2019 (11) TMI 933 - AT - Income Tax

Addition in respect of receipt for supply of software as held to be royalty income - Addition in royalty income distributor of software products developed by the other companies, and it merely purchased and re-sold the off the shelf software without acquiring or transferring any right to use the copyright in the software. Thus, it could not be possibly have transferred any copyright - HELD THAT - From the submissions of the Ld. AR it is observed that Avnet Asia and its parent company are all distributors of software and hardware products of various manufacturers, but whether they provide the services which include the royalty component or not, this major aspect was neither verified by the Assessing Officer as well as DRP. AO and the DRP has not looked into the aspect of the assessee and its group companies whether they merely buy and sell software products developed by other companies or acquire any right in the said products which involves the royalty components. The case laws referred by the Ld. AR though seem to be on the issue but in the present case the facts were not properly verified by the Revenue authorities. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for proper adjudication of this aspect in light of the decisions mentioned by the Ld. AR. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 2 to 2.4 are partly allowed for statistical purpose. Selling warranties, upgrades and similar service packages on behalf of manufacturers of the software without providing any actual service - AR submitted that the assessee was not providing technical service at all - HELD THAT - We have heard both the parties and perused all the relevant material available on record. From the perusal of the assessment order it can be seen that the Assessing Officer should have verified the nature of service packages and direct sale of provision of services relating to FTS. This fact is not disputed by the Ld. AR that the nature of services are not properly verified by the Assessing Officer. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for proper adjudication. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground Nos. 3 to 3.3 are partly allowed for statistical purpose.

Summary

Issues Involved:
1. Taxability of software supply as "Royalty".
2. Taxability of service package sales as "Fees for Technical Services" (FTS).
3. Allowance of credit for tax deducted at source (TDS).

Detailed Analysis:

1. Taxability of Software Supply as "Royalty":

The appellant contended that the assessment order, which categorized receipts from software supply as "Royalty" income, was based on incorrect legal and factual premises. The appellant argued that it acted merely as a distributor of software products developed by other companies, purchasing and reselling off-the-shelf software without acquiring or transferring any copyright in the software. Therefore, it could not have transferred any copyright, and the consideration paid by customers should not be taxable as royalty.

The appellant referenced decisions from the Delhi High Court, such as CIT vs. Dynamic Vertical Software India P. Ltd. and PCIT vs. M. Tech India (P) Ltd., arguing that similar transactions had not been treated as royalty. However, the Dispute Resolution Panel (DRP) and the Assessing Officer (AO) followed the Karnataka High Court's decisions, treating the software supply as royalty income.

The Tribunal noted that the appellant and its group companies are distributors of software and hardware products, but the AO and DRP did not verify whether the appellant provided services involving royalty components. Thus, the Tribunal remanded the issue back to the AO for proper adjudication, considering the appellant's claim that it merely buys and sells software without acquiring any rights. The AO was instructed to verify the nature of transactions and reconsider the classification of receipts as royalty income.

2. Taxability of Service Package Sales as "Fees for Technical Services" (FTS):

The appellant argued that it sold warranties, upgrades, and similar service packages on behalf of software manufacturers without providing any actual service. The appellant contended that it did not provide technical services, and the agreements clearly set out the nature of transactions.

The Tribunal observed that the AO should have verified the nature of service packages and the direct sale of services related to FTS. Since the verification was not properly conducted, the Tribunal remanded the issue back to the AO for proper adjudication. The AO was instructed to verify the nature of services and determine whether the receipts should be classified as FTS income.

3. Allowance of Credit for Tax Deducted at Source (TDS):

The appellant contended that the AO did not allow credit for tax deducted at source. The Tribunal noted that this aspect was not properly verified by the AO. Therefore, the Tribunal remanded the issue back to the AO for verification and proper adjudication, ensuring that the appellant is given an opportunity for a hearing.

Conclusion:

The Tribunal partially allowed the appeals for statistical purposes, remanding the issues back to the AO for proper verification and adjudication. The AO was instructed to re-examine the classification of software supply receipts as royalty income, the nature of service package sales as FTS, and the allowance of TDS credit, ensuring that the appellant is given a fair opportunity to present its case.