIRD PARTY TO DIRE CTLY GRANT CUSTOMERS THE RIGHT TO REPRODUCE MICROSOFT SOFTWARE PRODUCTS FOR INTERNAL USE. 3. ON THE SAME DATE THE ASSESSEE ENTERED INTO A LIC ENSE AGREEMENT WITH MICROSOFT OPERATIONS PTE. LIMITED, SINGAPORE ('M S OPS'), WHEREIN GRACEMAC HAS GRANTED MS OPS THE: NON-EXCLUSIVE LICENSE TO MANUFACTURE MICROSOFT PRODUCTS IN SINGAPORE; NON-EXCLUSIVE LICENSE TO DISTRIBUTE THE PRODUCTS SO MANUFACTURED TO RETAILERS OR TO MS CORP OR TO SUBSIDIARIES OF MS CORP; AND NON-EXCLUSIVE RIGHT TO LICENSE OR SUBLICENSE THE RI GHT TO REPRODUCE MICROSOFT SOFTWARE PRODUCTS TO CERTAIN END USERS (LARGE ACCOUNT CUSTOMERS) FOR THEIR INTERNAL USE. 4 4. THIS AGREEMENT WAS RENEWED W.E.F. APRIL 3, 2004. T HERE IS NO SIGNIFICANT DIFFERENCE ON ACCOUNT OF ACTIVITIES AND LICENSE GRANTED BY THE ASSESSEE BUT THE ONLY DISTINCTION BETWEEN THE TW O AGREEMENTS IS THE ALTERATION IN THE ABBREVIATED NAMES, NAMELY, FR OM MS CORP TO MSFT AND FROM MO OPS TO MO. THESE NEW ABBREVIATED NA MES HAVE BEEN USED IN FURTHER DISCUSSION OF THE CASE. 5. IN LIEU OF THE ABOVEMENTIONED RIGHTS, THE ASSESS EE EARNS ROYALTY FROM MO. THE ROYALTY IS COMPUTED ON THE BASIS OF TH E NET SELLING PRICE OF MICROSOFT PRODUCTS MANUFACTURED BY MO AND DISTRI BUTED TO RETAILERS, MSFT OR SUBSIDIARIES OF MSFT. IN TURN, MO HAS ENTER ED INTO A NON- EXCLUSIVE DISTRIBUTION AND INTERCOMPANY SERVICES AG REEMENT ('DISTRIBUTION AGREEMENT') WITH MICROSOFT REGIONAL SAL ES CORPORATION, USA ('MRSC') WHEREIN MRSC HAS BEEN APPOINTED AS A DIS TRIBUTOR OF MICROSOFT PRODUCTS MANUFACTURED BY MO. MRSC HAS BEE N GIVEN THE RIGHT TO DISTRIBUTE MICROSOFT PRODUCTS IN ASIA (WITH RESTRICTIONS IN CHINA, KOREA AND TAIWAN), JAPAN, SOUTH EAST ASIA AND THE SOUTH PACIFIC AS PER SCHEDULE A OF DISTRIBUTION AGREEMENT . PURSUANT TO THE DISTRIBUTION AGREEMENT, MRSC HAS ENTERED INTO AGREE MENTS WITH VARIOUS DISTRIBUTORS IN INDIA. THE DISTRIBUTORS HAV E A RIGHT TO DISTRIBUTE THE PRODUCTS IN INDIA. 5 6. THUS, ALL THE THREE COMPANIES I.E. THE ASSESSEE COMPANY, THE LICENSEE AND THE DISTRIBUTION COMPANY I.E. MSRSC AR E ALL ASSOCIATED ENTERPRISES AND SUBSIDIARIES OF MICROSOFT CORPORATI ON USA. 7. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEED INGS THE ASSESSEE WAS REQUIRED TO FURNISH THE FOLLOWING DETAIL S: (I) COPY OF AGREEMENT BETWEEN GRACEMAC CORPORATION AND MICROSOFT CORPORATION RELEVANT TO F.Y. 2004-05. (II) COPY OF LICENSE AGREEMENT WITH MICROSOFT OPERATIONS PTE. LTD., SINGAPORE RELEVANT TO F.Y. 2004-05. (III) PLEASE STATE AS TO WHY NOT THE PAYMENTS RECEI VED BY THE ASSESSEE FROM SALE OF PRODUCTS IN INDIA BE TAXED AS ROYALTIES AS PER THE PROVISIONS OF THE INCOME TAX ACT,1961 AS WE LL AS THE TAX TREATY BETWEEN INDIA AND USA, FOR THE DETAILED REAS ONS MENTIONED IN THE ASSESSMENT ORDER OF PREVIOUS YEAR. PLEASE STATE WHETHER ANY NEW FACTS RELEVANT TO THE CHARACT ERIZATION OF INCOME HAVE OCCURRED DURING THE YEAR, IF YES, THE S AME BE SUBMITTED. 6 (IV) THE TOTAL AMOUNT OF SOFTWARE PRODUCTS SOLD DIS TRIBUTORS IN RESPECT OF FINISHED IN INDIA AND THE SOFTWARE PRODU CTS SOLD UNDER OPEN LICENSING PROGRAMME DURING F.Y. 2004-05 B E STATED. (V) PLEASE STATE THE AMOUNTS RECEIVED/RECEIVABLE BY GRACEMAC CORPORATION DURING THE PERIOD 01.04.2004 TO 31.03.2 005. (VI) THE COPY OF FINANCIALSTATEMENTS OF GRACEMAC CO RPORATION RELEVANT TO INDIAN F.Y. 2004-05. 8. THE ASSESSEE FURNISHED THE REQUISITE DETAILS AND AFTER CAREFULLY PERUSING THE DOCUMENTS FURNISHED BY THE ASSESSEE, T HE ASSESSING OFFICER FORMED A BELIEF THAT ON THE BASIS OF GRANTI NG OF RIGHTS, THE ASSESSEE GOT THE EXCLUSIVE RIGHTS WITH REGARD TO MIC ROSOFT PRODUCTS IN EXCHANGE OF STOCKS TO MS CORP. DUE TO THIS, THE IN TELLECTUAL PROPERTY RIGHTS OWNER IS GRACEMAC CORP. AND ANY PAYMENTS ARIS ING IN INDIA IN LIGHT OF PROVISIONS OF PARAGRAPH 7(B), ARTICLE 12 O F THE INDIA-US TAX TREATY, ARE TAXABLE AS ROYALTIES. FORMING THIS BEL IEF, THE ASSESSING OFFICER HELD THAT NOT ONLY 35% OR 40% OF THE AMOUNT BUT TOTAL AMOUNT OF USD 155,646,892 IS TAXABLE AS ROYALTY @ 15% AS P ROVIDED IN ARTICLE 12 OF INDIA US DTAA. 7 9. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE, AT THE VERY OUTSET, STATED THAT THE ENTIRE ACTION BY THE ASSESSING OFFI CER HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE B Y THE TRIBUNAL IN THE CASE OF MOCROSOFT CORPORATION FOR AY.S 1997-98 TO 1999-2000 IN THE CASE OF MOL CORPORATION FOR A.Y 2011-12 AND FURTHER IN THE CASE OF MOL CORPORATION FOR A.YS 2007-08 TO 2010-11. COPIES OF THE ORDERS OF THE TRIBUNAL HAVE BEEN SUPPLIED TO US. 10. PER CONTRA, THE LD. DR, RELYING UPON THE ORDERS OF THE LOWER AUTHORITIES, HOWEVER CONCEDED THAT THE IMPUGNED DISP UTE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL I N THE EARLIER YEARS. 11. FOR THE SAKE OF BREVITY, WE HAVE CONSIDERED THE DECISION OF THE CO-ORDINATE BENCH IN ITA NOS. 1328 TO 1330/DEL/2008 FOR A.YS 1997-98 TO 1999-2000 ORDER DATED 13.05.2019. THE RELEVANT DISCUSSIONS ARE AS UNDER: 9. WE HAVE GONE THROUGH THE RECORD IN THE LIGHT OF THE SUBMISSIONS MADE ON EITHER SIDE. WE FIND THAT THE F ACTS OF THIS CASE ARE IDENTICAL TO THE FACTS INVOLVED IN THE CAS E OF INFRA-SOFT LTD (SUPRA), MORE PARTICULARLY ON A READING OF THE REASONING OF THE LD. AO IN THIS CASE TO ARRIVE AT THE CONCLUSION THAT THE 8 SALES/LICENSING OF THE SOFTWARE WAS ROYALTY IN JUXT APOSITION TO PARAGRAPH NO. 11 OF ORDER OF THE HONBLE JURISDICTI ONAL HIGH COURT WHICH ARE STRIKINGLY SIMILAR. HONBLE COURT A FTER DEALING WITH THIS ISSUE EXTENSIVELY HELD THAT WHAT IS TRANS FERRED IN THIS MATTER IS NEITHER THE COPYRIGHT NOR THE USE OF THE COPYRIGHT IN THE SOFTWARE, BUT WHAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIGHTED MATERIAL OR ARTICLE WHICH IS CLEARLY DI STINCT FROM THE RIGHTS IN THE COPYRIGHT, AND THE RIGHT THAT IS TRA NSFERRED IS NOT A RIGHT TO USE THE COPYRIGHT BUT IS ONLY LIMITED TO THE RIGHT TO USE THE COPYRIGHTED MATERIAL AND THE SAME DOES NOT GIVE RISE TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME ONL Y. 10.. 11.. 12. ON A CAREFUL READING OF THE FACTS OF INFRA-SOFT LTD (SUPRA), AS COULD BE CULLED OUT FROM PARAGRAPHS 3 TO 12 WE F IND THAT THE FACTS IN BOTH THE CASES ARE IDENTICAL AND THE ISSUE THAT WAS DEALT WITH IS ALSO IDENTICAL. WE, THEREFORE, DO NOT HAVE ANY HESITATION IN OUR MIND TO HOLD THAT IN VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF IN FRASOFT (SUPRA), THE ISSUE INVOLVED IN THIS MATTER IS NO LO NGER RES INTEGRA AND HAS TO BE ANSWERED BY STATING THAT THERE IS N O TRANSFER OF ANY RIGHT IN RESPECT OF COPYRIGHT BY THE ASSESSEE A ND IT IS THE CASE OF MERE TRANSFER OF COPYRIGHTED ARTICLE AND TH E PAYMENT WAS FOR A COPYRIGHTED ARTICLE AND REPRESENTS THE PU RCHASE PRICE OF AN ARTICLE AND CANNOT BE CONSIDERED AS ROYALTY E VEN UNDER THE 9 INCOME TAX ACT, 1961 OR UNDER THE DTAA. WHEN ONCE W E REACH SUCH A CONCLUSION, WE DO NOT FIND ANY NEED FOR FURT HER VERIFICATION OF ANY FACT AT THE END OF THE ASSESSIN G OFFICER. INSOFAR AS THE LAW LAID DOWN BY THE HONBLE HIGH CO URT IS CONCERNED, WHETHER OR NOT THIS PARTICULAR JUDGEMENT WAS AVAILABLE BEFORE THE ASSESSING OFFICER AT THE TIME OF FRAMING OF THE ASSESSMENT, IT MAKES LITTLE DIFFERENCE BECAUSE THE DECISION OF THE HONBLE HIGH COURT BINDS THE LEARNED ASSESSI NG OFFICER IN THE SAME WAY AS IT BINDS THIS TRIBUNAL ALSO. WE, TH EREFORE, DO NOT FIND ANY NEED TO REMAND THE MATTER BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER. 13. . 14. ON THE ASPECT OF INTEREST UNDER SECTION 234B, L D. AR PLACED RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS GE PACKAGED POWER INC. (2015) 373 IT R 0065 (DELHI). IN THIS CASE, THE HONBLE HIGH COURT OF DE LHI REFERRED AND FOLLOWED ITS DECISION IN THE CASE OF DIRECTOR O F INCOME TAX VS. JACABS CIVIL INCORPORATED (2011) 330 ITR 0578 W HEREIN IT WAS HELD THAT SEC. 195 PUT AN OBLIGATION ON THE PAY ER I.E., ANY PERSON RESPONSIBLE FOR PAYING ANY AMOUNT TO A NON-R ESIDENT, TO DEDUCT TAX AT SOURCE AT THE RATES IN FORCE FROM SUC H PAYMENTS, THUS, ENTIRE TAX IS TO BE DEDUCTED AT SOURCE WHICH IS PAYABLE ON SUCH PAYMENTS MADE BY THE PAYER TO THE NON-RESIDENT ; THAT IF THE SAID PAYER HAS DEFAULTED IN DEDUCTING TAX AT SO URCE, THE 10 DEPARTMENT CAN TAKE ACTION AGAINST THE PAYER UNDER THE PROVISIONS OF SECTION 201 OF THE ACT AND COMPUTE TH E AMOUNT ACCORDINGLY; THAT IN SUCH A CASE, THE NON-RESIDENT IS LIABLE TO PAY TAX BUT THERE IS NO QUESTION OF PAYMENT OF ADVANCE TAX; AND THAT, THEREFORE, ASSESSEE IS NOT LIABLE TO PAY INTE REST UNDER SECTION 234B ON ACCOUNT OF DEFAULT OF THE PAYER IN DEDUCTING TAX AT SOURCE FROM THE PAYMENTS MADE TO THE ASSESSE E. IT IS PERTINENT TO NOTE THAT THE DECISION IN JACABS CIVIL INCORPORATED(SUPRA) RELATES TO THE AY2001-02. 15. BE THAT AS IT MAY, INASMUCH AS WE HELD IN THE P RECEDING PARAGRAPHS THAT THERE IS NO ROYALTY INCOME INVOLVED IN THIS MATTER, AND FOR WANT OF PERMANENT ESTABLISHMENT, TH E BUSINESS INCOME OF THE ASSESSEE IS NOT TAXABLE IN INDIA,WE, THEREFORE, IN THESE CIRCUMSTANCES AND ALSO WHILE RESPECTFULLY FOL LOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, HOLD THIS ISSUE IN FAVOUR OF THE ASSESSEE IN ALL THE ASSESSMENT YEA RS. 12. AS NO DISTINGUISHING DECISION HAS BEEN BROUGHT TO OUR NOTICE AND ON FINDING PARITY IN THE FACTS WITH THE FACTS OF THE YEAR UNDER CONSIDERATION, RESPECTFULLY FOLLOWING THE FINDINGS O F THE CO-ORDINATE BENCH [SUPRA], WE DECIDE ACCORDINGLY. 11 13. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ITA NO. 946, 947, 9451/DEL/2012 AND 5233/DEL/2010 ARE ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 16.11 .2020. SD/- SD/- [ K. N. CHARY ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 16 TH NOVEMBER, 2020 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI 12 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE DATE ON WHICH THE APPROVED DRAFT COMES TO DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE DATE ON WHICH THE FAIR ORDER COMES BACK TO DATE ON WHICH THE FINAL ORDER IS UPLOADED ON DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE DATE OF DISPATCH OF THE ORDER