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TMI Blog2024 (8) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... 023 and the certificate dated 10 May 2023 framed in identical terms. 2. On facts which are undisputed, it appears that the petitioner approached the respondents by way of an application for being accorded Nil Withholding Tax Certificates under Section 197 of the Act in the following circumstances. The petitioner is stated to be a company incorporated under the laws of the United States of America and engaged in providing localization and translation solutions. As part of its business operations, it is stated to provide to its clients various services including detail-critical business processes, translation and localization, digital marketing and global engineering. For the purposes of facilitating outsourcing of projects, it had entered into agreements titled "Contract Localization Services" with its various group entities including with its Indian entity, being Lionbridge Technologies LLP (India) (LB India) on 11 July 2019. As per the said agreement, the Indian entity was to be outsourced work which according to the writ petitioner stood restricted to providing backend support services. 3. The petitioner is also stated to have entered into multiple user master agreements with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bal engineering etc. 2. The applicant has submitted that M/s Lionbridge Technologies LLC (LB US) being the parent entity has entered into license agreements with third parties viz. Microsoft, Adobe etc. for use of programs/ software's such as Microsoft Windows, Outlook, MS office etc. These programs/software's are used by M/s Lionbridge Technologies LLP (LB India) for the internal use of its business. LB US shall proportionately allocated the cost based on the number of users i.e. LB US shall allocate the cost to LB India on the basis of users of these licensed programs/software's and LB India shall make payment to LB US on cost-to-cost basis in the nature of reimbursement of expenses. 3. The assessee has submitted copy of sample copy of invoices; debit notes raised the company to LB India and copy of agreement between LB LLC and LB India etc. Regarding taxability of software, the assessee has also relied upon the judgement of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (2021) 281 taxmann 19(SC). However, the applicant has failed to explain the same. 4. On perusal of contract Localization Service Agreement dated 11.07.2019 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision rendered by the Supreme Court in Engineering Analysis Center for Excellence Private Limited v. Commissioner of Income Tax & Anr [(2022) 3 SCC 321] to contend that in the absence of any transfer of copyright, the reimbursement on cost-to-cost basis as received by it from its group entity - LB India could not be subjected to tax. However, the respondent while placing its reliance on the Draft Assessment Order dated 21 September 2022 proceeded to hold that since the petitioner had purchased the software and installed the same in the premises of its group entities, the prayer for the grant of Nil Withholding Tax Certificate would not sustain. It proceeded further to observe that it appeared that the petitioner had been charging its subsidiaries in India as well as across the globe "in lieu of provision of usage of the infrastructure in place....". A similar order was passed for FY 2023-24 dated 08 March 2023 which has been impugned before us in W.P.(C) 8192/2023. 9. In view of the above and resting its decision on the Draft Assessment Order, the respondent proposed the Tax Withholding Certificate under Section 197 of the Act being issued at the rate of 9.99% for both FYs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary to observe that the assessee has entered into a separate agreement with Indian subsidiary, in terms of which, the Indian subsidiary provides certain back office support services to the assessee and gets remunerated at cost plus 15°/o mark-up. A reading of the draft assessment order certainly gives an impression that the Assessing Officer has mixed up both the transactions and under a misconceived notation that the assessee has received markup over the cost of software, has proceeded to treat the receipts as royalty. However, neither the Departmental Authorities have brought on record any material to establish that the reimbursement of cost to the assessee is inclusive of markup, nor at the time of hearing before us, learned Departmental Representative could place any evidence on record to demonstrate that the reimbursement of cost includes element of markup. Therefore, in our view, the cost-to-cost reimbursement of price paid towards software cannot be treated as royalty." 12. The aforesaid would have, thus, been sufficient for the impugned orders being quashed and set aside. However, we deem it apposite and necessary to enter the following additional observations. 13. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Section 194-E of the Income Tax Act belongs to a set of various provisions which deal with TDS, without any reference to chargeability of tax under the Income Tax Act by the non-resident assessee concerned. This section is similar to Sections 193 and 194 of the Income Tax Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Income Tax Act. On the other hand, as has been noted in GE Technology [GE (India) Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29] , at the heart of Section 195 of the Income Tax Act is the fact that deductions can only be made if the non-resident assessee is liable to pay tax under the provisions of the Income Tax Act in the first place. xxxx xxxx xxxx 66. What is made clear by the judgment in GE Technology [GE (India) Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29] is the fact that the "person" spoken of in Section 195(1) of the Income Tax Act is liable to make the necessary deductions only if the non-resident is liable to pay tax as an assessee under the Income Tax Act, and not otherwise. This judgment also clarifies, after referring to CBDT Circular No. 728 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment." 15. We in this regard also take note of Rule 28AA of the Income Tax Rules, 1962 (1962 Rules) and which stands framed in the following terms:- "Certificate for deduction at lower rates or no deduction of tax from income other than dividends. 28AA . (1) Where the Assessing Officer, on an application made by a person under sub-rule (1) of rule 28 is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub-section (1) of section 197 for deduction of tax at such lower rate or no deduction of tax. (2) The existing and estimated liability referred to in sub-rule (1) shall be determined by the Assessing Officer after taking into consideration the following:- (i) tax payable on estimated income of the previous year relevant to the assessment year; (ii) tax payable on the assessed or returned [or estimated income, as the case may be, of last four] previous years; (iii) existing li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax collected at source in the previous years. Rule 28AA of the 1962 Rules thus clearly required the authority to confer and accord due consideration on aspects pertaining to chargeability when raised by the assessee. 17. What needs to be emphasised is that merely because the grant of a certificate under Section 197 of the Act is not accorded finality or may not amount to a definitive determination on the question of taxability, the same would not absolve the authority from considering all aspects in light of the statutory mandate referred to above. 18. We are constrained to observe that while passing the impugned order, the respondent has clearly failed to bear the aforesaid aspects in consideration. Not only was the decision in Engineering Analysis cited for its consideration, it also appears to have been vehemently urged that the supply or licensing of software cannot possibly be viewed as being "royalty" either under the Act or the DTAA. The aforesaid submissions could not have possibly been negated merely on the basis of a Draft Assessment Order. 19. In the scheme of Section 144C of the Act, a draft order of assessment is clearly inchoate and does not represent a final or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s distributors/customers which is in the nature of fee for technical services (FTS)/royalty." 12. Mr. Kumar's argument, that at this stage, the Assessing Officer (AO) was not required to employ the statutory tools, which an Assessing Officer brings into play while carrying out the assessment, is a submission with which one cannot quibble. That said, clearly, the concerned officer was required to examine the application, in the background of the parameters set forth in rule 28AA of the Rules. Concededly, that exercise has not been carried out. 13. In so far as Mr. Kumar's argument is concerned, that reduction of withholding tax under section 195 is the rule, it is required to be borne in mind, that deduction of withholding tax morphs into an obligation, only if the sum received is chargeable to tax. The petitioner's entire case is, that the sum that it receives under the distributor agreement is not chargeable to tax. It is in that context, that the petitioner has moved an application under section 197 of the Act for being issued a certificate with "nil" rate of withholding tax." 20. Milestone Systems again was a case where certification under Section 197 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms. He submits that in terms of the judgment of the Supreme Court in Engineering Analysis Centre (supra), there is no transfer of copyright in favour of the member firms, including EYGBS (India), and therefore, the payment received from EYGBS (India) by EYGSL (UK) does not amount to royalty under article 13 of the Double Taxation Avoidance Agreement between India and the United Kingdom (hereinafter referred to as the "India-UK DTAA")." 22. While accepting the challenge raised by the assessee, the Court held as under:- "13. A reading of the above judgment would clearly show that for the payment received by EYGSL (UK) from EYGBS (India) to be taxed as "royalty", it is essential to show a transfer of copyright in the software to do any of the acts mentioned in section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licensee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end- user to have access to and make use of the licenced software over which the licensee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as "royalty". 14. In the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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