2022 (6) TMI 125 - AT - Income Tax

Income taxable in India - Taxability of Software License - ascertaining the taxability in India of the payments received from EYGBS and EYME and for withholding taxes - HELD THAT - In light of the favourable order of Hon'ble HC setting aside the order of Hon'ble AAR to the extent passed against the assessee, the order passed by AO and CIT(A) does not stand. Accordingly, payments received by appellant towards software license maintenance charges, global technology charges and GWAN connectivity charges are not taxable in India. Accordingly, upon careful consideration, we find that undoubtedly Hon ble Delhi High Court 2021 (12) TMI 571 - DELHI HIGH COURT reversed the order of AAR but the Hon ble High Court order was not in existence when the authorities below passed the order. Hence it would be appropriate to remit the cases to the AO to follow the Hon ble High Court order and give effect accordingly - Appeals filed by the assessee stand allowed for statistical purposes

Summary

Issues Involved:
1. Taxability of Software License and Maintenance Charges.
2. Taxability of Global Technology Charges and GWAN Connectivity Charges.
3. Binding nature of the AAR ruling.
4. Applicability of Section 158A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Software License and Maintenance Charges:
The primary issue revolves around whether the reimbursement of actual costs for software licenses and maintenance charges, amounting to INR 5,21,55,780, constitutes "Royalty" under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The assessee contended that these payments were mere reimbursements and not taxable. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld that these payments were taxable as "Royalty" based on the ruling of the Authority for Advance Rulings (AAR) in the assessee's own case. The AAR had determined that the software charges were taxable as "Royalty" under both the Act and the treaty.

2. Taxability of Global Technology Charges and GWAN Connectivity Charges:
The assessee argued that the Global Technology Charges (INR 44,21,795) and GWAN Connectivity Charges (INR 1,01,88,428) were not in the nature of "Royalty" and hence not taxable in India. The CIT(A) dismissed this ground, stating that the matter was pending rectification before the AAR and that the AAR had not explicitly ruled these charges as "Royalty." The AO, following the AAR's ruling, considered these charges taxable at 10% as "Royalty."

3. Binding Nature of the AAR Ruling:
The AO and CIT(A) both emphasized the binding nature of the AAR ruling as per Section 245S of the Income Tax Act, which states that the AAR's rulings are binding on the applicant and the tax authorities. The CIT(A) noted that since the AO's order was based on the AAR's decision, no appeal was maintainable on this ground. The Tribunal also upheld this view, stating that the AO had correctly followed the AAR ruling, and no fault could be found in their orders.

4. Applicability of Section 158A:
The assessee had filed an application under Section 158A to avoid repetitive appeals and to await the decision of the High Court on a similar issue. However, the CIT(A) found this application irrelevant as the assessee had already filed a writ petition before the High Court against the AAR ruling. The Tribunal agreed, noting that the CIT(A) correctly dismissed the appeal on this ground.

Conclusion:
The Tribunal noted that the Delhi High Court had reversed the AAR ruling, holding that the payments for software licenses and maintenance charges, global technology charges, and GWAN connectivity charges were not "Royalty" and thus not taxable in India. Consequently, the Tribunal remitted the cases to the AO to follow the High Court's order and give effect accordingly. The appeals for the assessment years 2012-13, 2013-14, 2014-15, and 2015-16 were allowed for statistical purposes, directing the AO to reconsider the taxability in light of the High Court's decision.