2021 (11) TMI 1033 - AT - Income Tax

Tribunal Rules in Favor of Assessee on Taxability of Offshore Receipts

The Tribunal ruled in favor of the assessee in a case concerning taxability of receipts from Power Grid Corporation of India Limited (PGCIL) and North ... Income accrued in India - royalty receipts - India - USA DTAA - Taxability of offshore software and hardware maintenance and support services - long-term software and hardware maintenance and support agreements, signed between the assessee and PGCIL for Southern and Western region - HELD THAT:- From the explanation provided in the MOU that forms an integral part of tax treaty that service only, if it makes available technical knowledge, experience, skill, know-how or processes to the service recipient. The receiver of this service can be said to acquire the relevant skills used by service provider only if he acquires those skills in such a way that he can himself use them independently without getting any assistance or being dependent on the service provider in future. The facts of the present case clearly show that the offshore maintenance and support services provided by the assessee PGCIL are not geared towards making available any technical knowledge, experience, skills, know how or processes to PGCIL. Our view is supported by the fact that the term of the agreement is five years and services provided by the assessee are repetitive and ongoing in nature. This means that PGCIL is not able to apply technical or skill use by the assessee for rendering such services. Given that repetitive nature of the services, it would be factually incorrect to allege that the services make available any technical knowledge, expertise, skill, knowhow or processes to PGCIL. The taxability of offshore software and hardware maintenance and support services has to be examined in terms of beneficial provisions of Article 12 of the tax treaty. We find that in the case in hand, the customer would not be able to apply technology on its own and the customer would continue to depend on the assessee for provision of software and hardware maintenance and support services in future as well. DR, in his written submissions, has reiterated the findings of the DRP which, as mentioned elsewhere, were based on incorrect facts. Further, judicial decisions relied upon by the ld DR are not applicable on the facts of the case In hand qua the agreement under dispute. Considering the facts of the case in totality, in light of the judicial decisions discussed here in above, we are of the considered view that the receipts from PGCIL do not qualify as ‘Royalty’ under Article 12(4)(a) and 12(4)(b) of the India US DTAA. The same is directed to be deleted. Scope of NDPL contract. This is relevant only for Assessment Years 2010–11, 2011–12 and 2012–13 - NDPL contract is divided into two purchase orders. The first purchase order is towards software licenses and second purchase order is for offshore services. For Assessment Year 2010–11, the assessee received consideration under both purchase orders but for Assessment Year 2011– 12 only license fee under first purchase order was received and in 2012– 13 only service fee was received under second purchase order. Under the first purchase order, no copyright has been transferred to NDPL and there is only right to use the software, which is clear from the relevant contract. This issue has now been well settled by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt Ltd [2021 (3) TMI 138 - SUPREME COURT] In light of the aforementioned decision of the Hon'ble Supreme Court, since the payment towards software license does not qualify as “Royalty” services even if connected with such software, do not qualify as FIS under Article 12(4)(a) of the India US DTAA read with MOU/Protocol. The DRP’s findings in Assessment Year 2010–11 are premised on the basis that the software supplied by the assessee qualifies as “Royalty”. This finding is incorrect in light of the decision of the Hon'ble Supreme Court [supra]. The other finding of the DRP that consideration for US dollar 1 lakh is towards software and hardware is also incorrect. The entire consideration of US dollar 1 lakh is towards software as is evident from the contract with NDPL. The relevant clause of the contract relating to scope of service makes it clear that services are in the nature of remote troubleshooting and do not make available any skill, knowledge, experience to NDPL. Considering the facts of the case in light of the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt Ltd [supra] we are of the considered view that the consideration for services in connection with supply of software do not qualify as FIS under Article 12(4)(a) or 12(4)(b) of the India USDTAA. We, accordingly, direct for deletion of the addition. Charging of interest under section 234B and 234C - HELD THAT:- This has been settled by the Hon'ble Supreme Court in the case of Mitsubishi India Ltd [2021 (9) TMI 875 - SUPREME COURT] in which the Supreme Court has held that prior to Assessment Year 2013–14, no interest is to be charged under section 234B of the Act. Charging of interest under section 234C is consequential. We, accordingly, direct the Assessing Officer to charge interest as per provisions of the law. Issues Involved:1. Taxability of receipts from Power Grid Corporation of India Limited (PGCIL) for offshore maintenance and support services.2. Taxability of receipts from North Delhi Power Limited (NDPL) for offshore supply of software licenses.3. Charging of interest under sections 234B and 234C of the Income Tax Act.Detailed Analysis:Issue 1: Taxability of Receipts from PGCIL- Facts and Agreement: The assessee entered into an agreement with PGCIL on 29.12.2006 to provide offshore maintenance and support services, including remote troubleshooting and incidental spare parts supply for EMS and SCADA systems. All services were performed from outside India.- Assessing Officer's Stand: The services were taxable as Fees for Included Services (FIS) under section 9(1)(vii) of the Income Tax Act and/or Article 12 of the Tax Treaty.- Assessee's Contention: The assessee opted to be governed by the more beneficial provisions of the tax treaty, rendering section 9(1)(vii) inapplicable.- Tribunal's Finding: The Tribunal agreed with the assessee, stating that the tax treaty's provisions are more beneficial, thus section 9(1)(vii) does not apply. The services did not make available any technical knowledge, experience, skills, know-how, or processes to PGCIL, as required by Article 12(4)(a) of the Indo-US DTAA. The services were repetitive and ongoing, indicating that PGCIL could not independently apply the technical skills.- Conclusion: The receipts from PGCIL do not qualify as ‘Royalty’ under Article 12(4)(a) and 12(4)(b) of the India-US DTAA. The addition was directed to be deleted.Issue 2: Taxability of Receipts from NDPL- Facts and Agreement: The NDPL contract was divided into two purchase orders: one for software licenses and another for offshore services. For Assessment Year 2010-11, the assessee received consideration under both orders.- Tribunal's Analysis: No copyright was transferred to NDPL; only the right to use the software was granted. The Supreme Court in Engineering Analysis Centre of Excellence Pvt Ltd ruled that payments for software licenses do not constitute ‘Royalty’. Consequently, the payments for services connected with such software do not qualify as FIS under Article 12(4)(a) of the India-US DTAA.- Conclusion: The consideration for services related to software supply does not qualify as FIS under Article 12(4)(a) or 12(4)(b) of the India-US DTAA. The addition was directed to be deleted.Issue 3: Charging of Interest under Sections 234B and 234C- Tribunal's Decision: The Supreme Court in Mitsubishi India Ltd held that prior to Assessment Year 2013-14, no interest is to be charged under section 234B. Charging of interest under section 234C is consequential.- Conclusion: The Assessing Officer was directed to charge interest as per the provisions of the law.Final Judgment: The appeals filed by the assessee were allowed, and the order was pronounced in the open court on 24.11.2021.