IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT & SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA No. 726/Del/2015 (Assessment Year: 2011-12) Comptel Oyj vs DCIT Post Box No. 1000, 00181 Circle 1(2)(1), Helsinki, Finland. International Taxation AADCC5974F New Delhi. ITA No. 1686/Del/2016 (Assessment Year: 2012-13) Comptel Oyj vs DCIT (International Taxation) Post Box No. 1000, 00181 Circle 1(2)(1), Helsinki, Finland. International Taxation AADCC5974F New Delhi. Assessee by Sh. Piyush Chawla, CA Ms. Poonam Ahuja, CA Revenue by Sh. Anuj Arora, CIT DR Date of Hearing 20.07.2016 Date of Pronouncement 03.10.2016 ORDER PER BENCH: Both these appeals have been preferred by assessee. ITA No. 726/Del/2015 pertains to AY 2011-12 and has ITA Nos. 726/D/15 & 1686/D/16 Page 1 of 14 been filed against order dated 25/11/2014 passed u/s 143(3)/144C(13) of Income Tax Act, 1961 (hereinafter called Act ). ITA No. 1686/Del/2016 pertains to AY 2012-13 and has been filed against order dated 25/01/2016 passed u/s 143(3)/144C (1) of Act. Since both these appeals were heard together, for sake of convenience, same are being disposed of together. 2. assessee company is Finnish Software Company incorporated and registered in Finland and is listed on Helsinki Stock Exchange. It is tax resident of Finland as per provisions of Double Taxation Avoidance Agreement between India and Finland (DTAA/Treaty). assessee is stated to develop, manufacture and deliver off shelf mediation, charging and fulfillment solutions and software. company s solution and software are being sold to telephone operators who maintain and provide services in Telecommunication Networks. assessee company is stated to be Global Market Player in providing convergent mediation software solutions. Comptel Solutions support ITA Nos. 726/D/15 & 1686/D/16 Page 2 of 14 core business processes of operators and service providers by generating concrete savings that allow for new business models and sustained customer loyalty. Comptel link product portfolio includes Comptel Event Link for event mediation and usage data management, Comptel Instant Link for automated user provisioning and service activation and Comptel Online Link for online and pre-delivery charging for non-voice services. 2.1 For AY 2011-12, return of income was filed declaring nil income. core issue involved in this assessment year is whether consideration received by assessee fell into category of royalty under provisions of Act as well as under provisions of India Finland (DTAA). 2.2 For AY 2012-13 return of income was filed declaring income from Fee from Technology Services (FTS) at Rs. 20,92,31,368/- and offering it for taxation under provisions of DTAA. In this year also, core issue of contention is as to whether consideration received by ITA Nos. 726/D/15 & 1686/D/16 Page 3 of 14 assessee fell in category of royalty under provisions of Act as well as under provisions of India Finland DTAA. 2.3 From records, it is seen that during assessment proceedings for AY 2008-09, AO had held that assessee s receipts constituted royalty income taxable in India both under provisions of Act and DTAA. same was followed for AY 09-10 and 10-11 also. orders of AO were also confirmed by Hon ble DRP. Now, in AY 11-12 also AO has followed orders for earlier assessment years. In A.Y. 12-13 also, AO followed findings in his orders of earlier years. 2.4 assessee has now preferred appeals before ITAT and has raised following grounds of appeal: Grounds of ITA No. 726/Del/15 for AY 2011-12: 1. That on facts and circumstances of case and in law, impugned order passed by Deputy Commissioner of Income Tax, Circle 1(2)(1), International Taxation, New Delhi u/s ITA Nos. 726/D/15 & 1686/D/16 Page 4 of 14 143(3) read with section 144C of Income-tax Act, 1961 is bad in law and void ab-initio. 1.1 That Ld. AO grossly erred in assessing income of Appellant at Rs. 81,26,22,784/- as against nil income declared by Appellant in return of income. 2. That on facts and circumstances of case and in law, Ld. AO/DRP erred in not appreciating fact that case of Appellant is squarely covered by judgment of jurisdictional High Court in case of Infrasoft Ltd. vs. ADIT [125 TTJ 53] wherein Hon ble High Court while interpreting similar agreement held that payment made for supply of software to be used by assessee in its own business would not amount to royalty. 3. That on facts and circumstances of case and in law, Ld. AO/DRP erred in holding that receipts in hands of Appellant from sale of standard software are in nature of royalty u/s 9(1)(vi) clauses (i), (iii), (iva) and (v) of Act and under Article 13(3)(a) and 13(3)(b) of Double Taxation Avoidance Agreement (DTAA) between India and Finland. ITA Nos. 726/D/15 & 1686/D/16 Page 5 of 14 3.1 That Ld. AO/DRP erred in holding that Appellant is receiving payment for conferment of right in nature of copyright. 3.2 That Ld. AO/DRP erred in holding that Appellant is receiving payment for transfer of right to use process embedded in software to customer who use such process while carrying out their business. 3.3 That Ld. AO/DRP erred in holding that consideration received by Appellant from sale of standard software is for use of commercial cum scientific equipment. 4. That on facts and in circumstances of case and in law, Ld. AO/DRP erred in applying retrospective amendment introduced by Finance Act, 2012 in definition of Royalty under section 9(1)(vi) of Act without appreciating that there is no corresponding amendment in definition of royalty under DTAA. 5. That on facts and circumstances of case and in law, Ld. AO/DRP erred in not allowing TDS credit of Rs. 6,40,81,778/- ignoring TDS certificates submitted before AO/DRP. 6. That on facts and circumstances of case and in law, Ld. AO erred in applying tax ITA Nos. 726/D/15 & 1686/D/16 Page 6 of 14 rate of 15% on all receipts without appreciating that agreements entered with Tech Mahindra and statements of work with IBM Global Services India Private Limited and IBM India Private Limited were post June, 2005 and accordingly receipts, even if treating same as royalty thereof ought to be taxed at rate of 10% in view of provisions of section 115A of Act. 6.1 That on facts and circumstances of case and in law, Ld. AO erred in grossing up receipts without appreciating that same can be done only in hands of payer for purpose of deduction of taxes and not for computing income. 7. That on facts and circumstances of case and in law, Ld. AO/DRP erred in levying interest u/s 234B of Act. above grounds of appeals are without prejudice to each other. That appellant craves leave to add, alter, amend or withdraw all or any ground of objections either before or at time of hearing of these objections. ITA Nos. 726/D/15 & 1686/D/16 Page 7 of 14 Grounds of ITA No. 1686/Del/16 for AY 2012-13 1. That on facts and circumstances of case and in law, impugned order passed by Ld. DCIT, Circle 1(2)(1), Intl. Taxation, New Delhi u/s 143(3) read with section 144C of Income Tax Act, 1961 is bad in law and void ab-initio. 1.1 That Ld. AO grossly erred assessing income of Appellant at Rs. 37,59,28,211/- as against income of Rs. 20,92,31,368/- declared by appellant in return of income. 2. That on facts and circumstances of case and in law, Ld. AO/DRP erred in not appreciating fact that case of Appellant is squarely covered by judgment of jurisdictional High Court in case of Infrasoft Ltd. vs. ADIT [264 CTR 329 (Del)] wherein Hon ble High Court while interpreting similar agreement held that payment made for supply of software to be used by asessee in its own business would not amount to royalty. 3. That on facts and circumstances of case and in law, Ld. AO/DRP erred in holding that receipts in thehands of Appellant from sale of standard software are in nature of royalty as defined in section 9(1)(vi) of Act and ITA Nos. 726/D/15 & 1686/D/16 Page 8 of 14 under Article 12(3) of Double Taxation Avoidance Agreement between India and Finland. 3.1 That Ld. AO/DRP erred in holding that Appellant is receiving payment for conferment of right allowing use of copyright. 3.2 That Ld. AO/DRP erred in holding that Appellant is receiving payment for transfer of right to use process embedded in software to customer who use such process while carrying out their business. 3.3 That Ld. AO/DRP erred in holding that consideration for supply of software shall qualify as Royalty by virtue of retrospective amendment introduced in definition of royalty under DTAA. 3.4 That Ld. AO/DRP erred in holding that there is no conflict in interpretation between section9 (1)(vi) and DTAA so far as taxation of income from sale of software as royalty is concerned. 4. That Ld. AO/DRP erred in placing reliance on Article 3 of DTAA or section 90(3) of Act to conclude that receipts from sale of software are royalty without identifying undefined term of DTAA for which definition of Act is proposed to be used. ITA Nos. 726/D/15 & 1686/D/16 Page 9 of 14 5. That on facts and circumstances of case and in law, Ld. AO/DRP erred in grossing up receipts without appreciating that same can be done only in hands of prayer for purpose of deduction of taxes and not for computing income. 5.1 Without prejudice to aforesaid, where in case of net of tax contracts, grossing up is done assuming taxes have been duly withheld by payer, additional tax credit for taxes withheld on account of grossing up ought to have been given by Ld. AO/DRP. 6. That Ld. AO/DRP erred in charging interest u/s 234B and 234D of Act. 7. Appellant craves leave to alter, amend or withdraw all or any of grounds of objections contained herein or add any further grounds as may be considered necessary either before or during hearing of objections. 3. At outset, Ld. AR submitted that issue that sale of software by assessee was chargeable to tax under Article 7 of DTAA as business income and not under Article 12 as royalty has already been settled in favour of assessee by ITAT Delhi B Bench in assessee s own case ITA Nos. 726/D/15 & 1686/D/16 Page 10 of 14 in ITA Nos. 5411/Del/2010, 5587/Del/2011 and ITA No. 699/Del/2013 for A.Ys. 07-08, 08-09, 09-10 respectively. Ld. AR submitted copy of said order and pointed out that issues under appeal in present appeals were identical to issues decided by ITAT as aforesaid and submitted that in view of decision of coordinate bench of ITAT, issue was squarely covered in favour of assessee. Ld. AR pointed out that ground nos. 1, 2 and 3 were similar in both present appeals and were covered in favour of assessee by order of ITAT. 4. Ld. CIT DR placed extensive reliance on order of lower authorities and vehemently argued that receipts were taxable as royalty and not as business income. 5. We have heard rival contentions and have perused material on record. perusal of impugned order reveals that AO has given categorical finding that there was no change in facts or business model during assessment years 11-12 and 12-13 as compared to earlier assessment years 08-09, 09-10 and 10-11 and, therefore, ITA Nos. 726/D/15 & 1686/D/16 Page 11 of 14 findings made and conclusions arrived at in earlier assessment years would also apply with equal force in assessment years in question. It has been stated by AO that there has been admittedly no change in factual matrix or business model of assessee from earlier years and as such there was no reason to arrive at different conclusion other than that as earlier assessment years on question as to whether sale of software was to be charged as business income or as royalty. Ld. AR has placed reliance on decision of ITAT Delhi B Bench in its own case for A.Ys. 07-08, 08-09 and 09-10 on this issue and perusal of aforesaid order reveals that reliance of Ld. AR is well placed as issue is squarely covered in favour of assessee by order of ITAT, wherein coordinate bench has discussed issue at great length and has thereafter held in Paragraph 27 of said order as under: 27. In view of this we allow ground no. 1 to 3 of appeal of assessee holding that sale of software by assessee is standard software which is ITA Nos. 726/D/15 & 1686/D/16 Page 12 of 14 chargeable to tax under Article 7 of DTAA as business income of assessee and not under Article 12 as Royalty . 5.1 On identical set of facts, respectfully following decision of coordinate bench of ITAT in assessee s own case for A.Ys. 07-08, 08-09 and 09-10, we hold that for A.Ys. 11-12 and 12-13, sale of software by assessee is sale of standard software which is chargeable to tax under Article 7 of DTAA as business income of assessee and not under Article 12 as Royalty . In result, ground nos. 1, 2 and 3 for both years under appeal are allowed. 5.2 In A.Y. 11-12, assessee has raised ground no. 5 which challenges action of not allowing TDS credit of Rs. 64,081,778/-. Similarly, ground no. 5 in AY 12-13 challenges action of grossing up of receipts for purpose of computation of income. Both issues are set aside to file of AO with direction to grant credit of TDS, if found in accordance with law and also to re-compute gross receipts for purpose of taxation. Hence, these grounds are allowed for statistical purposes. ITA Nos. 726/D/15 & 1686/D/16 Page 13 of 14 5.3 All other grounds are consequential in nature and are, therefore, dismissed. 6. In final result, both appeals of assessee are partly allowed. Order is pronounced in open court on 03.10.2016 Sd/- Sd/- (G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDICIAL MEMBER Dated: 03.10.2016 *Kavita Arora Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI ITA Nos. 726/D/15 & 1686/D/16 Page 14 of 14 Comptel Oyj v. DCIT Circle 1(2)(1), International Taxation, New Delhi