TaxTMI 
TaxTMI 
2024 (6) TMI 155
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....otices 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 protection given to such a programme under the Act to prev....
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....nt 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 for imparting of any information concerning technical, industrial, commercial or scie....
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....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. Since the assessee has under reported its income which is in consequence of misreporting thereof, I consider it a fit case to ini....
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....r 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 application as used by the Company prior to Closing - Use of the @ge.com email address for the Company's employees (Supplier will work with the Company to define and implement a mutually acceptable method of fo....
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....vice & 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 testing services to ensure that they effectively develop and deploy secure applications. Security assessments leverage industry best practices to find critical vulnerabilities and provide customized remediation guidance before code is deployed to a production environment an....
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....s 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 provided by the assessee is Intellectual Property Right (IPR) of the assessee and the usage of such IPR attracts Royalty. Hence, the same is taxable as a process royalty under the Act as well as the DTAA. 7.4 Without prejudice to the above, it can be seen that the income received by the assessee can also be viewed from the pers....
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....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 of definition of royalty defined under section 9 (1) (vi), it can safely be inferred that for the payments to be characterized as "royalty", such payments have to be necessarily for the use of any property mentioned in clause (iii) of Explanation 2 to section 9 (1) (vi) of the Act and the "process" being one of the constituent items occurring in the said definition, it....
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....ax 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. 9. We are informed by Mr. Jolly that insofar as AY 2017-18 is concerned, the petitioner had chosen to avail of the MAP procedure laid in place in terms of the India-USA DTAA and since the quantum of tax did not merit further challenge, the same came to be closed. However, and insofar as AYs 2018-19 and 2019-20 are concerned, the petitioner was also faced with notices issued under Section 270A of th....
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....r 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 provision has been clearly misconstrued and misinterpreted by the respondent while passing the impugned orders. Mr. Jolly also sought to underline the fact that the assessment orders had nowhere recorded any findings which may have established a case of misreporting as envisaged under Section 270A (9). Learned counsel contended that in the facts of the present case, an allegation of misrepresentation or suppression would cle....
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....aw 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 during the search conducted on the premises of the assessee and that the said assets related to the income of the assessee for the relevant assessment years. Explanation 5, as noted in the said judgement, was inserted in the statute by Taxation Laws (Amendment) Act, 1984, w.e.f. 01.10.1984. 7. In our opinion, the conclusion reached by the Tribunal in the instant case that the notice for imposition of penalty under Section 271 (....
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....ection 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 under Section 270A. 20. According to Mr. Rai, if the aforesaid position be accepted, it would be apparent that the case of the petitioner would fall within the exclusionary provisions enshrined in sub-section (3) of Section 270AA and thus the Court would hold that the respondent had acted correctly in rejecting the applications for immunity. 21. For the purposes of evaluating the correctness of the rival submissions addressed, we deem it apposite to extract Sections 270A and 270AA hereinb....
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....etween 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- (A - B) + (C - D) where, A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions); B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income; C = the total income assessed as per the provisions contained in section 115JB or section 115JC; D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount o....
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....nt 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 an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; (d) the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under Section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and (e) the amount of undisclosed income referred to in Section 271-AAB. (7) The penalty referred to in sub-section (....
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....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 case may be. 270-AA. Immunity from imposition of penalty, etc.- (1) An assessee may make an application to the Assessing Officer to grant immunity from imposition of penalty under Section 270-A and initiation of proceedings under Section 276-C or Section 276-CC, if he fulfils the following conditions, namely:- (a) the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of Section 143 or Section 147, as the case may be, has been paid within the period specified in such notice of demand; and (b) no appeal against the order referred to in clause (a) has been filed. (2) An application referred to in sub-section (1) shall be made within one month from the end of the month in which the order referred to in clause (a) of sub-section (1) has been received and shall be made in such form and verified in such manner as may be prescribed. (3) ....
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....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 income. The aforesaid aspect assumes added significance bearing in mind the indisputable position that a prayer for immunity could have been denied in terms of Section 270AA (3) only if it were a case of misreporting. The SCNs' failed to indicate the specific charge which was sought to be laid against the petitioner. This, since they sought to invoke both sub-sections (2) as well as sub-section (9) of Section 270A. There was thus an abject failure on the part of the respondents to indicate the branch of Section 270A which was sought to be invoked. The SCNs' would thus clearly fall foul of the principles which had been enunciated in Minu Bakshi and Schneider Electric. 25. Turning then to Section 270AA, we find that sub-section (3) of that provision requires the AO to confer consideration on the following three aspects: - (a) Whether the conditions precedent specified in sub-section (1) of Section 270AA have been complied with? (b) The period for filing an ....
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....rvices 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 is proposed to be taken. The fundamental purpose behind the serving of show-cause notice is to make the noticee understand the precise case set up against him which he has to meet. This would require the statement of imputations detailing out the alleged breaches and defaults he has committed, so that he gets an opportunity to rebut the same. Another requirement, according to us, is the nature of action which is proposed to be taken for such a breach. That should also be stated so that the noticee is able to point out that proposed action is not warranted in the given case, even if the defaults/breaches complained of are not satisfactorily explained. When it comes to blacklisting, this requirement becomes all the more imperative, having regard to the fact that it is harshest possible action." 79. Similar observations find place in UMC Technologies Pvt. Ltd. v. Food Corporation of India: "13. At the outset, it must be noted that it is the first principle of civilised jurisprudence that a person against whom a....