ITO Can’t By-Pass SC Decision In ‘Engineering Analysis’ In The Name Of A Review Petition Filed By Dept: Delhi High Court

The Delhi High Court has set aside the Income Tax Department’s order rejecting the assessee’s application seeking a certificate for “NIL” rate of withholding tax under Section 197 of the Income Tax Act, 1961. The bench of Justices Rajiv Shakdher and Tara Vitasta Ganju observed that the concerned officer had failed to consider the Apex Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. Commissioner of Income Tax (2021), which was relied upon by the assessee in support of its plea for a “NIL” rate of withholding tax. The assessee, in its application, had pleaded that the consideration received by it did not constitute royalty, and thus the same was not chargeable to tax, in view of the judgment of the Supreme Court in Engineering Analysis. However, the concerned officer had simply by-passed the said judgement of the Supreme Court on the ground that the revenue department has filed a review petition, the Court noted. The bench remarked that as long as the judgment of the Supreme Court in Engineering Analysis (2021) is in force, the income tax authority cannot side step the judgment on the ground that the department has filed a review petition. The Court thus directed the Income Tax officer to reconsider assessee’s application under Section 197, in light of the Supreme Court’s decision in Engineering Analysis (2021), where it was ruled that payments made to non-resident computer software manufacturers/ suppliers for resale/use of computer software, is not taxable as Royalty in India. The petitioner, Milestone Systems A/S, is a non-resident company, incorporated under the laws of Denmark, and is in the business of providing IP Video Management Software and other video surveillance related products across the globe. The petitioner entered into a Distributor Partner Agreement with various companies/entities for sale of its Software in India. Claiming that the sum it received under the Distributor Agreement was not chargeable to tax in India, the petitioner filed an application under Section 197 of the Income Tax Act for being issued a certificate with “NIL” rate of withholding tax. The income tax authority, however, passed an order rejecting petitioner’s application seeking a certificate for “NIL” rate of withholding tax, and issued a certificate providing a withholding tax rate of 9.99%. Against the said withholding tax certificate issued to it, the petitioner filed a writ petition before the Delhi High Court. The petitioner, Milestone Systems, argued before the Court that its partners or the end users are not conferred any ‘right of use of copyright’ under the Distributor Agreement. It claimed that the distributing partners only acquire a license to the copyrighted Software under the Agreement. It further pleaded that the said aspect has been dealt with by the Supreme Court in Engineering Analysis (2021), and thus the consideration received by it under the Distributor Agreement did not constitute royalty, and the same was not chargeable to tax. The petitioner averred that the Income Tax officer, while passing the said order, had failed to consider the vital issue, i.e., whether or not the consideration received by it towards the sale of software in India, constituted royalty under the Income Tax Act and/or under the Double Taxation Avoidance Agreement (DTAA) between India and Denmark. To this, the revenue department argued before the Court that while examining an application moved under Section 197, the concerned officer is not carrying out an assessment, and therefore, while rendering a decision on the Section 197 application, the parameters which apply for assessing taxable income would not get triggered. As per Section 197 of the Income Tax Act, if the Assessing Officer (AO) is satisfied that the total income of the recipient justifies deduction of income tax at any lower rate or no deduction of income tax, the AO shall, on an application made by the assessee in this behalf, issue to him such lower withholding tax certificate, as may be appropriate. Referring to the facts of the case, the Court concluded that the order rejecting the petitioner’s application seeking a certificate for “NIL” rate of withholding tax, did not deal with the core issue which arose for consideration, and which was the basis on which the application under Section 197 had been moved by the petitioner. The Court reckoned that the petitioner had relied upon the Apex Court’s decision in Engineering Analysis (2021) in support of its contention that the consideration received by it under the Distributor Agreement did not constitute royalty, and thus the same was not chargeable to tax. However, the same was not considered or dealt with by the concerned officer while passing the order, the Court said. “As noted hereinabove, it is the petitioner’s case, that the Software sold by it to its distributor partners...

ITO Can’t By-Pass SC Decision In ‘Engineering Analysis’ In The Name Of A Review Petition Filed By Dept: Delhi High Court

Parina Katyal

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