Avnet Aisa Pte. Ltd., New Delhi v. DCIT (International Taxation), New Delhi

1 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI N.K. BILLAIYA ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE JUDICIAL MEMBER ITA NO.1288/DEL/2015 (A.Y. 2011-12) AND ITA NO.4173/DEL/2016 (A.Y. 2012-13 ) AVNET ASIA PTE. LTD. C/O. CA K N GURUNATH CGS & CO. CAS NO. 979 13 CROSS 19 MAIN 11 FLOOR BSK II STAGE BANGALORE VS. DCIT CIRCLE-1(1)(1) INTERNATIONAL TAXATION ROOM NO. 409 4 TH FLOOR E-2 BLOCK PRATYAKSH KAR BHAVAN CIVIC CENTRE NEW DELHI PAN : AAICA7012R (APPELLANT) (RESPONDENT) ORDER PER SUCHITRA KAMBLE JM: THESE TWO APPEALS ARE FILED BY THE ASSESSEE AGAINS T THE ASSESSMENT ORDER DATED 24.12.2014 AND 28.01.2016 PASSED BY DCI T CIRCLE-1(1)(1) INTERNATIONAL TAXATION NEW DELHI FOR ASSESSMENT YE AR 2011-12 AND 2012-13 RESPECTIVELY. 2. THE GROUNDS OF APPEAL ARE AS UNDER: ITA NO. 1288/DEL/2015 (A.Y. 2011-12) 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE IMPUGNED ASSESSMENT ORDER PASSED PURSUANT TO DIRECT ION OF DRP APPELLANT BY SH. TAPAS RAM MISRA ADV. RESPONDENT BY SHRI G.K.DHALL CIT DR (INT. TAX) DATE OF HEARING 11.09.2019 DATE OF PRONOUNCEMENT 18.11.2019 2 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 UNDER SECTION 144C(5) OF THE INCOME TAX ACT 1961 ( 'THE ACT') IS BASED ON INCORRECT LEGAL AND FACTUAL PREMISE CONTR ARY TO JUDGMENTS OF THE JURISDICTIONAL HIGH COURT AND UNTENABLE IN LAW. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONC LUDING FOLLOWING DIRECTION OF THE DRP THAT THE RECEIPT OF RS. 2 91 02 372/- TOWARDS SUPPLY OF SOFTWARE WAS TAXABLE AS 'ROYALTY'. 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING T HAT THE APPELLANT WAS A DISTRIBUTOR OF SOFTWARE PRODUCTS DEVELOPED BY OTHER COMPANIES AND IT MERELY PURCHASED AND RE-SOLD THE OFF THE SHELF SOFTWARE WITHOUT ACQUIRING OR TRANSFERRING ANY RIGH T TO USE THE COPYRIGHT IN THE SOFTWARE. 2.2 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING T HAT THE APPELLANT A DISTRIBUTOR NEVER ACQUIRED ANY COPYRIGHT IN THE SOFTWARE AND HENCE IT COULD NOT BE POSSIBLY HAVE TRANSFERRED ANY COPY-RIGHT. 2.3 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN IGNORING THE DECIS IONS OF THE JURISDICTIONAL DELHI HIGH COURT AND IN FOLLOWING TH E DECISIONS OF THE KARNATAKA HIGH COURT INSTEAD. 2.4 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN CONCLUDING THAT TH E CONSIDERATION PAID BY THE CUSTOMERS IN INDIA FOR THE USE OF THE S OFTWARE WOULD BE TAXABLE AS ROYALTY EVEN WHILE RECOGNIZING THAT THE APPELLANT NEVER OWNED ANY COPYRIGHTS IN THE SOFTWARE THAT IT COULD TRANSFER TO THE CUSTOMERS. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONC LUDING FOLLOWING THE DIRECTION OF DRP THAT RS.3 04 35 127/- RECEIVE D FROM SALE OF SERVICE PACKAGE TO BE TAXABLE AS FEES FOR TECHNICAL SERVICES. 3.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING T HAT THE APPELLANT WAS SELLING WARRANTIES UPGRADES AND SIMILAR SERVIC E PACKAGES ON BEHALF OF MANUFACTURERS OF THE SOFTWARE WITHOUT PRO VIDING ANY ACTUAL SERVICE. 3 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 3.2 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE A PPELLANT WAS PROVIDING TECHNICAL SERVICE WHILE IN FACT THE APPEL LANT WAS NOT PROVIDING ANY SERVICE AT ALL. 3.3 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN ASSURING WITHOUT ANY FACTUAL BASIS THAT THE APPELLANT 'MADE AVAILABLE' TECHNICA L KNOWLEDGE ETC. MERELY BECAUSE THE CUSTOMER BENEFITTED FROM REMOTE SUPPORT AND UPGRADES PROVIDED DIRECTLY BY THE MANUFACTURER OF S OFTWARE. 4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE T HE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING CREDIT FOR TAX DEDUCTED AT SOURCE. THE APPELLANT CRAVES LEAVE TO ADD TO ALTER AMEND OR VARY FROM THE AFORESAID GROUNDS OF APPEAL AT OR BEFORE THE TIME O F HEARING. ITA NO. 4173/DEL/2016 (A.Y. 2012-13) 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE IMPUGNED ASSESSMENT ORDER PASSED PURSUANT TO DIRECT ION OF DRP UNDER SECTION 144C(5) OF THE INCOME TAX ACT 1961 ( 'THE ACT') IS BASED ON INCORRECT LEGAL AND FACTUAL PREMISE CONTR ARY TO JUDGMENTS OF THE JURISDICTIONAL HIGH COURT AND UNTENABLE IN LAW. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONC LUDING FOLLOWING DIRECTION OF THE DRP THAT THE RECEIPT OF RS. RS. 2 3 68 26 107/- TOWARDS SUPPLY OF SOFTWARE WAS TAXABLE AS 'ROYALTY' . 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING T HAT THE APPELLANT WAS A DISTRIBUTOR OF SOFTWARE PRODUCTS DEVELOPED BY OTHER COMPANIES AND IT MERELY PURCHASED AND RE-SOLD THE OFF THE SHELF SOFTWARE WITHOUT ACQUIRING OR TRANSFERRING ANY RIGH T TO USE THE COPYRIGHT IN THE SOFTWARE. 2.2 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN CONCLUDING THAT TH E CONSIDERATION PAID BY THE CUSTOMERS IN INDIA FOR THE USE OF THE S OFTWARE WOULD BE 4 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 TAXABLE AS ROYALTY EVEN WHILE RECOGNIZING THAT THE APPELLANT NEVER OWNED ANY COPYRIGHTS IN THE SOFTWARE THAT IT COULD TRANSFER TO THE CUSTOMERS. 2.3 THAT THE HONORABLE DRP FAILED TO APPRECIATE THAT P AYMENT FOR A MERE RESALE OF COMPUTER SOFTWARE DE HORS ANY COPY RIGHT ASSOCIATED WITH IT IS NOT COVERED WITHIN THE AMBIT OF CLAUSE ( V) OF THE DEFINITION OF ROYALTY UNDER THE ACT IGNORING THE WELL SETTLED PR INCIPLES AS LAID DOWN BY THE JURISDICTION HON'BLE HIGH COURT OF NEW DELHI. 2.4 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP ERRED ON FACTS AND IN LAW IN IGNORING THE DECIS IONS OF THE JURISDICTIONAL DELHI HIGH COURT AND IN FOLLOWING TH E DECISIONS OF THE KARNATAKA HIGH COURT INSTEAD. 2.5 THAT THE LEARNED AO AS WELL AS THE HONORABLE DR P FAILED TO APPRECIATE THAT IN ORDER TO QUALIFY AS A ROYALTY PA YMENT WITHIN THE ACT IT IS TO BE ESTABLISHED THAT THE ACQUIRER BY MAKING PAYMENT OBTAINS ALL OR ANY OF THE COPYRIGHTS OF THE LITERAR Y WORK BEING SOFTWARE. FURTHER DISTINCTION HAS TO BE MADE BETWE EN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHT ED ARTICLE' 2.6 THE LEARNED AO AND HONORABLE DRP HAVE ERRED IN DETERMINING THE ABOVE SAID INCOME BY PLACING EXCESSIVE RELIANCE ON THE RETROSPECTIVE AMENDMENT TO SECTION 9(L)(VI) BY THE FINANCE ACT 2012 READ WITH EXPLANATION 4 TO THE SAID SECTION BY THE FINANCE ACT 2012 HOLDING THE INCOME EARNED BY THE ASSESSE AS ROYALTY INCOME - NOT APPRECIATING THE FACT THAT NO RETROSPECTIVE AMENDME NT INTO A DOMESTIC LAW CAN BE READ INTO A TAX TREATY AS JUDI CIALLY DECIDED. 2.7 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE T HE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING CREDIT FOR TAX DEDUCTED AT SOURCE. THE APPELLANT CRAVES LEAVE TO ADD TO ALTER AMEND OR VARY FROM THE AFORESAID GROUNDS OF APPEAL AT OR BEFORE THE TIME O F HEARING. 3. WE ARE TAKING UP FACTUAL ASPECT OF ASSESSMENT YE AR 2011-12 AS A LEAD MATTER. AVNET ASIA PVT. LTD. IS A 100% SUBSIDIARY OF AVNET INC. USA. THE 5 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 GROUP IS B2B DISTRIBUTOR OF SEMICONDUCTORS INTERCO NNECT PASSIVE AND ELECTROMECHANICAL COMPONENTS ENTERPRISE NETWORK AN D COMPUTER EQUIPMENT AND EMBEDDED SUBSYSTEMS FROM LEADING MAN UFACTURES. THE ASSESSEE COMPANY PROCURES GOODS FROM VENDORS IN SIN GAPORE AND OTHER OVERSEAS COUNTRIES FOR SALE TO ITS CUSTOMERS IN IND IA. THE ASSESSEE SUPPLIED HARDWARE AND SOFTWARE FOR USE BY ITS CUSTOMERS IN I NDIA. THE ASSESSEE COMPANY FILED E-RETURN FOR ASSESSMENT YEAR 2011-12 DECLARING NIL INCOME ON 30.03.2013. THE NOTICE U/S 143(2) OF THE INCOME TAX ACT 1961 WAS ISSUED ON 12.08.2013 TO THE ASSESSEE. IN RESPONSE T O VARIOUS NOTICES THE CHARTERED ACCOUNT APPEARED AS THE AUTHORISED REPRES ENTATIVE OF THE ASSESSEE ATTENDED THE CASE TIME TO TIME AND FILED N ECESSARY DETAILS/ DOCUMENTS. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS ASSESSEE WAS ASKED TO FURNISH DETAILS OF ALL THE REVENUE STREAMS RECEIVED/ACCRUED IN INDIA. IN RESPONSE ASSESSEE FURNISHED DETAILS OF IT S TOTAL SALES VIDE SUBMISSION DATED 13.02.2014 WHICH IS INCORPORATED IN THE ASSESSMENT ORDER. THE ASSESSING OFFICER OBSERVED THAT THE ASSE SSEE IS SUPPLYING SOFTWARE HARDWARE AND PROVIDING SERVICES TO ITS CL IENTS IN INDIA. THE ASSESSEE WAS AGAIN ASKED TO SHOW CAUSE AS TO WHY SO FTWARE LICENSING SHALL NOT BE TAXED AS ROYALTY INCOME AND SERVICES PROVIDE D BY THE ASSESSEE SHALL NOT BE TAXED AS FTS. IN RESPONSE THE ASSESSEE FILED DETAILED LEGAL SUBMISSIONS DATED 19.03.2014. THE DRAFT ASSESSMENT ORDER WAS PASSED AND WAS SERVED TO THE ASSESSEE ON 04.04.2014. THEREAFTE R THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP ). THE DRP VIDE DIRECTIONS DATED 14.11.2014 DISPOSED OFF THE OBJECT IONS OF THE ASSESSEE. THE ASSESSMENT ORDER PASSED ON 24.12.2014. THE ASSESSIN G OFFICER OBSERVED THAT ASSESSEE COULD NOT TRANSFER RIGHT TO THE CUSTO MER WITHOUT OWNING IT. THEREFORE AT THE TIME OF SALE TO THE CUSTOMERS IN INDIA ASSESSEE REMAINS THE OWNER OF SUCH RIGHTS WHICH ARE TRANSFERRED TO THE C USTOMERS BY THE ASSESSEE. THEREFORE ASSESSEE COULD NOT MERELY BE CATEGORIZED AS A COMMISSION AGENT OR A PASS THROUGH ENTITY. WHILE PROVIDING THE SOFTW ARE TO THE CUSTOMERS ASSESSEE COMPANY IN EFFECT TRANSFERRED THE LICENSE TO USE THE SOFTWARE BY THE CUSTOMERS. THE CUSTOMER WAS GRANTED A LICENSE BY TH E ASSESSEE UNDER WHICH 6 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 THE CUSTOMER WAS GRANTED SOME OF THE RIGHTS BY THE ASSESSEE USING WHICH THE CUSTOMER IS AUTHORIZED TO COPY THE CODE INTO TH E HARD DISK OF COMPUTER/ EQUIPMENT RUN THE EXECUTABLE FILE/ INSTALLER PROGR AMME INSTALL THE PROGRAMME INTO THE COMPUTER/ EQUIPMENT AND RUN THE PROGRAMME TO GET THE INTENDED RESULT. FOR THIS RIGHT TO USE THE SOFT WARE A SEPARATE CONSIDERATION IS PROVIDED UNDER THE CONTRACT/ PURCH ASE ORDER. THE ASSESSEE WAS ALSO REQUIRED TO RENDER THE SERVICES OF TECHNIC AL SUPPORT FOR THE EQUIPMENT. FOR THESE SERVICES WHICH REQUIRES SPECI ALIZED SKILLS ASSESSEE WAS SEPARATELY REMUNERATED. THE INVOICES RAISED BY THE ASSESSEE ALSO CLEARLY DISTINGUISH THE NATURE AND QUANTUM AND CLASSIFY THE RECEIPTS INTO THREE DISTINCT HEADS (I) SUPPLY OF HARDWARE (II) LICEN SING OF SOFTWARE AND (III) TECHNICAL SUPPORT SERVICES. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE TOOK A STAND THAT ENTIRE RECEIPTS UNDER TH E CONTRACT CONSTITUTE BUSINESS INCOME AND IN ABSENCE OF PE OF ASSESSEE IN INDIA THESE PROFITS CANNOT BE TAXED IN INDIA. THE ASSESSING OFFICER DIS CUSSED EACH OF THESE CATEGORY OF RECEIPTS SEPARATELY AS THEY ARE GOVERNE D BY TOTALLY DIFFERENT SET OF RULES OF INTERNATIONAL TAXATION. THE FIRST CATEGORY IS THE RECEIPTS OUT OF HARDWARE SUPPLY UNDER THE CONTRACTS. THIS CLEARLY G IVES RISE TO BUSINESS INCOME. IN ABSENCE OF ANY FACTS ON RECORDS TO THE C ONTRARY THE ASSESSEES CONTENTION OF NO PE IN INDIA WAS ACCEPTED BY THE AS SESSING OFFICER. THE SECOND CATEGORY IS THE RECEIPTS OUT OF LICENSING OF SOFTWARE UNDER THE CONTRACT. THE ASSESSING OFFICER OBSERVED THAT THE S OFTWARE HAS BEEN SEPARATELY LICENSED AND CHARGED TO THE CUSTOMER. CU STOMER ALSO ENTERS INTO THE END USER LICENSE AGREEMENT WITH THE ASSESSEE UN DER THE TERMS AND THIS AGREEMENT AT THE TIME OF THE SUPPLY THE ASSESSEE O WNS THE IPR IN THIS SOFTWARE AND THE CUSTOMER IS GRANTED SOME OF THESE RIGHTS SPECIALLY THE RIGHT TO USE THE SOFTWARE IN LIEU OF AN AGREED CONSIDERAT ION. THE ASSESSING OFFICER MADE FOLLOWING ADDITIONS AND ASSESSED TOTAL TAXABLE INCOME AT RS. 5 95 37 499/- :- RECEIPT FOR SUPPLY OF SOFTWARE INR 29 102 372 (HELD TO BE ROYALTY INCOME TAXABLE @ 10%) RECEIPT FOR TECHNICAL SERVICES 7 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 (2 81 91 571 + 22 43 556) INR 3 04 35 127 (HELD TO BE FTS INCOME TAXABLE @ 10%) TOTAL TAXABLE INCOME INR 5 95 37 499 TAXABLE @ 10% INR 59 53 750 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER THE ASS ESSEE FILED APPEAL BEFORE US. 5. AS REGARDS GROUND NO. 1 THE SAME IS GENERAL IN N ATURE. HENCE THE SAME IS DISMISSED. 6. AS REGARDS GROUND NO. 2 TO 2.4 THE LD. AR SUBMI TTED THAT THE ASSESSEE WAS A DISTRIBUTOR OF SOFTWARE PRODUCTS DEV ELOPED BY THE OTHER COMPANIES AND IT MERELY PURCHASED AND RE-SOLD THE OFF THE SHELF SOFTWARE WITHOUT ACQUIRING OR TRANSFERRING ANY RIGHT TO USE THE COPYRIGHT IN THE SOFTWARE. THUS IT COULD NOT BE POSSIBLY HAVE TRANS FERRED ANY COPYRIGHT. IN FACT DRP OBSERVED THAT THE ASSESSEE NEVER OWNED ANY COPYRIGHTS IN THE SOFTWARE THAT IT COULD BE TRANSFER TO THE CUSTOMER. THE LD. AR SUBMITTED THAT THE SAME IS COVERED BY THE DECISION OF THE TR IBUNAL IN CASE OF BLACK DUCK SOFTWARE INC. VS. DCIT (2017) 86 TAXMANN.COM 6 2 (DELHI-TRIB.). THE LD. AR ALSO RELIED UPON THE DECISION OF HONBLE DEL HI HIGH COURT IN CASE OF CIT VS. DYNAMIC VERTICAL SOFTWARE INDIA P. LTD. [20 11] 332 ITR 222 (DELHI) AS WELL AS THE DECISION IN THE CASE OF PCIT VS. M. TECH INDIA (P) LTD. 381381 ITR 31 (DELHI). THE LD. AR FURTHER SUBMITTE D THAT THE ASSESSEE IS A TRADER AND NOT A DEVELOPER OR MANUFACTURER. AVNET A SIA AND ITS PARENT COMPANY ARE ALL DISTRIBUTORS OF SOFTWARE AND HARDWA RE PRODUCTS OF VARIOUS MANUFACTURERS. THIS MAJOR FACT WAS IGNORED BY THE A SSESSING OFFICER AS WELL AS DRP. THE ASSESSEE AND ITS GROUP COMPANIES MERELY BUY AND SELL SOFTWARE PRODUCTS DEVELOPED BY OTHER COMPANIES AND NEVER ACQ UIRE ANY RIGHT IN THE SAID PRODUCTS. THE LD. AR SUBMITTED THAT THIS TRANS ACTION OF PURCHASE AND SALE OF THIRD PARTY SOFTWARE PRODUCTS IS IDENTICAL TO THE FACTS IN THE CASE OF DYNAMIC VERTICAL SOFTWARE INDIA (P.) LTD. ITA NO. 1 692/2010 DECIDED BY THE 8 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 HONBLE DELHI HIGH COURT. THUS MERELY PURCHASING A SOFTWARE FROM THE THIRD PARTY AND SELLING IT TO THE INDIAN CUSTOMER DOES NO T AMOUNTS TO ROYALTY. THE LD. AR FURTHER SUBMITTED THAT THE DECISIONS OF THE HONBLE KARNATAKA HIGH COURT IN CASE OF SAMSUNG ELECTRONICS AND SYNOPSIS I NTERNATIONAL ARE DISTINGUISHED BY THE ASSESSEE BUT THE SAME WAS NOT CONSIDERED BY THE AO/DRP. 7. THE LD. DR SUBMITTED THAT THE SERVICES WERE PROV IDED ON THE BASIS OF ROYALTY AND THE SAME WAS CLEARLY SET OUT BY THE ASS ESSING OFFICER AS WELL AS THE DRP. THE LD. DR SUBMITTED THAT UNDER INCOME TAX ACT 1961 TAXATION OF ROYALTY INCOME ARISING FROM SOFTWARE IS COVERED BY THE PROVISIONS OF SECTION 9 SECTION 115A AND PART II OF SCHEDULE I OF THE RE SPECTIVE FINANCE ACT. AS PER EXPLANATION 2 TO SECTION 9(1)(VI) OF THE INCOME TAX ACT THE TERM ROYALTY IS DEFINED AS CONSIDERATION FOR TRANSFER OF ALL OR ANY RIGHT (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF A PATENT TECH NOLOGY OR OF COPYRIGHT TRADE MARK; USE OF TECHNOLOGY; USE OF A PATENT TRADEMARK INDUSTRIAL COMMERCIAL OR SCIENTIFIC EQUIPMENT; IMPARTING OF INFORMATION C ONCERNING FOR THE WORKING OF OR USE OF TECHNOLOGY; OR CONCERNING TECHNICAL INDUSTRIAL COMMERCIAL OR SCIENTIFIC KNOWLEDGE; RENDERING SERVICES IN CONNECT ION WITH THE ACTIVITIES IN CONNECTION WITH THE ABOVE I.E. THE ACTIVITIES OF T HE USE OR RIGHT TO USE OR IN RESPECT OF PATENT TRADEMARK TECHNOLOGY OR COPYRI GHT. THE IMPORTANT FEATURE OF THE PROVISION IS THAT THE PAYMENT SHOULD BE A CONSIDERATION FOR TRANSFER (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF OR THE USE OR RIGHT TO USE A PATENT TRADE MARK TECHNOLOGY OR COPYRIGH T. THE IDENTIFICATION OF THE CONSIDERATION OF PAYMENT IS THEREFORE NECESSA RY TO DETERMINE WHETHER IT IS ROYALTY. SUCH CONSIDERATION SHOULD BE IN RESPECT OF TRANSFER OF ALL OR ANY RIGHT (INCLUDING THE GRANTING OF A LICENCE) THE US E OR THE RIGHT TO USE OF COPYRIGHT PATENT TRADEMARK ETC. THESE EXPRESSION S CONVEY A CLEAR MEANING THAT THE ABSOLUTE TRANSFER OF (ALL THE RIGHT IN THE PROPERTY OR RIGHT TO USE PROPERTY) PROPERTY IS NOT A REQUIREMENT TO CHARACTE RIZE A PAYMENT AS ROYALTY. A PAYMENT FOR THE ABSOLUTE ASSIGNMENT AND OWNERSHIP OF RIGHTS IS NOT A PAYMENT FOR THE USE OF SOMETHING BELONGING TO ANOTH ER. ACCORDINGLY 9 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 PAYMENTS FOR TRANSFER OF ANY RIGHT IN RESPECT OF A PATENT TECHNOLOGY OR OF COPYRIGHT TRADEMARK OR FOR SIMPLICITER USE OF PATE NT TRADEMARK COPY RIGHT ETC. ARE IN NATURE OF ROYALTY UNDER SECTION 9(1) OF THE ACT. EXPLANATION 4 CLARIFIES THAT THE INTENTION OF THE LEGISLATURE HAS ALWAYS BEEN TO INCLUDE CONSIDERATION IN RESPECT OF TRANSFER OF ALL OR ANY RIGHT FOR USE OR RIGHT TO USE A COMPUTER SOFTWARE (INCLUDING GRANTING OF LICENCE) AS ROYALTY IRRESPECTIVE OF THE MEDIUM THROUGH WHICH SUCH RIGHT IS TRANSFERRED. THUS LEGAL OWNERSHIP OF SUCH RIGHTS INDIRECT USE OF SUCH RIGHTS AND CLA IMS RELATED TO THE LOCATION OF SUCH RIGHTS WILL NOT BE MATERIAL IN DECIDING WHE THER SUCH CONSIDERATION AMOUNTS TO ROYALTY. THE LD. DR FURTHER SUBMITTED TH AT AS PER INDIA- SINGAPORE DTAA ROYALTY IS DEFINED AS CONSIDERATION FOR THE USE OR THE RIGHT TO USE ANY COPYRIGHT OF A LITERARY ARTISTIC OR SCI ENTIFIC WORK FALLS WITHIN THE DEFINITION OF ROYALTY. THUS THE ASSESSING OFFICER AS WELL AS DRP HAS RIGHTLY MADE ADDITION IN RESPECT OF RECEIPT FOR SUPPLY OF S OFTWARE AS HELD TO BE ROYALTY INCOME. THEREFORE THE APPEAL OF THE ASSESS EE DESERVES TO BE DISMISSED. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE SUBMISSIONS OF THE LD . AR IT IS OBSERVED THAT AVNET ASIA AND ITS PARENT COMPANY ARE ALL DISTRIBUT ORS OF SOFTWARE AND HARDWARE PRODUCTS OF VARIOUS MANUFACTURERS BUT WHE THER THEY PROVIDE THE SERVICES WHICH INCLUDE THE ROYALTY COMPONENT OR NOT THIS MAJOR ASPECT WAS NEITHER VERIFIED BY THE ASSESSING OFFICER AS WELL A S DRP. THE ASSESSING OFFICER AND THE DRP HAS NOT LOOKED INTO THE ASPECT OF THE ASSESSEE AND ITS GROUP COMPANIES WHETHER THEY MERELY BUY AND SELL SO FTWARE PRODUCTS DEVELOPED BY OTHER COMPANIES OR ACQUIRE ANY RIGHT I N THE SAID PRODUCTS WHICH INVOLVES THE ROYALTY COMPONENTS. THE CASE LAW S REFERRED BY THE LD. AR THOUGH SEEM TO BE ON THE ISSUE BUT IN THE PRESENT C ASE THE FACTS WERE NOT PROPERLY VERIFIED BY THE REVENUE AUTHORITIES. THERE FORE IT WILL BE APPROPRIATE TO REMAND BACK THIS ISSUE TO THE FILE OF THE ASSESS ING OFFICER FOR PROPER ADJUDICATION OF THIS ASPECT IN LIGHT OF THE DECISIO NS MENTIONED BY THE LD. AR. NEEDLESS TO SAY THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING 10 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 PRINCIPLES OF NATURAL JUSTICE. GROUND NO. 2 TO 2.4 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 9. AS REGARDS TO GROUND NO. 3 TO 3.3 THE LD. AR FU RTHER SUBMITTED THAT THE ASSESSEE WAS SELLING WARRANTIES UPGRADES AND S IMILAR SERVICE PACKAGES ON BEHALF OF MANUFACTURERS OF THE SOFTWARE WITHOUT PROVIDING ANY ACTUAL SERVICE. THE LD. AR SUBMITTED THAT THE ASSESSEE WAS NOT PROVIDING TECHNICAL SERVICE AT ALL. THERE IS NO SERVICE COMPONENT INVOL VED AND THE SAME WAS CLEARLY SET OUT IN THE AGREEMENTS. THE LD. AR FURTH ER SUBMITTED THAT IN ASSESSMENT YEAR 2011-12 THE ASSESSING OFFICER SHOU LD HAVE VERIFIED THE NATURE OF SERVICE PACKAGES AND DIRECT SALE OF PROVI SION OF SERVICES RELATING TO FTS. 10. THE LD. DR RELIED UPON THE ASSESSMENT ORDER AND THE DIRECTIONS OF THE DRP. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF THE ASSESS MENT ORDER IT CAN BE SEEN THAT THE ASSESSING OFFICER SHOULD HAVE VERIFIED THE NATURE OF SERVICE PACKAGES AND DIRECT SALE OF PROVISION OF SERVICES R ELATING TO FTS. THIS FACT IS NOT DISPUTED BY THE LD. AR THAT THE NATURE OF SERVI CES ARE NOT PROPERLY VERIFIED BY THE ASSESSING OFFICER. THEREFORE IT WI LL BE APPROPRIATE TO REMAND BACK THIS ISSUE TO THE FILE OF THE ASSESSING OFFICE R FOR PROPER ADJUDICATION. NEEDLESS TO SAY THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE. GROUND NOS. 3 TO 3.3 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 12. AS REGARDS TO GROUND NO. 4 THE LD. AR SUBMITTE D THAT THE CREDIT FOR TAX DEDUCTED AT SOURCE SHOULD HAVE BEEN ALLOWED BY THE ASSESSING OFFICER. 13. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 11 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT RECORD. THIS ASPECT IS NOT PROPERLY VERIFIED BY THE ASSESSI NG OFFICER AS REGARDS CREDIT FOR TAX DEDUCTED AT SOURCE. THEREFORE IT WILL BE A PPROPRIATE TO REMAND BACK THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER. NE EDLESS TO SAY THE ASSESSEE BE GIVEN PROPER OPPORTUNITY OF HEARING BY FOLLOWING PR INCIPLES OF NATURAL JUSTICE. GROUND NO. 4 IS PARTLY ALLOWED FOR STATISTICAL PURP OSE. 14. THUS APPEAL BEING ITA NO. 1288/DEL/2015 FOR A. Y. 2011-12 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 15. AS REGARDS APPEAL BEING ITA NO. 4173/DEL/2016 F OR A.Y. 2012-13 INVOLVES ONLY ONE ISSUE THAT OF SUPPLY OF SOFTWARE WHETHER AMOUNTS TO ROYALTY OR NOT WHICH IS IDENTICAL TO THE GROUND NO. 2 TO 2.4 OF THE APPEAL BEING ITA NO. 1288/DEL/2015 FOR A.Y. 2011-12 WHICH IS ADJUDICATED BY US IN PARA 8 HEREINABOVE. THE SAME FINDINGS WILL BE AP PLICABLE HERE AS WELL. THUS GROUND NO. 2 TO 2.6 ARE PARTLY ALLOWED FOR ST ATISTICAL PURPOSE. AS REGARDS GROUND NO. 3 THE SAME IS IDENTICAL TO THE GROUND NO. 4 OF APPEAL BEING ITA NO. 1288/DEL/2015 FOR A.Y. 2011-12 THER EFORE GROUND NO. 3 IS ALSO PARTLY ALLOWED FOR STATISTICAL PURPOSE. HENCE APPEAL BEING ITA NO. 4173/DEL/2016 FOR A.Y. 2012-13 IS PARTLY ALLOWED FO R STATISTICAL PURPOSE. 16. IN RESULT BOTH THE APPEALS FILED BY THE ASSESS EE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER IS PRONOUNCED IN THE OPEN COURT ON 18 TH NOVEMBER 2019. SD/- SD/- (N.K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 18 TH NOVEMBER 2019. *BR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 12 ITA NO. 1288/DEL/2015 & ITA NO. 4173/DEL/2016 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR ITAT NEW DELHI