2021 (9) TMI 21 - AT - Income Tax

Tribunal remits issues to AO for fresh consideration post-SC decision. Assessee to be heard.

Infosys BPM Limited Versus Deputy Commissioner of Income-tax International Taxation Circle-2 (1) Bengaluru

Infosys BPM Limited Versus Deputy Commissioner of Income-tax International Taxation Circle-2 (1) Bengaluru - TMI Issues Involved:1. Payments for software subscription, access to portals, access to online databases, etc.2. Bandwidth charges or connectivity charges.3. Legal fees, professional fees, training fees, certification fees, etc.Detailed Analysis:1. Payments for Software Subscription, Access to Portals, Access to Online Databases, etc.:The CIT(A) classified the payments made by the assessee into three categories, with the first category being payments for software subscription, access to portals, and online databases. The CIT(A) referred to the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd. (2012) to conclude that such payments are considered 'royalty' under the Act. The CIT(A) rejected the assessee's claim that the definition of 'royalty' under the Double Taxation Avoidance Agreement (DTAA) should apply instead of the Act's definition, stating that the payments for the use of or right to use the software are considered royalty under various treaties and need to be taxed in India.The CIT(A) also examined the Copyright Act, 1957, specifically Section 14, to determine whether the assessee received any rights that could be considered royalty. The CIT(A) concluded that the grant of a license for the right to use or limited distribution is considered a copyright under Section 14(a)(iii) and 14(b)(ii) of the Copyright Act. The CIT(A) further rejected the claim that the use of software is not royalty within the IT Act, citing the decision of the Karnataka High Court in the case of Samsung Electronics.The Tribunal, however, noted that the decision of the Karnataka High Court in Samsung Electronics has been overruled by the Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021). The Supreme Court held that payments for software do not constitute royalty if the end-user only gets a non-exclusive license to use the software without any transfer of copyright. The Tribunal remitted the issue back to the Assessing Officer (AO) for fresh consideration in light of the Supreme Court's decision and the End User License Agreements (EULA).2. Bandwidth Charges or Connectivity Charges:The CIT(A) examined whether payments for data connectivity charges and data center racks and links fees are considered royalty. The CIT(A) concluded that these payments are for the use of equipment, processes, and algorithms, and therefore, are taxable as royalty under the DTAA. The CIT(A) rejected the appellant's claim that these payments are not taxable in India under the tax treaties.The Tribunal noted that the Delhi High Court in the case of New Skies Satellite BV held that income from providing data transmission services by lease of transponders is not regarded as royalty under the DTAA. The Tribunal also noted that the Supreme Court in the case of Engineering Analysis approved the Delhi High Court's decision. The Tribunal remitted the issue back to the AO for fresh consideration in light of the Supreme Court's decision and the agreements between the parties.3. Legal Fees, Professional Fees, Training Fees, Certification Fees, etc.:The CIT(A) identified payments towards consulting fees, training fees, etc., and concluded that these payments are in the nature of 'fees for technical services rendered.' The CIT(A) rejected the appellant's claim that TDS is not deductible on these payments, stating that the appellant failed to furnish evidence regarding the nature of payments and agreements.The Tribunal noted that once the payment for the use of software and access to online services is regarded as not in the nature of royalty, the related payments for consulting fees, legal fees, professional fees, training fees, certification fees, and sub-contracting charges should also not be regarded as royalty. The Tribunal remitted the issue back to the AO for re-examination in light of the applicable DTAA provisions and the agreements between the parties.Conclusion:The Tribunal allowed the appeals for statistical purposes and remitted the issues back to the AO for fresh consideration in light of the Supreme Court's decision in the case of Engineering Analysis and the agreements between the parties. The AO is directed to afford the assessee an opportunity of being heard in the set-aside proceedings.