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2020 (3) TMI 969 - HC - Income TaxInterpretation of Section 44BB and 44DA - income on account of receipts from provision of software enabled solutions to the oil and gas industry along with providing annual maintenance services of the software - categorization of the income of the assessee - whether Royalty or FTS - whether the receipts from the activities rendered by the assessee fall under Section 44BB or fall within the purview of Section 44DA after the amendment introduced by the Finance Act, 2010? - HELD THAT - If the nature of services rendered have a proximate nexus with the extraction of production of mineral oils, it would be outside the ambit of the definition of FTS. In the instant case, since the nature of services rendered by the Petitioner gets excluded from the definition of FTS , in light of what is discussed above, the next logical question that arises for consideration is whether the Petitioner can claim the benefit of Section 44BB. The answer to this question is contingent on factual determination, as the legal position has changed from April 01, 2011. It is now required to be considered whether the receipts in the hands of the assessee qualify to be royalty or not? If the answer to this question is in the affirmative, then in that event, the relevant provision would now be 44DA(1). CIT has also made certain observations that the assessee is not transferring the ownership in the software to the purchaser and is only granting a license to use the same. It has been further held that under Clause (v) of Explanation 2 to Section 9 (1) (vi) of the Act, transfer of all or any rights in respect of any copyright is Royalty . It has been held that if the software continues to be owned by the licensor, the use thereof would amount to Royalty . From the above it manifests that the contracts executed by the assessee are composite contracts and there is no bifurcation with respect to the nature of consideration relating to the services rendered. The assessee has not segregated its activities into supply of software and maintenance/support services. The entire income derived under the contracts was offered for taxation under section 44BB. Revenue in its note of arguments has contended that supply of software is royalty and other services are FTS and accordingly Petitioner is liable to pay tax under Section 44DA of the Act. Whether the services of updating the software/renewal of license or warranty services or maintenance of software are inextricably and essentially linked to the supply of the software and are ancillary services is a question of fact that would require determination after examining the dominant purpose of such contracts. In our opinion, there is no factual clarity on this aspect. We do not find any such distinction/segregation that can be inferred with respect to the receipts in the hands of the assessee under the contracts executed by it, referred above. The CIT being a fact-finding body has failed to give a reasoned order with respect to the nature of income and its subsequent application. In view of the afore-going discussion, we set aside the impugned order and the matter is remanded to the file of the Ld. CIT to assess the Petitioner s income and tax payable thereon by first determining the nature of the income/receipts in the hands of the assessee in light of the observations made in this judgment. The CIT, would be required to give a finding of fact on the following aspect Whether the income from services provided by the Assessee including the supply of software as well as ancillary services such as maintenance and installation would be covered under the definition of Royalty under the Explanation 2 to section 9(vi) of the Income Tax Act? If the answer to the above question is in the affirmative, the income would be taxable under section 44DA. On the contrary, if the answer is in the negative, the income of the assessee would not be taxable under section 44DA but section 44BB as held in ONGC 2015 (7) TMI 91 - SUPREME COURT as well as CBDT Circular No. 1862 dated 22.10.1990 since it is excluded from the definition of Fees for Technical Services under the Explanation 2 to section 9(vii) of the Act, being covered under the exception relating to mining and like activities provided in the definition of FTS. Lastly, though this ground has not been raised by the assessee, however, it is required to be examined whether the assessee s case would be covered under the India-Australia DTAA. Article 12(3) of the said DTAA provides the definition of Royalty. The Petitioner is granted liberty to claim benefit under the said DTAA before the Ld. CIT if it wishes to do so. Besides, in the event the answer to the question is in the affirmative, the assessee shall also be at liberty to assail such findings on merit, as we have refrained ourselves from determining whether the income of royalty is excluded from the definition under the Act. The writ petition is allowed in the above terms.
Issues Involved:
1. Applicability of Section 44BB vs. Section 44DA of the Income Tax Act, 1961. 2. Nature of income: Royalty or Fees for Technical Services (FTS). 3. Interpretation of amendments introduced by the Finance Act, 2010. 4. Examination of the definition of FTS and its exclusions. 5. Determination of whether the income falls under the India-Australia DTAA. Detailed Analysis: Applicability of Section 44BB vs. Section 44DA: The primary issue revolves around whether the income of the Petitioner should be taxed under Section 44BB or Section 44DA of the Income Tax Act, 1961. The Petitioner, an Australian company, argued for taxation under Section 44BB, which applies to non-residents providing services or facilities in connection with the prospecting, extraction, or production of mineral oils. The Assessing Officer and the Commissioner of Income Tax (CIT) held that the income fell under Section 44DA, which pertains to income by way of royalty or fees for technical services (FTS). Nature of Income: Royalty or FTS: The CIT did not clearly categorize the income as either royalty or FTS. The CIT concluded that the income should be assessed under Section 44DA as Royalty/FTS, stating that the services provided by the Petitioner, such as software maintenance and support, do not directly involve mining or drilling operations. This interpretation was challenged as being too restrictive. Interpretation of Amendments Introduced by the Finance Act, 2010: The amendments introduced by the Finance Act, 2010, added a proviso to Section 44BB and a second proviso to Section 44DA, clarifying that Section 44BB would not apply to income falling under Section 44DA. The Court held that after April 1, 2011, income falling within the scope of Section 44DA would be excluded from Section 44BB. This amendment aimed to resolve the conflict between the two sections, emphasizing that income characterized as royalty or FTS should be taxed under Section 44DA. Examination of the Definition of FTS and Its Exclusions: The definition of FTS under Explanation 2 to Section 9(1)(vii) excludes services related to "mining or like projects." The CBDT Circular No. 1862 clarifies that services like training and drilling operations for oil and natural gas exploration fall outside the ambit of FTS. The Court emphasized that if the services provided by the Petitioner are for "mining or like projects," they would not qualify as FTS and thus would not fall under Section 44DA. Determination of Whether the Income Falls Under the India-Australia DTAA: The Court granted the Petitioner the liberty to claim benefits under the India-Australia Double Taxation Avoidance Agreement (DTAA). Article 12(3) of the DTAA provides the definition of royalty, which could impact the taxability of the income. Conclusion: The Court set aside the impugned order and remanded the matter to the CIT to reassess the nature of the income and its taxability. The CIT was directed to: 1. Determine whether the income from services provided by the Petitioner, including software supply and ancillary services, falls under the definition of royalty under Explanation 2 to Section 9(1)(vi). 2. If the income is categorized as royalty, it would be taxable under Section 44DA. 3. If not, the income would be taxable under Section 44BB, as it would be excluded from the definition of FTS. 4. Examine whether the income falls under the India-Australia DTAA, allowing the Petitioner to claim benefits if applicable. The writ petition was allowed, and the matter was remanded for reassessment in light of the Court's observations.
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