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2017 (7) TMI 1269 - AT - Income TaxSupply of software which are off the shelf software - providing software on rental basis - software facilitates related to training used for the exploration/extraction of mineral oils - applicability provisions of Section 44BB - Indo-US DTAA - PE in India - HELD THAT - Software supply to the foreign company cannot be taxed as royalty - The assessee claimed that these services have been provided in connection with the exploration, and the extraction of mineral oils in India and these revenues should be tax in terms of provisions of Section 44BB. CIT (A) deleted the additions made by the AO and held that the said additions should be as per the provisions of Section 44BB of the Act, but since there is no Permanent Establishment in India, the assessee cannot be taxed in India at least in A.Y. 2002-03. This issue has not arose in subsequent years wherein the CIT (A) has rightly held that the same should be taxed as per provisions of Section 44BB of the Act. As regards to the rental of software which was in connection with the exploration/extraction of mineral oils in India, the Assessing Officer was not right by applying 15% of rate by applying decision of Advance Authority Ruling in case of Ishikawajima Harima Heavy Industries Co. Ltd. v. DIT 2004 (10) TMI 87 - AUTHORITY FOR ADVANCE RULINGS as the facts of the said case is different from that of the present appeals. Thus, for subsequent years the issue of permanent establishment is not in question and hence the applicability of the judgment of ONGC is very much necessary as all these activities which assessee took are coming under the purview of Section 44BB. AO is therefore, directed to tax the income of the assessee as per Section 44BB for A.Y. 2003-04, 2004-05, 2005-06, 2006-07 and 2008-09. Needless to say the assessee be given the opportunity to hear before the Assessing Officer.
Issues Involved:
1. Tax Effect and Applicability of CBDT Circular No. 21/15 2. Taxability of Software Supply and Related Services 3. Permanent Establishment (PE) in India 4. Income from Training Services 5. Income from Software Rental 6. Applicability of Section 44BB of the Income Tax Act, 1961 Detailed Analysis: 1. Tax Effect and Applicability of CBDT Circular No. 21/15 The appeals for Assessment Years (A.Y.) 2004-05 and 2008-09 were dismissed due to the tax effect being less than ?10 lacs, as per the CBDT Circular No. 21/15 dated 10/12/2015, which revised the monetary limit for filing appeals before the Tribunal. This dismissal is not to be considered a precedent for other years. 2. Taxability of Software Supply and Related Services For A.Y. 2002-03, the Assessing Officer (AO) treated income from software supply, installation, commissioning, and training as taxable in India. The AO categorized parts of the income as 'fee for included services' under Article 12 of the India-US DTAA and taxed them at 15%. However, the CIT(A) held that the sale of software was in the nature of the sale of goods and not taxable in India due to the absence of a Permanent Establishment (PE). This decision was based on the Supreme Court judgment in Tata Consultancy Services v. State of Andhra Pradesh and the ITAT Delhi Bench decision in Motorola Inc. v. Dy. CIT. 3. Permanent Establishment (PE) in India The CIT(A) observed that the assessee did not have a PE in India as per Article 5(2) of the India-US DTAA. This was a crucial factor in determining that the business profits from the sale of software could not be taxed in India. The CIT(A) noted that the AO had not examined the PE status adequately. 4. Income from Training Services The CIT(A) held that income from training services provided without supplying software was taxable in India but should be taxed under section 44BB of the Income-tax Act, 1961, rather than at 15% as 'fee for included services'. This decision was consistent across the assessment years under consideration. 5. Income from Software Rental For A.Y. 2003-04 and 2006-07, the AO treated income from providing software on a rental basis as 'fee for included services' and taxed it at 15%. The CIT(A), however, held that renting software was akin to renting machinery or equipment and should be taxed under section 44BB, not as 'fee for included services'. 6. Applicability of Section 44BB of the Income Tax Act, 1961 The CIT(A) consistently applied section 44BB to income from training and software rental services, considering these services were connected with the exploration and extraction of mineral oils. This was supported by the Supreme Court's decision in ONGC Ltd. v. CIT, which emphasized that services inextricably linked to the exploration and extraction of mineral oils should be taxed under section 44BB. Conclusion: The Tribunal dismissed the revenue's appeal for A.Y. 2002-03 and partly allowed the appeals for A.Y. 2003-04, 2004-05, 2005-06, 2006-07, and 2008-09 for statistical purposes. The Tribunal directed the AO to tax the income of the assessee as per section 44BB for these years, considering the absence of a PE in India and the nature of the services provided. The decision emphasized the application of DTAA provisions and relevant judicial precedents in determining taxability.
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