2019 (1) TMI 35 - AT - Income Tax

Appeal granted on AMC treatment under Income Tax Act, DTAA considerations to be factored in fresh assessment.

Cognizant Technology Solutions India Private Limited Versus The Income Tax Officer, International Taxation II (1), Chennai

The Tribunal allowed the appeal challenging the treatment of annual maintenance charges (AMC) as fees for technical services under the Income Tax Act. It ... Assessee in default u/s.201(1) - TDS u/s 195 - TDS on AMC charges to Non Residents - Payments made for software annual maintenance charges and payments made for what is claimed as software license fees - application of 'making available” clause in the Article defining Royalty and fees for included services, in the respective DTAA’s - Held that:- Considering the facts and circumstances of the case, we are of the opinion that the question whether assessee was liable to deduct tax on AMC charges to Non Residents requires a fresh look by the ld. Assessing Officer. We set aside the orders of the lower authorities on this issue remit it back to the file of the ld. Assessing Officer AO for consideration afresh in accordance with law. For payments made to license for software, without deducting tax at source - Commissioner of Income Tax (Appeals) had considered the payments made by the assessee to be Royalty for the license granted by the payees to the assessee for using the software. No examination has been done on the real nature software, whether it was firmware or embedded software or standalone software. The question whether the payments were Royalty or not hinges upon the nature of software supplied. Unless a close analysis is done on the purchases orders 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 the nature of payments effected by the assessee. In the circumstances, the question whether the payments effected by the assessee to JQ Network would constitute Royalty in our opinion also requires a fresh look by the ld. Assessing Officer. We therefore set aside the orders of the lower authorities on this issue also and revert it back to the file of the AO for consideration afresh in accordance with law - Appeal of the assessee allowed for statistical purposes. Issues involved:1. Treatment of annual maintenance charges as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961.2. Consideration of Double Taxation Avoidance Agreements (DTAA) with USA, Australia, Singapore, and Canada in relation to AMC payments.3. Determination of software license fees paid to a company as Royalty under Section 9(1)(vi) of the Act and Article 12(3) of the DTAA between India and Singapore.Issue 1: Treatment of annual maintenance charges (AMC) as fees for technical services:The appeal challenged the order treating the assessee as an assessee in default under section 201(1) of the Income Tax Act and levying interest under section 201(1A) on payments made for software AMC. The contention was that the payments were considered as fees for technical services. The Authorized Representative argued that the lower authorities failed to consider DTAA provisions with specific definitions of royalty and fees for included services. The contention was that the technical services were not made available to the assessee through the AMCs, and reliance was placed on the DTAA with respective countries. The Tribunal found that the lower authorities did not analyze the transactions with relevant DTAA articles and remitted the issue back to the Assessing Officer for fresh consideration.Issue 2: Consideration of DTAA in relation to AMC payments:The Authorized Representative contended that the lower authorities did not consider the DTAA provisions with USA, Australia, Singapore, and Canada, which defined royalty and fees for included services more narrowly than the Act. The Tribunal observed that the Commissioner of Income Tax (Appeals) did not examine whether technical services were made available to the assessee through the AMCs. It was noted that the assessee could opt for DTAA provisions if found more beneficial. The Tribunal set aside the lower authorities' orders and directed a fresh assessment by the Assessing Officer.Issue 3: Determination of software license fees as Royalty:Regarding payments made for software license fees without TDS deduction, the contention was limited to payments to a specific company. The Authorized Representative argued that the payments did not constitute Royalty as defined in the Act and DTAA. The Commissioner of Income Tax (Appeals) considered the payments as Royalty, but the Tribunal found that a detailed analysis of the nature of the software supplied was necessary. The Tribunal set aside the lower authorities' orders and remitted the issue for fresh consideration by the Assessing Officer.In conclusion, the Tribunal allowed the appeal for statistical purposes and remitted both issues back to the Assessing Officer for fresh consideration in accordance with the law.