Case Law Details
Avnet Asia Pte Ltd Vs ACIT (ITAT Delhi)
Introduction: The Income Tax Appellate Tribunal (ITAT) in Delhi has delivered a significant verdict in the case of Avnet Asia Pte Ltd Vs ACIT. The central theme revolves around the nature of receipts generated from the reselling of hardware and software packages.
Analysis: The Revenue appealed against four separate orders concerning Avnet Asia for the assessment years 2013-14 to 2017-18. The crux of the contention was whether the amounts received from the sale of software and hardware should be categorized as ‘Royalty’ under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The Assessing Officer had initially posited that the sale of software amounted to royalty income. However, after deliberations, the Tribunal noted that Avnet Asia was merely a distributor and didn’t transfer any rights related to copyrights. This perspective is reinforced by the Supreme Court’s decision in the Engineering Analysis Centre of Excellence Pvt. Ltd. case. Moreover, past rulings concerning the assessee for similar transactions were also taken into consideration.
Conclusion: The ITAT Delhi upheld the decision of the Commissioner (Appeals) that the receipts from the sale of hardware and software packages by Avnet Asia do not fall under the ‘Royalty’ category as per the India-Singapore DTAA. Furthermore, the Tribunal affirmed the deletion of additions made on the account of royalty income and Fees for Technical Services (FTS). This landmark decision provides clarity on the categorization of receipts from the sale of software and hardware under the India-Singapore DTAA.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeals by the Revenue, in respect of the same assessee, arise out of four separate orders, all dated 03.03.2022, of learned Commissioner of Income-tax (Appeals)-42, Delhi pertaining to assessment years 2013-14, 2014-15, 2015-16 and 2017-18.
2. Grounds raised by the Revenue in all these appeals are identical except variation in figures. Therefore, for ease of reference, we reproduce the grounds raised in ITA No. 1282/Del/2022 hereunder:
“1. That in the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in deleting the addition made by the A.O. amounting to Rs.94,21,081/- received by assessee company as receipts from Technical services are taxable as Fees for Technical Services u/s 9(1)(vii) of the Income Tax Act, 1961.
2. Whether on facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in holding that receipts of the assessee from sale of software is not taxable as royalty.”
3. Briefly, the facts are, the assessee is a non-resident corporate entity and a tax resident of Singapore. As stated by the Assessing Officer, the assessee is a wholly owned subsidiary of Avnet Inc. USA. The Avnet group is a back to back distributor of semiconductors, interconnect, passive and electromechanical components, enterprise network and computer equipment and embedded subsystems from leading manufacturers. It is further stated, the assessee procures goods from vendors in Singapore and other overseas countries for sale to its customers in India. The Assessing Officer has further stated that in the assessment years under dispute, the assessee had supplied hardware and software used by its customers in India. In course of assessment proceedings, the Assessing Officer observed that the facts involved in impugned assessment years are identical to assessee’s case in assessment year 2012-13. He further observed that in assessment year 2012-13, the revenue earned by the assessee from sale of software was taxed as royalty income. Based on the decision taken by the Assessing Officer in assessment year 2012-13, show cause notices were issued to the assessee to explain, as to why, the revenue from sale of software should not be treated as royalty income. Though, the assessee, objecting to the proposed addition, submitted that it is a re-seller of hardware and software and it has not transferred any right to use of copyright, however, the Assessing Officer remained un-convinced and ultimately concluded that the amount received by the assessee from sale of software is taxable as royalty income under section 9(1)(vi) of the Act and Article 12(3) of India-Singapore Double Taxation Avoidance Agreement (DTAA). Further, the amount received by the assessee towards rendering certain services was treated by the Assessing Officer as fee for technical services (FTS) under section 9(1)(vii) of the Act. He also held that since the services rendered are ancillary and subsidiary to the application or enjoyment of the right, property or information, which resulted in payment of royalty, the fee received is to be treated as FTS even under Article 12(4) of India-Singapore DTAA. Accordingly, he also brought to tax the service charges received by the assessee on gross basis by applying the rate of 10%.
4. The assessee contested the aforesaid additions by filing appeals before learned first appellate authority. After perusing the facts and materials available on record, learned first appellate authority found that the assessee merely purchases hardware including software packages from vendors in Singapore and other overseas countries and re-sells them to customers in various countries including customers in India. Thus, the assessee is merely a distributor of software, therefore, falls under category-III of various types of transactions considered by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, 125 taxmann.com 42 (SC). In other words, the assessee is merely a re-seller of copyrighted articles and has not transferred any right to use a copyright. He further noticed that in assessee’s own cases in assessment years 2011-12 and 2012-13 after remand by the Tribunal, the Assessing Officer himself has accepted that the amounts received by the assessee from sale of software packages are not in the nature of royalty either under the provisions of section 9(1)(vi) of the Act or under Article 12(3) of India-Singapore DTAA, in view of Hon’ble Supreme Court’s decision in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). Thus, in view of the aforesaid, learned first appellate authority ultimately concluded that the receipts from hardware and software packages are not in the nature of royalty. Accordingly, he deleted the additions.
5. In so far as re-characterisation of service charges received as FTS under section 9(1)(vii) of the Act and Article 12(4) of India-Singpore DTAA, learned Commissioner (Appeals) observed, once it is held that the receipts from sale of hardware and software packages are not in the nature of royalty, the service charges cannot be considered to be ancillary and subsidiary to payment of royalty, hence, would not fall under Article 12(4)(a) of the Treaty. Proceeding further, he held that since, while rendering services, the assessee had not made available the knowledge, skill or knowhow etc., it will not fall as FTS under Article 12(4)(b) of the Treaty as well. Further, he held that since the fees received are not towards services consisting of development or transfer of technical plan or technical design, they cannot be treated as FTS under Article 12(4)(c) of the treaty. Accordingly, he deleted the additions made towards FTS.
6. We have considered rival submissions and perused materials on record. In so far as the first issue relating to taxability of amounts received from Indian customers towards sale of hardware along with software packages as royalty income, undisputed facts are, the assessee is merely a re-seller/distributor of hardware along with software packages. It is a fact on record that the assessee procures the hardware and software packages from non-resident vendors and re-sells them to Indian customers without any value addition, along with, warranty packages. The facts on record clearly reveal that what the assessee has sold to Indian customers is copyrighted articles and not use or right to use of any copyright. This is so because, the assessee procures hardware and software packages from other vendors and sells them to third party customers. Therefore, the ownership over copyright lies with the manufacturer and original supplier of software packages and not with the assessee. Therefore, the ratio laid down by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) will squarely apply to assessee’s case.
7. One more relevant aspect, which needs to be considered is, while dealing with identical issue in assessee’s own case in assessment years 2011-12 and 2012-13, the Tribunal in ITA No. 1288/Del/2015 and 4173/Del/2016 had passed an order on 18.11.2019, wherein, after taking note of the fact that the assessee is merely a distributor of software and hardware products after procuring the same from other vendors/manufacturers, the Tribunal had directed the Assessing Officer to verify whether there is any component of royalty involved in such transactions. Pertinently, while re-examining the issue in pursuance to the directions of the Tribunal in the assessment years 2011-12 and 2012-13, the Assessing Officer has concluded that the receipts from sale of hardware and software packages are not in the nature of royalty. This is very much evident from the assessment orders dated 26.11.2021 passed in the assessment years 2011-12 and 2012-13, copies of which are placed in the paper book. In fact, learned first appellate authority, while deciding assessee’s appeals for the impugned assessment years, had taken note of the aforesaid decision of the Assessing Officer in assessment years 2011-12 and 2012-13. Thus, once, the Assessing Officer himself has accepted the nature of identical payments received by the assessee in assessment years 2011-12 and 2012-13 not to be in the nature of royalty, there should not have been any further controversy on the issue and, in our view, the Revenue should have fairly accepted the decision of learned first appellate authority instead of litigating further. Be that as it may, after carefully analysing the material facts and keeping in view the ratio laid down by the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), we do not find any infirmity in the decision of the learned Commissioner (Appeals) on the issue. Therefore, we uphold the deletion of additions made on account of royalty income.
8. In so far as the issue relating to taxability of service charges received by the assessee as FTS, in our view, it does not require much deliberation. Undisputedly, though, the Assessing Officer has not expressed in so many words, however, his observations clearly reveal that he has treated the receipts as FTS by applying Article 12(4)(a) of India-Singapore DTAA, which treats fee received for services which are ancillary and subsidiary to the royalty income as FTS. Once, it is held that the receipts from sale of hardware and software packages are not in the nature of royalty either under the provisions of the Act or under Treaty provisions, the case of the Assessing Officer in treating the service charges as FTS under Article 12(4)(a) of the treaty is bound to fail. Therefore, we uphold the decision of learned first appellate authority in deleting the additions made on account of FTS.
9. At this stage, we must clarify, though, learned first appellate authority has recorded his conclusive findings on applicability of Article 12(4)(b) and 12(4)(c) of India-Singapore DTAA to the service charges received by the assessee, however, since the Assessing Officer has not examined these aspects in the respective assessment orders, we desist from dealing with these issues. However, the issues relating to applicability of Articles 12(4)(b) and 12(4)(c) of India-Singapore DTAA to the service charges are kept open for deliberation if they arise in future in appeals relating to any other assessment years. Our decision above will apply mutatis mutandis to all the appeals under consideration. Grounds are dismissed.
10. In the result, all the appeals are dismissed.
Order pronounced in the open court on 25/07/2023.
