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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, 4th Floor, E-2 Block, Pratyaksh Kar Bhavan,a
November, 19th 2019

Referred Sections:
Section 144C(5) of the Income Tax Act, 1961
Section 9(l)(vi) by the Finance Act, 2012
Section 115A

Referred Cases / Judgments:
Duck Software Inc. vs. DCIT (2017) 86 taxmann.com 62 (Delhi-Trib.).
CIT vs. DYNAMIC VERTICAL SOFTWARE INDIA P. LTD. [2011] 332 ITR 222
PCIT vs. M. Tech India (P) Ltd. 381381 ITR 31 (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.               Vs.    DCIT
           C/o. CA K N Gurunath, CGS &               Circle-1(1)(1),
           Co., Cas,                                 International Taxation,
           No. 979, 13 Cross, 19 Main, 11            Room No. 409,
           Floor, BSK II Stage                       4th Floor, E-2 Block,
           Bangalore                                 Pratyaksh Kar Bhavan,
                                                     Civic Centre
                                                     New Delhi
           PAN : AAICA7012R
           (Appellant)                               (Respondent)


              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


                                  ORDER

PER SUCHITRA KAMBLE, JM:

      These two appeals are filed by the assessee against the assessment
order dated 24.12.2014 and 28.01.2016 passed by DCIT, Circle-1(1)(1),
International Taxation, New Delhi for assessment year 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 direction of DRP
                                    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, contrary 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 concluding, 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 that 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 right 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 that 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 decisions of the
jurisdictional Delhi High Court and in following the 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 the consideration
paid by the customers in India for the use of the software 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 the case, the
Assessing Officer erred on facts and in law in concluding, following
the direction of DRP, that Rs.3,04,35,127/- received 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 that the appellant
was selling warranties, upgrades and similar service packages on
behalf of manufacturers of the software without providing 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 case, the
     DRP erred on facts and in law in holding that the appellant was
     providing technical service while in fact the appellant 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' technical knowledge etc.,
     merely because the customer benefitted from remote support and
     upgrades provided directly by the manufacturer of software.

     4      That on the facts and circumstances of the case, the
     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 of 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 direction of DRP
     under section 144C(5) of the Income Tax Act, 1961 ("the Act") is
     based on incorrect legal and factual premise, contrary 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 concluding, following
     direction of the DRP, that the receipt of Rs. Rs. 23,68,26,107/-
     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 that 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 right 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 the consideration
     paid by the customers in India for the use of the software 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 payment for
     a mere resale of computer software de hors any copyright associated
     with it is not covered within the ambit of clause (v) of the definition of
     royalty under the Act, ignoring the well settled principles 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 decisions of the
     jurisdictional Delhi High Court and in following the decisions of the
     Karnataka High Court instead.

     2.5 That the Learned AO as well as the Honorable DRP failed to
     appreciate that in order to qualify as a royalty payment within the
     Act, it is to be established that the acquirer, by making payment,
     obtains all or any of the copyrights of the literary work, being
     software. Further, distinction has to be made between the
     acquisition of a 'copyright right' and a 'copyrighted 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 amendment into a
     domestic law can be read into a Tax Treaty, as judicially decided.


     2.7    That on the facts and circumstances of the case, the
     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 of hearing."

3.   We are taking up factual aspect of Assessment Year 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, interconnect, passive and
electromechanical    components,     enterprise    network     and    computer
equipment, and embedded subsystems from leading manufactures. The
assessee company procures goods from vendors in Singapore and other
overseas countries for sale to its customers in India. The assessee supplied
hardware and software for use by its customers in India. 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 to various notices the
Chartered Account appeared as the Authorised Representative of the
assessee attended the case time to time and filed necessary details/
documents. During the course of assessment proceedings, assessee was
asked to furnish details of all the revenue streams received/accrued in
India. In response assessee furnished details of its total sales vide
submission dated 13.02.2014, which is incorporated in the assessment
order. The Assessing Officer observed that the assessee is supplying
software, hardware and providing services to its clients in India. The
assessee was again asked to show cause as to why software licensing shall
not be taxed as Royalty income and services provided 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. Thereafter, the assessee filed
objections before the Dispute Resolution Panel (DRP). The DRP vide
directions dated 14.11.2014 disposed off the objections of the assessee. The
Assessment Order passed on 24.12.2014. The Assessing Officer observed
that assessee could not transfer right to the customer 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 customers by the assessee.
Therefore, assessee could not merely be categorized as a commission agent
or a pass through entity. While providing the software to the customers,
assessee company in effect transferred the license to use the software by the
customers. The customer was granted a license by the 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 the hard disk of computer/
equipment, run the executable file/ installer programme, install the
programme into the computer/ equipment and run the programme to get
the intended result. For this right to use the software a separate
consideration is provided under the contract/ Purchase Order. The assessee
was also required to render the services of technical support for the
equipment. For these services, which requires specialized 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) Licensing of Software and (iii)
Technical support services. The Assessing Officer further observed that the
assessee took a stand that entire receipts under the contract constitute
business income and in absence of PE of assessee in India, these profits
cannot be taxed in India. The Assessing Officer discussed each of these
category of receipts separately as they are governed by totally different set of
rules of International taxation. The first category is the receipts, out of
hardware supply under the contracts. This clearly gives rise to business
income. In absence of any facts on records to the contrary, the assessee's
contention of no PE in India was accepted by the Assessing Officer. The
second category is the receipts out of licensing of software under the
contract. The Assessing Officer observed that the software has been
separately licensed and charged to the customer. Customer also enters into
the End User License Agreement with the assessee under the terms and this
agreement at the time of the supply, the assessee owns 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 consideration. 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 assessee filed appeal
before us.


5.    As regards Ground No. 1 the same is general in nature. Hence, the
same is dismissed.


6.    As regards Ground No. 2 to 2.4, the Ld. AR submitted that the
assessee was a distributor of software products developed 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 transferred 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 Tribunal in case of Black
Duck Software Inc. vs. DCIT (2017) 86 taxmann.com 62 (Delhi-Trib.). The
Ld. AR also relied upon the decision of Hon'ble Delhi High Court in case of
CIT vs. DYNAMIC VERTICAL SOFTWARE INDIA P. LTD. [2011] 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 submitted that the assessee is a
trader and not a developer or manufacturer. Avnet Asia and its parent
company are all distributors of software and hardware products of various
manufacturers. This major fact was ignored by the Assessing Officer as well
as DRP. The assessee and its group companies merely buy and sell software
products developed by other companies and never acquire any right in the
said products. The Ld. AR submitted that this transaction 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. 1692/2010 decided by the
                                             8      ITA No. 1288/Del/2015 &
                                                     ITA No. 4173/Del/2016



Hon'ble Delhi High Court. Thus, merely purchasing a software from the third
party and selling it to the Indian Customer does not amounts to royalty. The
Ld. AR further submitted that the decisions of the Hon'ble Karnataka High
Court in case of Samsung Electronics and Synopsis International are
distinguished by the assessee but the same was not considered by the
AO/DRP.


7.    The Ld. DR submitted that the services were provided on the basis of
royalty and the same was clearly set out by the Assessing 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 respective 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, technology or of copyright, trade
mark; use of technology; use of a patent, trademark, industrial, commercial
or scientific equipment; imparting of information concerning, for the working
of, or use of, technology; or concerning technical, industrial, commercial or
scientific knowledge; rendering services in connection with the activities in
connection with the above, i.e. the activities of the `use' or `right to use' or `in
respect of' patent, trademark, technology or copyright.            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 copyright. The identification of
the consideration of payment is, therefore, necessary 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 use or the right to use of
copyright, patent, trademark, etc. These expressions 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 characterize 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 another. 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 patent, 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 claims related to the location
of such rights will not be material in deciding whether such consideration
amounts to royalty. The Ld. DR further submitted that 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 scientific 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 software as held to be
royalty income. Therefore, the appeal of the assessee deserves to be
dismissed.







8.    We have heard both the parties and perused all the relevant material
available on record. From the submissions of the Ld. AR it is observed that
Avnet Asia and its parent company are all distributors of software and
hardware products of various manufacturers, but whether they provide the
services which include the royalty component or not, this major aspect was
neither verified by the Assessing Officer as well as 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 software products
developed by other companies or acquire any right in the said products
which involves the royalty components. The case laws referred by the Ld. AR
though seem to be on the issue but in the present case the facts were not
properly verified by the Revenue authorities. Therefore, it will be appropriate
to remand back this issue to the file of the Assessing Officer for proper
adjudication of this aspect in light of the decisions 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 further submitted that
the assessee was selling warranties, upgrades and similar 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 involved and the same was
clearly set out in the agreements. The Ld. AR further submitted that in
assessment year 2011-12, the Assessing Officer should have verified the
nature of service packages and direct sale of provision 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 assessment order it can be seen
that the Assessing Officer should have verified the nature of service
packages and direct sale of provision of services relating to FTS. This fact is
not disputed by the Ld. AR that the nature of services are not properly
verified by the Assessing Officer. Therefore, it will be appropriate to remand
back this issue to the file of the Assessing Officer 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 submitted 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 Assessing Officer as regards credit
for tax deducted at source. Therefore, it will be appropriate to remand back
this issue to the file of the Assessing Officer. Needless to say, the assessee be
given proper opportunity of hearing by following principles of natural justice.
Ground No. 4 is partly allowed for statistical purpose.


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 for 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 applicable here as well.
Thus, Ground No. 2 to 2.6 are partly allowed for statistical 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, therefore, 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 for statistical purpose.


16.   In result, both the appeals filed by the assessee are partly allowed for
statistical purpose.


Order is pronounced in the open court on 18th November, 2019.

             Sd/-                                             Sd/-

   (N.K. BILLAIYA)                                 (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER                                   JUDICIAL MEMBER

Dated: 18th 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

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