TaxTMI 
TaxTMI 
TaxTMI 
2024 (5) TMI 644
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....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 received from India were not offered to tax, either claiming benefit under....
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....RP, 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 use or right to use, however, the Assessing Officer has failed to carry out such directions. 7. Draw....
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....is. 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 IT infrastructure for the group companies, which consists of owned, leased, supported, and hosted IT systems, hardware....
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....plunk 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 best commercial conditions of such purchases. (C) Parties wish to establish a process of transfer (i.e. assignment, sublicense etc.) of the Licensed Software by the Initial User to the New User t....
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..... 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 of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of....
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....n 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 8 (Delhi HC) Relying on its ruling in the case of Asia Satellite Telecommunications Co. Ltd [2011] 197 Taxman 263 (Delhi HC), the Hon'ble Delhi HC has upheld the principle that the use or right to use any industrial, commercial or scientific equipment as envisaged in clause (iva) of Explanation 2 to sec.9(1)(0) contemplates full control and possession of the user over the equipment. Extracts of the ruling....
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.... 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 view the above observations /findings recorded by the Hon`ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (supra) involving similar facts and circumstances, it cannot be said that the amount paid by the assessee to SSA is for the use or right to use any industrial, commercial or scientific equipment as envisaged in clause (iva) of Explanation 2 to sec.9(1((vi) inserted w.e.f. 1.4.2002 in the absence of control & possession of the user over the equipment. ....
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....@ 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 order. 4.1.3.3 The AO has repetitively stated that the assessee maintains a global IT infrastructure which consists of owned, leased, supported, and hosted IT systems, hardware devices, internet and intranet systems etc. but the AO has not illustrated as to how the said infrastructure is maintained and is beneficial to the AEs in terms of acquiring the right to use the same. The AO should have clarified about the various hardware devices and software applications having matched with the detail of such scientific equipment under the relevant tax treaty. ....
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....ssessment 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 can constitute scientific or commercial equipment etc., the Assessing Officer has failed to demonstrate such fact in the assessment order. On a specific query from the Bench, as to what constitutes IT infrastructure and what are the hardware devices etc., which can be construed as scientific or commercial equipment, learned Departmental Representative fairly submitted that such facts are not forthcoming from the assessment order. The contention of the learned Departmental Representative that the Indian entity has been given right to use the server while accessing the software, is too specious an argument to be a....
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....isions 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 mandates that after receiving the directions issued by the DRP under sub-section (5), the Assessing Officer shall complete the final assessment in conformity with the directions issued by learned DRP. Thus, a conjoint reading of the aforesaid provisions make it clear that once the DRP issues certain directions while disposing of objections filed by an eligible assessee, the Assessing Officer is duty-bound to implement such directions in letter and spirit. 12. In the facts of the present appeal, undisputedly, the Assessing Officer has not implemented the directions of learned DRP as mandated under section 144C(10) read with se....
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.... 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 Limited (supra) where it was held that an order of assessment which is contrary to the mandatory provisions of Section 144C of the Act was declared as "one without jurisdiction, null and void and enforceable." It is therefore, for this reason, in the said case, the High Court of Andhra Pradesh set aside the impugned order while allowing the writ petition notwithstanding that the Petitioner had a statutory remedy available to it. 32. The situation as far as the present case is concerned is no different. The said order of the Andhra Pradesh High Court was upheld by the order of the Supreme Court when it dismissed Special Leave Appeal (Civil) 16694 of 2013 by ....
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....he 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 declined to follow the order of the Collector (Appeals) and reiterated his earlier decision that was set aside by the Collector (Appeals). The writ petition filed by the Assessee was allowed by the Bombay High Court against which the Union of India went before the Supreme Court. 38. The Supreme Court in Union of India v. Kamlakshi Finance Corporation Limited (supra) took exception to the conduct of the AO in overlooking the binding order of the Collector (Appeals) and reiterating the order passed by him earlier. In response to the plea of the Appellant that the Officer who passed the order was not actuated by any malafide, the Supreme Court observed, in this regard, as under: "6...... we are not concerned here ....
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....oner 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 provisions of the Act while passing this order which is grossly illegal, against the intent of legislature, without following the basic principles of natural justice and adopting very narrow interpretation of the provisions of the Act." 42. In the circumstances, the Court, while setting aside the final assessment order dated 28th January 2015, directs that the draft assessment order, the order of the DRP, the final assessment order as well as this order shall be placed before the concerned Commissioner who is administratively supervising the work of Additional CIT who passed the draft and final assessment order. The Commissioner will thereafter proceed in accordance with law after issuing notice to the concerned AO and affording him an opportunity of bei....