TaxTMI 
TaxTMI 
2024 (5) TMI 644
X X X X Extracts X X X X
X X X X Extracts X X X X
....te entity incorporated in Czech Republic and a tax resident of that country. As stated by the Assessing Officer, the assessee is engaged in the business of data processing, databank services, administration of networks, provision of software and consulting in the area of hardware and software. He has further stated, the assessee provides business support services for Information System (IS)/Information Technology (IT) system infrastructure and as a part of its IT related support services. It also acts as a central procurer of certain off-the-shelf software licenses and related maintenance services on behalf of its group companies. In the previous year relevant to the assessment year under dispute, the assessee received revenue from various activities/services performed in India. In the return of income filed for the assessment year under dispute, the assessee offered income of Rs. 101,75,08,330/-, the details of revenue offered to tax are as under: 1. Operational & Support Services Fee Rs. 63,34,80,990 2. Management Charges Rs. 24,90,89,670 3. Trademark Royalty Rs. 13,49,37,668 Total Rs. 101,75,08,328 4. However, certain other income re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uments/submissions available in the assessment record. After receiving the directions of learned DRP, the Assessing Officer, however, passed the final assessment order, more or less, in tune with the draft assessment order holding that the receipts are towards equipment royalty. 6. Before us, learned counsel appearing for the assessee submitted that before the Assessing Officer as well as before learned DRP, the specific case of the assessee was that the receipts are on account of sale of off-the-shelf software and reimbursement of cost without any markup. He further submitted that the assessee has asserted before the departmental authorities that the receipts are not for use or right to use of any equipment either in the nature of IT infrastructure or anything else, so as to treat them as equipment royalty under section 9(1)(vi) read with Explanation 2 clause (iva) and Article 12 of India - Czech DTAA. He submitted, though, learned DRP issued a specific direction to the Assessing Officer to specify through a speaking and reasoned order, how the receipts constitute equipment royalty and what are the hardware devices and software applications provided to the Indian entities for u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-charged the Indian affiliates the licence and maintenance fees in respect of the same on a cost-to-cost basis. While framing the draft assessment order, the Assessing Officer observed that the assessee maintains a global IT infrastructure, which consists of owned, leased, supported and hosted IT systems etc. According to him, IT infrastructure made of various hardware devices and software/applications is a scientific equipment and also in the nature of commercial equipment. He has further observed that the agreement between the assessee and Indian group entities provide for use or right to use of equipment. Thus, in these premises, he treated the receipts as royalty. 9. However, before learned DRP, to counter the aforesaid finding of the Assessing Officer, the assessee made detailed submissions categorically denying the allegation that it had provided use or right to use of any IT infrastructure etc. to the Indian group entities. The specific submissions/averments of the assessee before learned DRP denying the allegation of the Assessing Officer are enumerated below: "2. The Assessee respectfully submits that the allegations of the Ld. AO that the Assessee has a huge I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any IT infrastructure under this agreement. 5. Furthermore, the Assessee also centrally procured certain off-the shelf softwares (inter-alia Genesys, IBM Qradar, Vmware, Splunk etc.) and their related maintenance services on behalf of the Home Credit Group companies. Such modus operandi enabled the group to optimize third-party costs and brought efficiency into the procurement process. Thereafter, the costs incurred by the Assessee for procuring the third-party software and services were cross charged to the group companies on a cost-to-cost basis. 6. In this background, the Assessee received reimbursement of license fee and maintenance charges of INR 8,59,39,213 and 1NR 20,07,22,157, respectively from HCIFPL. Sample agreement in respect of such reimbursements was furnished to the Ld. AO vide submission dated 2 March 2022. Relevant extracts from the said agreement are reproduced below for ready reference: (B) Initial User shall, as a service company of the Home Credit Group and Genesys' partner procure central purchases of the Licensed Software under the MSLA for the purposes and use of the Affiliates including the New User in order to achieve the bes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee also wishes to highlight that HCIFPL maintains, supports and develops its own elaborate IT infrastructure in India, as required for its business operations and there is a large team of local IT experts who are responsible for maintaining and running such IT infrastructure. HCIFPL doesn't use IT infrastructure located outside India for running its core business activities with respect to India regulations. It is evident from the above, that due to commercial and legal requirements, HCIFPL doesn't use Assessee's infrastructure for its core business operations and IA. AO, without appreciating the facts of case and nature of business, has erroneously assumed that the Assessee has provided some IT infrastructure to FICIFPL for running its core business. 10. At this stage, it would be relevant to examine the provisions of the law as well as various principles held by multiple judicial precedents with respect to equipment royalty (i.e., consideration for the use or right to use industrial, commercial or scientific equipment). 11. Explanation 2 to section 9(i)(vi) of the Act defines 'royalty' as follows: Explanation 2. - For the purposes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quipment", either because the word "equipment" can only apply to a tangible product (and the fact that the digital product is provided on a tangible medium would not change thefact that the object of the transaction is the acquisition of rights to use the digital content rather than rights to use the tangible medium) or because the word "equipment", in the context of the definition of royalties, applies to property that is intended to be an accessory in an industrial, commercial or scientific process and could not therefore apply to property, such as a music or video CD, that is used in and for itself - Dassault Systems K.K. [2010] 188 TAXMAN 223 (AAR - New Delhi, affirmed by the Hon'ble SC) Licensed software products being intangible in nature cannot be brought into the purview of equipment royalty. Relevant extract has been reproduced below: 23. We may mention that the learned DR at one stage made a feeble attempt to bring the transaction under equipment royalty. However, it was not pursued further and moreover we find no legal basis for holding that there is any usage of equipment here. - DIT v. New Skies Satellite 1317 [201068 taxmann.com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 120161158 ITD 750 (Mumbai nArr) Relevant extract has been reproduced below (emphasis supplied): ....A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it... - Channel Guide India Ltd. v. ACTT (2 012125 taxmann.00131 25 (Minn ITAT) In absence of control and possession of user over equipment, amount paid to non-resident company cannot be held to be royalty for use or right to use any industrial, commercial or scientific equipment. Relevant extract has been reproduced below (emphasis supplied) 21. As already held in the various judicial pronouncements, the use or right to use any industrial, commercial or scientific equipment as envisaged in clause (Iva) of Explanation 2 to sec.9(Y)(vi) contemplates full control and possession of the user over the equipment. In this regard, it is relevant to refer to the following observations/findings recorded by the Hon'ble Delhi High Court in Para no. 65 to 68 of the order passed in the case of Asia Satellite Telecommunications Co. Ltd. (supra): 22. Keeping in vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proposed to the returned income by the I.d. AO ought to be deleted. " 10. Pertinently, after considering the aforesaid submissions of the assessee, learned DRP issued the following directions to the Assessing Officer: "4.1.3 The Panel has carefully considered the rival averments as mentioned above. At the outset, the Panel takes note that the value/figure on account of payment received under the head reimbursement of maintenance fee is taken by AO differently at para no. 2.2/page 2 @ INR 20,37,56,293/- and at para no. 5/page 8 @ INR 20,07,22,157/-. The assessee has taken this figure @ INR 20,07,22,157/- in its submission including the Synopsis. In this regard, the AO is directly to rectify it and taken the correct figure. 4.1.3.1 The Panel takes note from the AO's draft order that the assessee filed two submissions dated 07.02.2022 and 22.03.2022 and the order was passed on 29.09.2022. Meanwhile, as the AO has mentioned that an opportunity of personal hearing was also granted to the assessee, but date is not mentioned. 4.1.3.2 The AO has discussed the provisions related to royalty as per explanation 2(iva) to section 9(1)(vi) of the Act in the draft o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d make available any IT infrastructure to Indian group entity. iv. The draft assessment order is not self speaking of the facts of the case, hence, is ambiguous. 12. Thus, from the aforesaid observations of learned DRP, it is very much clear that learned Panel had concluded that the Assessing Officer has failed to establish his case of equipment royalty by bringing material facts on record. Since, learned DRP was not convinced with the theory of equipment royalty put up by the Assessing Officer, a specific direction was issued to the Assessing Officer to consider assessee's argument and complete the assessment by a speaking and reasoned order. However, a careful reading of final assessment order would make it clear that the Assessing Officer has done precious little to implement the directions of learned DRP in letter and spirit, other than repeating his observations made in the draft assessment order. Though, learned DRP had specifically directed the Assessing Officer to demonstrate, how the IT infrastructure is maintained; how it is beneficial to AEs in terms of acquiring the right to use; what are the various hardware devices and matching software applications, which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utory provisions, which a statutory authority properly instructed in law, cannot do. When the statue mandates a particular thing to be done in a particular manner, it has to be done in that manner only or not at all. 14. In the facts of the present appeal, undisputedly, the Assessing Officer has failed to implement the directions of learned DRP, hence, has not acted as per the mandate of section 144C(13). While considering the effect of non-implementation of directions of learned DRP, the Coordinate Bench in case of Bechtel Ltd. Vs. ACIT (supra) has held as under: "11. At this stage, we may refer to certain provisions contained under section 144C of the Act. As per sub-section (5) of section 144C of the Act, the DRP after receiving objection shall issue such direction as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment. Sub-section (8) of section 144C empowers the DRP to confirm, reduce or enhance the variation proposed in the draft assessment order. Sub-section (10) of section 144C makes it clear that every direction issued by the DRP shall be binding on the Assessing Officer. Whereas, subsection (13) of section 144C mand....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s an order under Section 143 (3) of the Act. Instead the AO confirmed the draft assessment order passed under Section 144C (1) of the Act. This, therefore, vitiated the entire exercise. The Court has no hesitation in holding that the final assessment order dated 28th January 2015 is without jurisdiction and null and void. The draft assessment order dated 28th March 2014, having been passed in respect of entities which were not 'eligible assessees', is also held to be invalid. 31. It is a matter of concern that the AO has in the present case has chosen to label the order of the DRP to be invalid and that is the justification for not complying with the said order. As already noticed, the DRP, in terms of Section 144C (15) (a) is a collegium of three Principal Commissioners or the Commissioner of Income Tax. The DRP admittedly is the superior authority in relation to an AO who in this case appears to be Additional CIT. Section 144C (10) read with Section 144C (13) makes it abundantly clear that there is no option with an AO but to be bound by orders and subject to review by the DRP. It is bound by the DRP. A reference may also be made to the decision in Zuari Cement L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ering the question is in the negative, the Court held that the draft assessment order of the AO is null and void and quashed on that basis. In para 15 of the said decision, it was observed as under: "15. Since we have quashed the draft assessment order, the question that the assessment has now become time barred as left open and it is open to the parties to take recourse of such remedy, as may be available to them in law." 37. As regards the conduct of the AO in the present case, the Court would only like to highlight the lead portion of the decision of the Supreme Court in Union of India v. Kamlakshi Finance Corporation Limited (supra). The facts in that case were that the according to the Assistant Collector ('AC'), the electrical insulation tapes manufactured by the Assessee, Kamlakshi Finance Corporation Limited ('KFCL') fell under the Tariff heading 39.19 of the Schedule to the Central Excise Tariff Act, 1985 whereas the Assessee was claiming they fell under Entry 85.47. The impugned order of the AO was set aside by the Collector (Appeals) who issued a direction to the AC to pass a fresh reasoned and speaking order. However, the AC de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a) the Division Bench of this Court dealt with the case where despite the clear directions given by the CIT (Appeals), the delayed refunds were paid to the Petitioner without any element of interest. It was noted that the Assistant Commissioner was merely required to comply with the directions given by the CIT (A) in the appellate order. However, the Assistant Commissioner look it upon himself to examine the case, as per his own understanding and therefore, had "gone to the extent of overreaching the orders of his superior authority, that is, the Commissioner (Appeals)." 40. Relying on the decision in Union of India v. Kamlakshi Finance Corporation Limited (supra) the Court set aside the rejection of claim of interest by the Petitioner in that case and directed the Assistant Commissioner to comply with the orders passed by the Commissioner Appeals). 41. The language used in the present case by the AO while disagreeing with the binding order of the DRP is wholly unacceptable. In the final assessment order dated 28th January 2015, the AO while discussing the order of the DRP observed inter alia in para 4.2 that "The DRP has not acted in accordance with the provision....