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2023 (10) TMI 1262
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.... I. Erred in considering the receipts on account of support and maintenance services to its customers in India as liable to tax in India: The learned AO has erred on facts and in circumstances or the case and in law in considering the receipts of INR 54,93,70,516 from support and maintenance services rendered in relation to sale as fees for technical services under the India- Singapore DTAA as well as under the Act and liable to tax in India. II. Invalidity of Assessment Proceedings: The learned AO has erred in conducting assessment proceedings for the assessment year 2020-21 and passing a final assessment order under section 143(3) read with section 144C of the Act without issuing a valid notice under section 143(2) the Act. The assessment proceedings were initiated by issuance of notice under section 143(2) by National Faceless Assessment Centre ('NaFAC'), without having authority to issue the said notice. III. Other grounds of appeal: 1. Initiation of penalty proceedings under section 274 read with section 270A of the Act. The learned AO has erred on the facts and in circumstances of the case and in law in proposi....
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....or Support services which did not make available any technical know-how to the customers. The AO observed that the Dispute Resolution Panel (DRP) in earlier assessment years has confirmed the action of the AO in treating such amount as Royalty. The assessee gave its bifurcation as, Rs. 67.94 crore from sale of software license and Rs. 41.06 crore from rendition of Support and Maintenance of the software licensed (hereinafter also called 'IT Support services'). The AO held that the first component was chargeable as Royalty under the Act as well as Article 12(3)(a) and the second was taxable as `fees for technical services' under the Act and also Article 12(4)(a) of the DTAA. The assessee's contention that the second item was in the nature of provision of services involving technical knowledge without making available such technical knowledge to the customers and hence not hit by Article 12(4)(b) of the DTAA, did not find favour with the AO. Following his view taken for earlier years, the AO notified the draft order including the entire amount from both the streams as chargeable to tax. The assessee raised objections before the DRP by contending that the Tribunal has deleted similar ....
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.... as well. Thus, it is evident that the AO has considered the receipt from IT Support services both under clauses (a) and (b) of Article 12(4) of the DTAA. 5. In order to appreciate the rival contentions, it would be apposite to consider the mandate of the relevant parts of Article 12 of the DTAA, which runs as under: `Article 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. .... 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information ; (b) any industrial, commercial or scientific equipment, other....
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.... the three clauses constitutes fees for technical services. In other words, if the consideration is received for rendering the services in the nature given in clause (a), the amount will become FTS without examining if the conditions of clauses (b) or (c) are satisfied. Similarly, if some consideration is received for the services which "make available" technical knowledge etc. under clause (b), it automatically becomes FTS without any further need to examine if the prescription of clauses (a) and (c) is satisfied. It follows that paras 3 and 4 of the Article 12 deal with distinct situations, mutually exclusive to each other, so as to constitute royalties or fees for technical services, as the case may be, in the given circumstances. 8. Adverting to the facts of the extant case, it is patent that the AO categorized Receipt on account of software licenses under clause (a) of para 3 of the Article 12 in the draft order and finalized its taxability. It is a different matter that the DRP held such amount not falling under para 3(a) of the Article and hence not taxable. Similarly, the AO treated the Receipt on account of IT Support services in the draft proceedings as falling u....
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....ine qua non for bringing any amount in relation to services under para 4(a) of Article 12. There can be two situations of income arising from licensing of software and also from support and maintenance services for such software. First, where the amount received by the assessee from licensing of software satisfies the condition of `royalty' as right to copy is also assigned to the licensee; and second, where copyright is not assigned. In the first situation, income from licensing of software would descend in para 3(a) of Article 12 and accordingly the amount of support and maintenance charges will be governed by para 4(a) of Article 12. In the second scenario, income from licensing of software would not satisfy the condition of `royalty' and hence will not drop into para 3(a) of Article 12 with sequitur that the question of application of para 4(a) to support and maintenance charges will not arise. Since there is no amount taxable as royalties under Article 12(3)(a) in this case, the IT Support service charges, as a natural corollary, cannot be brought within the purview of Article 12(4)(a) of the DTAA. II. Do IT Support charges fall under Article 12(4)(b)? 10.1. ....
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.... availability review • Recommendations to improve performance and availability that could be implemented in the next quarter • Review of support cases and incidents raised within BMC • Additional use cases Customer would like to deploy and Customer roadmap update • BMC roadmap and Customer innovation agenda update BMC will provide the following to assist the customer:- • Provide two (2) resources for 24 continuous months (inclusive of public holidays and annual leave) during Business Hours. • Services will be delivered onsite in Customer's location in Manesar, Gurgaon. • BMC resources will assist with operations onsite during on Business Days, some remote assistance may be required to support major or critical incidents outside of business hours. • In case of a critical incident that disrupts the High Availability of the system, BMC will - • Invoke our Severity 1 alert notification and place the Customer incident on Follow The Sun priority. • Convene a specialist team consisting operations BMC technical support analysis customer operations teams to furth....
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..... These services definitely require technical knowledge for their rendition. The question is whether such services make available any technical knowledge, experience, or skill etc. to the customers within the scope of para 4(b) of Article 12 of the DTAA? The expression `make available' has come up for consideration before several judicial forums. The Hon'ble Karnataka High Court in CIT Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar.) has held that the condition of the expression make available gets satisfied if the payer of the services is able to utilize the acquired knowledge or know how at his own in future without the aid of the service provider. The Authority for Advance Ruling in Production resources group, in Re (2018) 401 ITR 56 AAR has also held that "make available" connotes something which results in transmitting the technical knowledge so that the recipient could derive an enduring benefit and utilize the same in future on his own without the aid and assistance of the provider. On going through the above interpretation, it becomes palpable that in order to `make available' technical services, it is essential that the recipient of the services must acquire....
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....any such distinction and held the entire amount as chargeable to tax as royalty in the light of the decision in Samsung (supra). When the matter came up before the Tribunal, the decision in Engineering Analysis (SC)(supra) had been delivered by then, based on which the decision of the AO, treating the composite amount as royalty, was reversed. When neither the AO nor the DRP had treated the two streams of income as separate from each other, having different connotation in terms of the DTAA, there could have been no question of the Tribunal setting up a new case. Be that as it may, we have eloquently discussed the issue above and reached the conclusion that the income from IT Support services, even if viewed independent of software license income, is not chargeable to tax. The impugned order is, ergo, overturned and the addition of Rs. 42.42 crore and odd is directed to be deleted." 4. The CIT-DR could hardly indicate any distinction on facts or law, as the case may be, so far as the instant sole issue of support and maintenance services addition is concerned. We thus accept the assessee's instant first and foremost substantive grounds in very terms. 5. Mr. Irani a....