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2024 (6) TMI 155
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....oner has now additionally challenged the notices for levy of penalty under Section 270A of the Act. While the first writ petition, W.P.(C) 1646/2022, is concerned with Assessment Year [AY] 2018-19, the second writ petition, W.P.(C) 3312/2022, relates to AY 2019-2020. For the purposes of considering the challenge which stands raised, we deem it apposite to notice the following salient facts. 2. For AY 2017-18 and upon due processing of the Return of Income [ROI] which had been submitted, the respondents proceeded to pass an order of assessment on 15 February 2020 holding that the receipts of the petitioner in that year were liable to be taxed as royalty in terms of Section 9 (1) (vi) of the Act read along with Article 12 of the India-USA Double Taxation Avoidance Agreement [DTAA]. While dealing with the aspect of royalty, the Assessing Officer [AO] in that year had held as follows:- "vii) Though a software programme finds mention under copyright Act the same does not partake the character of a copyrighted product like the other items listed in the same section as music, architecture, literary work, etc. The limited purpose behind the legislature is deemed to be a protect....
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....f licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or pre-recorded music C.D or the C.D containing software and in view of the same, the Legislature in its wisdom has treated the literary work like books and other articles separately from "computer software within the meaning of the "copyright" as referred to above under section 14 of the Copyright Act. It is also clear from the above said analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute "royalty" within the meaning of article 12 (3) of the DTAA and even as per the provisions of section 9 (1) (vi) of the Act as the definition of "royalty" under clause 9 (1) (vi) of the Act is broader than the definition of "royalty" under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute "royalty....
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....sive right in copyright and where consideration paid was for rights in respect of copyright and for user of confidential information embedded in software/computer programme, it would fall within mischief of Explanation (2) of section 9 (1) (vi) and there would be a liability to pay tax. In favour of revenue (2001-02 to 2003-04) xi) The assessee has also cited various case laws, the fact of those cases are distinguishable from the case of assessee. It also has cited the case law of Hon'ble Delhi High Court in the following cases- a) CIT vs M Tech India Pvt Lid (2016) 287CTR 213(Delhi HC) Here payment made on account of purchase of software is treated as not Royalty. So facts of this case is different from the case of assessee b) DIT vs Infrasoft Ltd (2014)264 CTR 329 The Department has not accepted this judgement and filed SLP being civil Appeal No. 32/2017 which is pending before Hon'ble Supreme Court. 8. In the light of the above, the amount of receipt to the tune of Rs 2,37,97,653/- as IT Support service is taxable as royalty u/s 9 (1) (vi) of the Income Tax Act as well as under Article 12 of the DTAA at the rate provided in the DTAA. S....
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.... with Clix Finance India Pvt Ltd & Clix Capital Services Pvt Ltd that the company has provided IT access right and services of various software's to the above mentioned companies for doing their works and these are nothing but Royalty as defined in explanation 2 to section 9 (1) (vi) of the Income Tax and taxable u/s 9 (1) (vi) of the Act as well as Article 12 (3) of the India-USA DTAA." 5. The range of software services which were provided by the petitioner were described in paragraph 6 of the assessment order and which reads as follows:- "6. As per clause 2 the assessee company has provided IT access right of various software's to the above mentioned companies for doing their works. As a representative basis some these are detailed below: Type of Service Title Summary Description IT Application Service and IT Access Right Email - hosting and forwarding Provide access to and use of e-Mail hosting and routing Services, SPAM protection, SMTP relay; Email Forwarding to primary SMTP address to the new business email accounts up to 2 months after ending GE email usage> GECC will provide access to and use of the MS-Exchange server-side applica....
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....e Now Service Now Licenses, RTS Support, & Projects GECC will provide access to and use of the Service Now application, Licenses, Ready-to-Serve support & maintenance, and GE SN project requests as used by the Company prior to Closing IT Support Service & IT Access Right Third Party Systems & Security Third Party Systems & Security GECC will provide access to and use of third party systems and security as used by the Company prior to Closing. These include but are not limited to: -Third Party Assessment Services: a standardized assessment framework and methodology to evaluate information security risk of a third party in order to help GE Businesses make risk-based decisions. We provide a digitized process to track and monitor assessment activity, from initial risk assessment through issue management. -Database Security Services: Scan database layer for technical vulnerabilities and misconfiguration. Provide monitoring of database for segregation of duty issues. Conduct access reviews and highly privileged account monitoring. -Secure Development Life cycle: Provides GE development teams with Secure Development Lifecycle (SOL) education, tools and ....
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....urt vide order dated 02.03.2021 in case of Engineering Analysis Centre of Excellence Private Limited Vs. CIT & Anr. on the basis of facts that the software provided by the assessee is not a product but an end to end solution using a proprietary process. The undersigned is of the view that the term 'software' as it is being used presently has come a long way from its original intention. In the years gone by (specifically the cases where the Hon'ble Apex court has decided the meaning of term), software was basically a set of instructions which included some interaction between the computer and the human being. A set of instructions were laid down in the form of a program. The said program could be designed formula to compute or give an output of a certain format for which input was required on the machine. This pre-coded information specifically written on a Compact Disk (CD) or a floppy disk and sold as off the shelf by a number of companies. However, this is not the case with the assessee. The software provided by the assessee is a solution and the assessee itself is mentioning it as service, rather than a set of program only. The process by which the solution is provid....
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....roceeded to frame the following directions:- "10. Accordingly, final assessment order u/s 144C (3) r.w.s. 143 (3) is being passed as per draft assessment order at total income of Rs. 181,332,765/- which is taxable as Royalty/FTS @ 10% as per DTAA. Charge Interest u/s 234A, 234B, 234C & 234D as applicable. Give credit to the prepaid taxes after verification. Issue copy of the order and demand notice to the assessee. Penalty proceedings u/s 270A for misreporting of the Act is being initiated separately." 8. The order of assessment for AY 2019-20 proceeds along similar lines as would be evident from a reading of the following conclusions which stand recorded therein:- "7.1 It is clear from the table above that the assessee is providing IT Application Service and IT Access Right to its customers. It is clear that the assessee is allowing the use of its proprietary process embedded in its software for the business purpose of the clients. It has been held in the assessment order in case of the assessee for AY 2018-19 that the consideration received by the assessee is taxable as royalty income both as per the Act and as per the DTAA. 7.2 From a plain reading ....
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.... and would not need additional support from the assessee for performing the same role. The service receiver thus learns how to resolve and act on a particular issue and this knowledge is enduring in nature. Hence the same is alternately taxable as FTS as well. However, as the tax rate for both royalty and FTS is the same @ 10%, hence the same does not have an impact on the overall tax implication. 8. In the light of the above, the amount of receipt to the tune of Rs 3,42,298,126/- as IT Support service is taxable as royalty u/s 9 (1) (vi) of the Income Tax Act as well as under Article 12 of the DTAA at the rate provided in the DTAA. It is alternately also taxable as FTS as per 9 (1) (vii) of the Income Tax Act as well as under Article 12 of the DTAA. Since the assessee has under reported its income which is in consequence of misreporting thereof, I consider it a fit case to initiate penalty proceedings u/s 270A of the Act and the same is initiated separately. 9. The assessee had not filed objection before DRP within the prescribed time limit." Here too, the AO framed consequential directions for initiation of penalty proceedings under Section 270A of the Act. ....
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.... 13. Mr. Jolly submitted that for the purposes of being eligible to maintain an application under Section 270AA, it is incumbent upon the assesse to establish that the tax and interest payable as per the order of assessment has been duly deposited and that no appeal against the aforesaid order has been preferred. According to learned counsel, once those conditions stood fulfilled, there existed no justification for the applications being rejected. In view of the above, Mr. Jolly submitted, the respondent has committed a manifest illegality in holding that mere payment of the demand would not "ipso facto" entitle the petitioner-assessee to protection against any claims or allegations of misreporting as envisaged by Section 270A (9). Mr. Jolly also questioned the legality of the respondent rejecting the applications for immunity holding that the outcome of the penalty proceedings and any assumption of their ultimate fate would not be relevant since they would have to be independently considered. 14. According to learned counsel, the view as taken by the respondent is clearly contrary to the spirit underlying Section 270AA (3). Learned counsel submitted that the aforesaid provisio....
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....t, the principles propounded therein would equally apply to a notice under Section 270A. 17. It becomes pertinent to note that Section 271 (1) (c) speaks of various eventualities and which may expose an assessee to face imposition of penalties. These range from a failure to comply with a notice under Section 115WD or concealment or furnishing of inaccurate particulars of income or fringe benefits. Mr. Jolly sought to draw a parallel between Section 271 (1) (c) and Section 270A by highlighting the fact that both under-reporting as well as misreporting are considered to be separate and distinct transgressions. It is in the aforesaid backdrop that learned counsel contended that a SCN, in order to be recognized as valid and sustainable in law, must with due clarity indicate whether the assessee is charged of under-reporting or misreporting. It is in the aforesaid context that Mr. Jolly drew our attention to the following observations as rendered by the Division Bench of the Court in Minu Bakshi: "6.3. Third, if Explanation 5 to section 271 (1) of the Act were to be relied upon, the Revenue would have to establish that the assets, such as money, bullion etcetera were seized ....
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....h fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting. 9. This Court is further of the view that the impugned action of Respondent 1 is contrary to the avowed legislative intent of Section 270-AA of the Act to encourage/incentivise a taxpayer to (i) fast track settlement of issue; (ii) recover tax demand; and (iii) reduce protracted litigation." According to Mr. Jolly, the initiation of action under Section 270A of the Act is thus liable to be quashed and set aside on the aforesaid grounds. 19. Appearing for the respondents, Mr. Rai submitted that while it is true that the SCNs' referable to Section 270A had referred to both under-reporting/misreporting, the assessment orders had with adequate clarity identified the case against the petitioner as being liable to be viewed as that of misreporting. In view of the aforesaid, learned counsel contended that the petitioner had been placed on due notice of the charge which stood raised against it. According to learned counsel, the aforesaid facets of this particular case would be sufficient to negate the challenge which stands raised to the action ....
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....h loss into income. (3) The amount of under-reported income shall be,- (i) in a case where income has been assessed for the first time,- (a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of Section 143; (b) in a case where [no return of income has been furnished or where return has been furnished for the first time under Section 148],- (A) the amount of income assessed, in the case of a company, firm or local authority; and (B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A); (ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order: Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of Section 115-JB or Section 115-JC, the amount of total under-reported income shall be determined in accordance with the following formula- (....
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.... and (b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on. (6) The under-reported income, for the purposes of this section, shall not include the following, namely:- (a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or [the Joint Commissioner (Appeals) or the Commissioner (Appeals)] or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered; (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or [the Joint Commissioner (Appeals) or the Commissioner (Appeals)] or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom; (c) the amount of under-reported income determined on the basis of a....
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....mputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income; (c) in any other case, determined in accordance with the formula- (X-Y) where, X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of Section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of Section 143 or total income assessed, reassessed or recomputed in a preceding order. (11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year. (12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Joint Commissioner (Appeals) or the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the....
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....rms of Section 270A (3), the under-reported income is thereafter liable to be computed in accordance with the stipulations prescribed therein. However, the subject of misreporting of income is dealt with separately in accordance with the provisions comprised in sub-sections (9) and (10) of Section 270A. It is thus evident that both under-reporting as well as misreporting are viewed as separate and distinct misdemeanors. 23. However, and as we read the orders of assessment which were passed, the same carry no findings which may be viewed as indicative of the contingencies spelt out in clauses (a) to (f) of Section 270A (9) being attracted. In our considered opinion, in the absence of the AO having specified the transgression of the petitioner and which could be shown to fall within the ambit of sub-section (9) of Section 270A, proceedings for imposition of penalty could not have been mechanically commenced. 24. Notwithstanding the above, we note that the SCNs' which came to be issued for commencement of action under Section 270A were themselves vague and unclear. This since they failed to specify whether the petitioner was being charged with under-reporting or misreporting of ....
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.... Since there was a clear and apparent failure on the part of the respondents to base the impugned proceedings on a contravention relatable to Section 270A (9), the application for immunity could not have been rejected. As was noticed hereinabove, neither the AO nor the impugned SCNs' laid an allegation which could be said to be reflective of the petitioner having been found to have violated Section 270A (9). In fact, the notices themselves sought to take a wholly ambivalent stance while alleging that the petitioner had indulged in "under-reporting/misreporting". We thus have no hesitation in holding that the impugned SCNs' are rendered unsustainable on this short ground alone. 30. The importance of clarity and comprehensiveness which must imbue show cause notices came to be duly emphasised by us in our decision in Puri Constructions (P) Ltd. Vs. CIT 2024 SCC OnLine Del 939:- "78. The requisites of a valid show-cause notice were lucidly explained by the Supreme Court in Gorkha Security Services v. Government (NCT of Delhi) as under: "Contents of the show-cause notice 21. The central issue, however, pertains to the requirement of stating the action which....
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....the Supreme Court observed that the mere mentioning of a wrong provision would not justify the issuance of that prerogative writ and more so where the writ petitioner had failed to establish a total absence of jurisdiction. xxxx xxxx xxxx 83. The principle of a power otherwise inhering or existing and not being impacted by the mere mention of a wrong provision is one which we apply to ratify, save and uphold a decision which is otherwise found to be valid and sustainable. We would be wary of either readily or unhesitatingly adopting or invoking that precept at the stage of a show-cause notice especially where the noticee is left to fathom which of the more than fifty variable obligations it is alleged to have violated." 31. We are further constrained to observe that even the assessment orders fail to base the direction for initiation of proceedings under Section 270A on any considered finding of the conduct of the petitioner being liable to be placed within the sweep of sub-section (9) of that provision. The order of assessment as well as the SCNs' clearly fail to meet the test of "specific limb" as propounded in Minu Bakshi and Schneider Electric. A case of mi....