Case Law Details
Microstrategy Singapore Pte Limited Vs DCIT (ITAT Delhi)
Insofar as the issue of treating the amount received towards provisions of software related services as FTS, we have noticed that the Assessing Officer has not brought any cogent material on record to demonstrate that while providing the software related maintenance service, the assessee has made available any technical knowledge, knowhow, skill etc. so as to enable the recipient of such service to use it independently in exclusion of the assessee. Therefore, in our considered opinion, the conditions of Article 12(4)(b) of the Treaty are not satisfied. That being the factual position emerged on record, the amount received cannot be treated as FTS. Therefore, the addition made is deleted.
FULL TEXT OF THE ORDER OF ITAT DELHI
The assessee has preferred these appeals against order dated 17.01.2019 of the Commissioner of Income Tax (Appeal)- 23, New Delhi in appeal no. 52/17-18 for the assessment year 2013-14 arising out of order dated 30.04.2016 passed by the Dy. Commissioner of Income Tax, Circle 2(2)(1), Intl. Taxn., New Delhi; order dated 27.06.2019 of CIT(A)-43, New Delhi in appeal no. 10316/2018-19 for the assessment year 2016-17 arising out of order dated 15.02.2019 passed by the Dy. Commissioner of Income Tax, Circle 2(2)(1), Intl. Taxn., New Delhi; order dated 09.10.2020 of CIT(A)-43, New Delhi in Appeal no. 10045/2020-21 for the A.Y. 2017-18 arises out of order dated 30.01.2020 passed by the Dy. Commissioner of Income Tax, Circle 2(2)(1), Intl. Taxn., New Delhi. However, as the issues involved are common the same are taken up together for the convenience and to avoid contradictory findings. However, basic facts and figures of AY 2013-14 are being brought on record of the order.
2. The facts in brief are MSTR Singapore is company incorporated in and is a tax resident of Singapore and assessee claims it is eligible to claim the benefit under the India-Singapore Tax Treaty (‘the Treaty’). MSTR Singapore is a wholly owned subsidiary of Microstrategy, Inc. (‘MSTR US’) and is responsible for distribution and maintenance of software to customers in the Asian markets. It also offers consulting, systems integration and education service to its customers. MSTR Singapore sells its products in India through third party partners/distributors. During AY 2013-14, MSTR Singapore had rendered services to certain third party in India against a consideration of RS. 2,23,78,025/-. The company did not offer the receipts of Rs. 2,23,78,025/- to tax in India, as it believed that the Income/Fee do not constitute Royalty/Fees for Technical Services (FTS) as per article 12 of the DTAA between India and Singapore. It was the case of assessee that during the subject AY, the Company did not have any business presence in India to constitute a Permanent Establishment (‘PE’) in terms of Article 5 of the Double Taxation Avoidance Agreement between India and Singapore. The services/ facilities are provided from outside India. Accordingly, rendering of such services/ providing facilities does not result in the constitution of PE in India. Further, the Company does not have any agent in India who could constitute an Agency PE. However the Ld AO held that the consideration for software supplied by the assessee and consideration in lieu of providing information technology related support services is in the nature of royalty income taxable in India. Ld. CIT(A) observed that this issue also came up for determination during the appellate proceeding in its own case for the assessment year 2014-15 in Appeal No. 237/2016-17 before CIT(A)-43, New Delhi. After considering the arguments of the appellant, the CIT(A)-43, New Delhi vide his order dated 31.01.2018, dismissed the appeal.
3. Aggrieved by the impugned order of Ld. CIT(A), Assessee has come in appeal raising following grounds in ITA No. 2561/Del./2019, A.Y. 2013-14 :-
“On the facts and circumstances of the case and in law, the learned CIT(A) has :
General ground
1. erred in upholding the total income of the Appellant at Rs 2,29,83,230 as against the returned income of Rs. 6,05,200.
Taxability of sale of software products
2. erred in upholding that the income earned by the Appellant from sale of software products is taxable in India as ‘royalty’ under Section 9(1)(vi) of the Act and under Article 12 of the India – Singapore Tax Treaty.
Taxability of provision of software related support services
3. erred in upholding that income earned by the Appellant from provision of software related support services is taxable in India as ‘Fees for Technical Services’ under Section 9(l)(vii) of the Act and under Article 12 of India-Singapore Tax Treaty.
4. erred in upholding that income earned by the Appellant from provision of software related support services is taxable in India as ‘royalty’ under Section 9(l)(vi) of the Act and under Article 12 of India-Singapore Tax Treaty.
Levy of surcharge and education cess
5. erred in levying surcharge and education cess amounting to Rs. 1,14,916 and Rs. 72,397 respectively without appreciating the fact that the tax rate under Article 12 of the India-Singapore Tax Treaty is inclusive of surcharge and education cess;
Other grounds
6. erred in charging interest under Section 234B of the Act amounting to Rs 43,179;
7. erred in initiating penalty proceedings under Section 271(l)(c) of the Act.
Each of the above grounds of appeal is without prejudice to and independent of one another. The appellant craves leave to add, alter, amend or delete the above grounds of appeal at or before the time of hearing of the appeal, so as to enable the Hon’ble Income tax Appellate Tribunal to decide this appeal according to law.”
4. Heard and perused the record.
5. Ld. AR submitted that the grounds raised are already adjudicated in favour of the assessee, however, he did not press ground no. 5, 6 & 7. Ld. DR pointed out that in the assessment order there is an addition on account of receipt in lieu of providing information technology related support services as FTS and as such with regard to sale of software products being taxable as royalty has not been considered for addition by the ld. Tax Authorities below. Therefore, he submitted that ground no. 2 is superfluous. To this. Ld. AR was specifically requested to disclose what is the addition under challenge on account of raising this ground, however, nothing was submitted. Thus, the ground no. 2, 5, 6 & 7 are not being adjudicated as not pressed.
6. In regard to ground no 1, 3 & 4 it can be observed that in assessee’s own case for the assessment year 2014-15 vide ITA no. 2686/Del./2018, the addition has been deleted. The relevant para 14 to 16 are reproduced for convenience :-
“14. We have considered rival submissions and perused the materials on record. Undisputedly, during the year under consideration, the assessee had sold certain software products to customers in India and has also provided software related maintenance services. The first issue which arises for consideration is, whether the amount received by the assessee towards sale of software products and software related maintenance services can be treated as royalty under Article 12(3) of India – Singapore Tax Treaty. In case, it does not come within the ambit of royalty as defined under the Treaty, there is no need to go into the provisions of the Act. On a perusal of the assessment order it is noticed that the Assessing Officer has not factually examined the nature of transaction between the assessee and the Indian Customers. The Assessing Officer relying upon certain judicial precedents has straightway assumed that the assessee has sold a copyright. However, neither the sample agreement nor any other material available on record demonstrate that the assessee has transferred/sold the use or right to use a copyright and not copyrighted article.
15. On the contrary, the facts on record clearly demonstrate that what the assessee has sold is copyrighted article and not the copyright. It is also observed, while treating the payment received by the assessee as royalty, the departmental authorities have been greatly influenced by the decision of the Hon hie Karnataka High Court in case of Samsung Electronics Pvt. Ltd. (supra). However, the issue is no more res integra in view of the decision of Honhle Supreme court in case of Engineering Analysis Centre of Excellence (P.) Ltd. (supra). Since, the factual matrix clearly reveals that the assessee has sold a copyrighted article and not the copyright, the ratio laid down by the Honhle Apex Court in the decision referred to above would squarely apply. Accordingly, we hold that the amount received by the assessee from sale of software and provision of software related services cannot be treated as royalty under Article 12(3) of the India – Singapore DTAA.
16. Insofar as the issue of treating the amount received towards provisions of software related services as FTS, we have noticed that the Assessing Officer has not brought any cogent material on record to demonstrate that while providing the software related maintenance service, the assessee has made available any technical knowledge, knowhow, skill etc. so as to enable the recipient of such service to use it independently in exclusion of the assessee. Therefore, in our considered opinion, the conditions of Article 12(4)(b) of the Treaty are not satisfied. That being the factual position emerged on record, the amount received cannot be treated as FTS. Therefore, the addition made is deleted.”
7. Ld. DR has submitted that as in the adjudication for the assessment year 2014-15, the co-ordinate bench observed that there is no factual examination of the nature of transaction between the assessee and the Indian Customers. Therefore, the present case be restored to the files of Ld. AO for first giving a factual examination of the matter. However, this objection has been rightly met out by the Ld. AR referring to para 7 of the order of Ld. AO wherein Ld. AO has referred to the fact of having considered the agreements submitted by the assessee. We also observe that the AO has reproduced various clauses of the agreement to reach the conclusion. Thus, there is no substance in the attempt of Ld. DR to distinguish the case.
8. As a sequel of above discussion, respectfully following the decision of Co-ordinate Bench in the case of assessee for the assessment year 201415, it is held that findings of Ld Tax Authorities below holding receipts towards provisions of software related services as FTS, is not sustainable. The grounds no 1, 3 & 4 are allowed. The appeals are allowed.
Order pronounced in the open court on 27th June, 2022.
