2022 (2) TMI 514 - AT - Income Tax

Income accrued in India - Receipts on sale of hardware with embedded software - royalty receipts - DTAA between India and UK - assessee is a non-resident foreign company incorporated in United Kingdom - AR submitted that assessee granted exclusive non-transferrable license to customers in India to enable them to use the software for provision of DTH services to Indian subscribers - HELD THAT - As decided in own case 2021 (11) TMI 1023 - ITAT BANGALORE that pure reimbursement does not give rise to any income and the decisions cited by the learned AR in this regard lay down the above principle. We find that the revenue authorities have not firstly held that as to whether there was one-toone tally of sums spent by the Assessee that was reimbursed by NDS Pay Tv. Once this factual finding is rendered then there has been no payment for any services whatsoever. The question is can one infer that the sums reimbursed were for services rendered by Assessee when there is one to one tally. In our view it cannot be said so. As we have already mentioned the AO has proceeded to draw inferences on surmises and conjectures. Firstly there is no evidence to show that services were rendered which can be termed as FTS. Under the DTAA FTS can be taxed only when it makes available technical knowledge to the person making payment. On the application of make available clause of the DTAA, there is no finding whatsoever as to what was the technical service made available to NDS Pay TV. We, therefore, deem it fit to set aside this issue and remand the same for consideration by the AO in the light of the observations made above (in particular with regard to actual tally of expenses incurred and reimbursed by NDS Pay Tv to Assessee), in accordance with law, after affording assessee opportunity of being heard. The facts are identical and the arguments advanced by the Ld.AR as well as the Standing Counsel for revenue are similar with that raised in the preceding assessment years. It is noted that the Ld.AO proceeded on identical basis for the relevant assessment year, we are of the opinion that the entire addition in respect of international transaction needs to be looked into afresh having regards the principles laid down by various decisions cited and referred to by coordinate bench of this Tribunal hereinabove as well as the articles under the DTAA between India and UK. Levy of interest u/s. 234B on the proposed addition under international taxation - HELD THAT - As relying in assessee own case we direct that there shall be no levy of interest u/s. 234B of the Act under the present facts of the case. Accordingly, this ground raised by assessee stands allowed.

Issues Involved:
1. Treatment of receipts from software licensing as 'royalty'.
2. Treatment of receipts from sale of hardware as 'royalty'.
3. Treatment of receipts from support services as 'Fees for Technical Services' (FTS).
4. Treatment of amounts recovered from Cisco Video Technologies India Pvt. Ltd. (CVTIPL) as FTS.
5. Levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Receipts from Software Licensing as 'Royalty':
The learned AO treated the receipts from software licensing as 'royalty' under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The assessee argued that the software was sold and not licensed, and the title and risk passed to the customer upon sale. The Tribunal referenced the Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that payments for software sold/licensed on a physical medium cannot be classified as royalty. The Tribunal concluded that the receipts from software licensing should not be treated as royalty.

2. Treatment of Receipts from Sale of Hardware as 'Royalty':
The AO treated the receipts from the sale of hardware, including Set-Top Boxes (STBs) and viewing cards, as 'royalty'. The assessee contended that these items were sold, not licensed, and thus should not be considered royalty. The Tribunal, referencing the Supreme Court's decision, held that the sale of hardware with embedded software should be treated as a sale of goods and not as royalty. The Tribunal directed the AO to re-examine the issue in light of the Supreme Court's ruling.

3. Treatment of Receipts from Support Services as 'Fees for Technical Services' (FTS):
The AO categorized the receipts from support services as FTS. The assessee argued that the support services did not satisfy the 'make available' clause under the India-UK DTAA. The Tribunal noted that the technical knowledge and skills must remain with the recipient after the service ends, which was not the case here. The Tribunal concluded that the support services did not qualify as FTS and directed the AO to re-examine the issue.

4. Treatment of Amounts Recovered from CVTIPL as FTS:
The AO treated the amounts recovered from CVTIPL as FTS. The assessee contended that these amounts were reimbursements for payments made to third-party vendors on behalf of CVTIPL and did not constitute business support services. The Tribunal found that the AO's conclusions were based on surmises and conjectures. The Tribunal directed the AO to re-examine the issue, ensuring a one-to-one tally of expenses incurred and reimbursed, and determine if any services were rendered that could be classified as FTS.

5. Levy of Interest under Section 234B:
The AO levied interest under section 234B of the Income Tax Act on the proposed adjustments. The assessee argued that the receipts were subject to withholding tax, and thus, there was no requirement to pay advance tax. The Tribunal referenced the Supreme Court's decision in Mitsubishi Corporation, which held that non-residents are not liable to pay advance tax if the entire income is subject to TDS. The Tribunal directed that no interest under section 234B should be levied.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the issues in light of the Supreme Court's rulings and the DTAA provisions. The Tribunal also directed that no interest under section 234B should be levied on the assessee.

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