9911796707
TMI Blog2024 (6) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... the same carry no findings which may be viewed as indicative of the contingencies spelt out in clauses (a) to (f) of Section 270A (9) being attracted. In our considered opinion, in the absence of the AO having specified the transgression of the petitioner and which could be shown to fall within the ambit of sub-section (9) of Section 270A, proceedings for imposition of penalty could not have been mechanically commenced. Evaluation of the Assessment Orders and SCNs - We note that the SCNs which came to be issued for commencement of action under Section 270A were themselves vague and unclear. This since they failed to specify whether the petitioner was being charged with under-reporting or misreporting of income. The aforesaid aspect assumes added significance bearing in mind the indisputable position that a prayer for immunity could have been denied in terms of Section 270AA (3) only if it were a case of misreporting. The SCNs failed to indicate the specific charge which was sought to be laid against the petitioner. This, since they sought to invoke both sub-sections (2) as well as sub-section (9) of Section 270A. There was thus an abject failure on the part of the respondents to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act came to be rejected. X X X X Extracts X X X X X X X X Extracts X X X X ..... and in substance, unless licence is granted permitting the end user to copy, and download the software, the dumb C.D containing the software would not in any way be helpful to the end user as software would become operative, only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes, the difference between the computer software and copyright, in respect of books or pre-recorded music software as book and pre-recorded music C.D can be used once they are purchased, but so far as software stored in dumb C.D is concerned, the transfer of dumb C.D by itself would not confer any, right, upon the end user and the purpose of the C.D is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or pre-recorded music C.D or the C.D containing software and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case. Brief extracts are as follows: Assessee granted a non-exclusive non-transferable software license-without right of sub-licence. Licensee might make a reasonable number of copies of licensed software for backup and/or archival purposes only, even if it was not transfer of exclusive right in copyright, right to use confidential information embedded in software in terms of aforesaid license which makes it abundantly clear that there was transfer of certain rights which owner of copyright possessed in said computer software/programme in respect of copyright owned. Therefore in terms of DTAA consideration paid for use or right to use said confidential information in form of computer programme software would itself constitute royalty and attract tax. Court held that it is not necessary that there should be a transfer of exclusive right in copyright and where consideration paid was for rights in respect of copyright and for user of confidential information embedded in software/computer programme, it would fall within mischief of Explanation (2) of section 9 (1) (vi) and there would be a liability to pay tax. In favour of revenue (2001-02 to 2003-04) xi) The assessee has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in paragraph 3 of the assessment order and which is extracted hereinbelow:- "3. GECUS has received income on account of IT support services from Clix Finance India Private Limited, Clix Capital Services Private Limited and GE Capital Business Process Management Services Private Limited (now known as SBI Business Process Management Services Private Limited) totaling to INR 181,332,765 as follows: S.No. Name of Payer Amount Received (Rs.) Nature of Transaction 1 Clix Finance India Pvt Ltd 32,875,328 IT Support Services 2 Clix Capital Services Pvt Ltd 3,375,323 IT Support Services 3 SBI Business Process Management Services Pvt Ltd 145,082,114 IT Support Services Total 181,332,765/- It is found from the contract with Clix Finance India Pvt Ltd & Clix Capital Services Pvt Ltd that the company has provided IT access right and services of various software's to the above mentioned companies for doing their works and these are nothing but Royalty as defined in explanation 2 to section 9 (1) (vi) of the Income Tax and taxable u/s 9 (1) (vi) of the Act as well as Article 12 (3) of the India-USA DTAA." 5. The range of software services which were provided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior to Closing. As part of this Service, GECC will also provide to the Company Second-Level Support in relation to the MyGE Intranet. IT Application Service and IT Access Right Security Infrastructure & Event Management Client, server & network security solutions & services GECC will Provide services and support to follow Security Information & Event Management services as used by the Company prior to Closing, these include but are not limited to: -Email & Application Encryption (Digital Certificates) -Antivirus/Anti-Malware (Sophos & McAfee EPO) -Data encryption (Vormetric) -Detection solutions (ESG) IT Application Service and IT Access Right Service Now Service Now Licenses, RTS Support, & Projects GECC will provide access to and use of the Service Now application, Licenses, Ready-to-Serve support & maintenance, and GE SN project requests as used by the Company prior to Closing IT Support Service & IT Access Right Third Party Systems & Security Third Party Systems & Security GECC will provide access to and use of third party systems and security as used by the Company prior to Closing. These include but are not limited to: -Third Party Assessment Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of definition of royalty defined under section 9 (1) (vi), it can safely be inferred that for the payments to be characterized as "royalty", such payments have to be necessarily for the use of any property mentioned in clause (iii) of Explanation 2 to section 9 (1) (vi) of the Act and the "process" being one of the constituent items occurring in the said definition, it can further be safely assumed that "consideration for use of process would result in the payment being made to be referred as "royalty". 7.3 The case of the assessee is differentiated from the judgment of Hon'ble Supreme Court vide order dated 02.03.2021 in case of Engineering Analysis Centre of Excellence Private Limited Vs. CIT & Anr. on the basis of facts that the software provided by the assessee is not a product but an end to end solution using a proprietary process. The undersigned is of the view that the term 'software' as it is being used presently has come a long way from its original intention. In the years gone by (specifically the cases where the Hon'ble Apex court has decided the meaning of term), software was basically a set of instructions which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt had pronounced its verdict in Engineering Analysis and more particularly on 02 March 2021. However, the aforesaid decision was sought to be distinguished with the AO observing that the process by which the solution is provided by the petitioner constitutes an Intellectual Property Right [IPR] and that the usage of such IPR would attract royalty. It further observed that the nature of services which were extended would also qualify the test of "make available", a phrase oft appearing in tax treaties and thus liable to be taxed as Fee for Technical Services as well. Based on the aforesaid conclusions, it proceeded to frame the following directions:- "10. Accordingly, final assessment order u/s 144C (3) r.w.s. 143 (3) is being passed as per draft assessment order at total income of Rs. 181,332,765/- which is taxable as Royalty/FTS @ 10% as per DTAA. Charge Interest u/s 234A, 234B, 234C & 234D as applicable. Give credit to the prepaid taxes after verification. Issue copy of the order and demand notice to the assessee. Penalty proceedings u/s 270A for misreporting of the Act is being initiated separately." 8. The order of assessment for AY 2019-20 proceeds along similar lines as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the solution is provided by the assessee is Intellectual Property Right (IPR) of the assessee and the usage of such IPR attracts Royalty. Hence, the same is taxable as a process royalty under the Act as well as the DTAA. 7.4 Without prejudice to the above, it can be seen that the income received by the assessee can also be viewed from the perspective of IT Support services provided by the assessee. The nature of services provided is such that it makes available technical knowledge, experience, skill, know-how or processes as the service receiver gets wiser by getting such services from the assessee and would not need additional support from the assessee for performing the same role. The service receiver thus learns how to resolve and act on a particular issue and this knowledge is enduring in nature. Hence the same is alternately taxable as FTS as well. However, as the tax rate for both royalty and FTS is the same @ 10%, hence the same does not have an impact on the overall tax implication. 8. In the light of the above, the amount of receipt to the tune of Rs 3,42,298,126/- as IT Support service is taxable as royalty u/s 9 (1) (vi) of the Income Tax Act as well as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961." 12. Assailing the view as taken, Mr. Jolly, learned counsel for the petitioner, submitted that the respondent has acted wholly arbitrarily in rejecting the application for grant of immunity bearing in mind the undisputed position that the petitioner had duly complied with the conditions prescribed by Section 270AA (1) of the Act. It was the submission of learned counsel that once the petitioner had complied with the aforesaid conditions, the respondent was bound to process the applications for immunity in accordance with Section 270AA (3) of the Act. 13. Mr. Jolly submitted that for the purposes of being eligible to maintain an application under Section 270AA, it is incumbent upon the assesse to establish that the tax and interest payable as per the order of assessment has been duly deposited and that no appeal against the aforesaid order has been preferred. According to learned counsel, once those conditions stood fulfilled, there existed no justification for the applications being rejected. In view of the above, Mr. Jolly submitted, the respondent has committed a manifest illegality in holding that mere payment of the demand would not "ipso facto" entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to learned counsel, it was incumbent upon the respondents to categorically indicate whether the petitioner was being charged with underreporting or misreporting. Mr. Jolly submitted that the aforesaid imperatives which must inform a SCN is an aspect which stands settled in light of the judgment rendered by the Court in CIT vs. Minu Bakshi 2022 SCC OnLine Del 4853 and Schneider Electric South East Asia (HQ) (P) Ltd. vs. CIT 2022 SCC OnLine Del 870. Learned counsel submitted that although Minu Bakshi was a judgment rendered in the context of Section 271 (1) (c) of the Act, the principles propounded therein would equally apply to a notice under Section 270A. 17. It becomes pertinent to note that Section 271 (1) (c) speaks of various eventualities and which may expose an assessee to face imposition of penalties. These range from a failure to comply with a notice under Section 115WD or concealment or furnishing of inaccurate particulars of income or fringe benefits. Mr. Jolly sought to draw a parallel between Section 271 (1) (c) and Section 270A by highlighting the fact that both under-reporting as well as misreporting are considered to be separate and distinct transgressions. It is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d how the ingredient of sub-section (9) of Section 270-A is satisfied. In the absence of such particulars, the mere reference to the word "misreporting" by the respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. 8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent 1 was actually voluntary computation of income filed by the petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting. 9. This Court is further of the view that the impugned action of Respondent 1 is contrary to the avowed legislative intent of Section 270-AA of the Act to encourage/incentivise a taxpayer to (i) fast track settlement of issue; (ii) recover tax demand; and (iii) reduce protracted litigation." According to Mr. Jolly, the initiation of action under Section 270A of the Act is thus liable to be quashed and set aside on the aforesaid grounds. 19. Appearing for the respondents, Mr. Rai submitted that while it is true that the SCNs' referable to Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income has been furnished or where return has been furnished for the first time under Section 148]; (f) the amount of deemed total income reassessed as per the provisions of Section 115-JB or Section 115-JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment; (g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income. (3) The amount of under-reported income shall be,-- (i) in a case where income has been assessed for the first time,-- (a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of Section 143; (b) in a case where [no return of income has been furnished or where return has been furnished for the first time under Section 148],-- (A) the amount of income assessed, in the case of a company, firm or local authority; and (B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A); (ii) in any other case, the difference between the amount of income reassess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt, deposit or investment. (5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order-- (a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and (b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on. (6) The under-reported income, for the purposes of this section, shall not include the following, namely:-- (a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or [the Joint Commissioner (Appeals) or the Commissioner (Appeals)] or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered; (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or [the Joint C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount not chargeable to tax as if it were the total income; (b) where the total income determined under clause (a) of sub-section (1) of Section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income; (c) in any other case, determined in accordance with the formula-- (X-Y) where, X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of Section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of Section 143 or total income assessed, reassessed or recomputed in a preceding order. (11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year. (12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f in clauses (a) to (g) of Section 270A (2) were attracted. In terms of Section 270A (3), the under-reported income is thereafter liable to be computed in accordance with the stipulations prescribed therein. However, the subject of misreporting of income is dealt with separately in accordance with the provisions comprised in sub-sections (9) and (10) of Section 270A. It is thus evident that both under-reporting as well as misreporting are viewed as separate and distinct misdemeanors. 23. However, and as we read the orders of assessment which were passed, the same carry no findings which may be viewed as indicative of the contingencies spelt out in clauses (a) to (f) of Section 270A (9) being attracted. In our considered opinion, in the absence of the AO having specified the transgression of the petitioner and which could be shown to fall within the ambit of sub-section (9) of Section 270A, proceedings for imposition of penalty could not have been mechanically commenced. 24. Notwithstanding the above, we note that the SCNs' which came to be issued for commencement of action under Section 270A were themselves vague and unclear. This since they failed to specify whether the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eporting or misreporting. 29. Since there was a clear and apparent failure on the part of the respondents to base the impugned proceedings on a contravention relatable to Section 270A (9), the application for immunity could not have been rejected. As was noticed hereinabove, neither the AO nor the impugned SCNs' laid an allegation which could be said to be reflective of the petitioner having been found to have violated Section 270A (9). In fact, the notices themselves sought to take a wholly ambivalent stance while alleging that the petitioner had indulged in "under-reporting/misreporting". We thus have no hesitation in holding that the impugned SCNs' are rendered unsustainable on this short ground alone. 30. The importance of clarity and comprehensiveness which must imbue show cause notices came to be duly emphasised by us in our decision in Puri Constructions (P) Ltd. Vs. CIT 2024 SCC OnLine Del 939:- "78. The requisites of a valid show-cause notice were lucidly explained by the Supreme Court in Gorkha Security Services v. Government (NCT of Delhi) as under: "Contents of the show-cause notice 21. The central issue, however, pertains to the requirement of stating the actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt observed that the mere mentioning of a wrong provision would not justify the issuance of that prerogative writ and more so where the writ petitioner had failed to establish a total absence of jurisdiction. xxxx xxxx xxxx 83. The principle of a power otherwise inhering or existing and not being impacted by the mere mention of a wrong provision is one which we apply to ratify, save and uphold a decision which is otherwise found to be valid and sustainable. We would be wary of either readily or unhesitatingly adopting or invoking that precept at the stage of a show-cause notice especially where the noticee is left to fathom which of the more than fifty variable obligations it is alleged to have violated." 31. We are further constrained to observe that even the assessment orders fail to base the direction for initiation of proceedings under Section 270A on any considered finding of the conduct of the petitioner being liable to be placed within the sweep of sub-section (9) of that provision. The order of assessment as well as the SCNs' clearly fail to meet the test of "specific limb" as propounded in Minu Bakshi and Schneider Electric. A case of misreporting, in any case, canno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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