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2021 (11) TMI 1023 - AT - Income Tax


Issues Involved:
1. Taxability of receipts from the sale of hardware with embedded software as royalty.
2. Taxability of software receipts as royalty.
3. Reimbursement of expenses and whether they constitute Fees for Technical Services (FTS).
4. Non-grant of credit for Tax Deducted at Source (TDS).
5. Levy of interest under section 234B of the Income Tax Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.
7. Rates of tax to be applied on royalty and FTS.
8. Wrong rate of surcharge applied by the Assessing Officer (AO).
9. Short grant of credit for TDS.

Detailed Analysis:

1. Taxability of Receipts from Sale of Hardware with Embedded Software as Royalty:
The primary issue was whether the receipts from the sale of hardware with embedded software could be taxed as royalty. The AO and the DRP treated these receipts as royalty under the Income Tax Act and the India-UK DTAA. The Tribunal referred to the Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. The Supreme Court held that payments for software embedded in hardware do not constitute royalty but are akin to the sale of goods. The Tribunal applied this principle, concluding that the receipts in question could not be taxed as royalty, as the software was part of an integrated system and not independently licensable.

2. Taxability of Software Receipts as Royalty:
The AO and DRP treated the software receipts as royalty under section 9(1)(vi) of the Act and the India-UK DTAA. The Tribunal, following the Supreme Court's judgment in Engineering Analysis, held that the software receipts were not in the nature of royalty. The Tribunal emphasized that the software was integral to the hardware and did not have an independent existence. Therefore, the receipts could not be taxed as royalty.

3. Reimbursement of Expenses and Whether They Constitute FTS:
The assessee argued that the reimbursements from Cisco Video for expenses incurred on its behalf were purely on a cost-to-cost basis and did not contain any profit element. The AO and DRP treated these reimbursements as FTS. The Tribunal found that the AO's conclusions were based on assumptions and lacked concrete evidence. The Tribunal remanded the issue to the AO for fresh consideration, directing that the AO should examine if there was a one-to-one tally between the expenses incurred and the reimbursements received. If the reimbursements were purely cost-based, they could not be treated as FTS.

4. Non-Grant of Credit for TDS:
The assessee raised an issue regarding the non-grant of credit for TDS. The Tribunal directed the AO to consider the claim and allow credit for TDS in accordance with the law.

5. Levy of Interest Under Section 234B:
The Tribunal referred to the Supreme Court's decision in DIT Vs. Mitsubishi Corporation, which held that interest under section 234B could not be levied on non-resident foreign companies when the entire income was subject to TDS. Following this precedent, the Tribunal directed that no interest under section 234B should be levied on the assessee.

6. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal noted that the issue of initiation of penalty proceedings under section 271(1)(c) is not appealable and dismissed this ground as devoid of merit.

7. Rates of Tax to be Applied on Royalty and FTS:
The Tribunal found that the issue of the rates of tax to be applied on royalty and FTS became academic in light of its conclusion that the receipts in question were not in the nature of royalty or FTS.

8. Wrong Rate of Surcharge Applied by the AO:
In the appeal for the Assessment Year 2012-13, the assessee raised an issue regarding the wrong rate of surcharge applied by the AO. The Tribunal remanded this issue to the AO for fresh consideration, directing that the surcharge should be levied as per the provisions of law.

9. Short Grant of Credit for TDS:
The Tribunal directed the AO to allow appropriate credit for TDS in accordance with the law for the Assessment Year 2013-14.

Conclusion:
The Tribunal allowed the appeals partly, concluding that the receipts from the sale of hardware with embedded software and software receipts could not be taxed as royalty. It remanded the issue of reimbursements to the AO for fresh consideration and directed the AO to grant credit for TDS and apply the correct rate of surcharge. The Tribunal also held that no interest under section 234B should be levied and dismissed the ground regarding the initiation of penalty proceedings.

 

 

 

 

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