ITAT Directs Revenue To Give Effect To High Court Order Holding Software License Charges Received By EY Not Taxable As 'Royalty'

The Bench, consisting of Astha Chandra (Judicial Member) and Shamim Yahya (Accountant Member), noted that the Delhi High Court, reversing the order passed by the AAR, has held that the payment received by EYGSL (UK) for providing access to computer software to its EY member firms located in India did not amount to 'Royalty' and hence, it was not taxable in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA.

The assessee EY Global Services Limited (UK) (EYGSL (UK)) is providing technology and other support services and software licenses to the member firms of the EY Network. The assessee entered into agreements with each EY member firm, pursuant to which it provided certain services required by the member firms. Thereafter, the assessee recovered the costs incurred by it from the member firms on actual usage basis.

The assessee filed an income tax return showing 'Nil' income. The assessee contended that the payments received by it from Indian member firms of the EY were mere reimbursement of costs and thus, they were not taxable under the Income Tax Act, 1961 as well as under the Double Taxation Avoidance Agreement (DTAA) between India and United Kingdom (UK).

To avoid any litigation with the income tax department, the assessee filed an application before the Authority of Advance Ruling (AAR) to seek an advance ruling that the payments received by the assessee from its member firms were not taxable in India under the Income Tax Act or under the DTAA. The AAR passed an order ruling that all services render by the assessee, except software charges, were not taxable in India. Thus, the AAR held that software charges received by the assessee were taxable as 'Royalty' as per the provisions of the Income Tax Act and the DTAA.

During the assessment proceedings, the Assessing Officer (AO) observed that the AAR in its order had held that the consideration received by the assessee for giving a right to benefit from the computer software procured by the assessee from several third-party vendors, was in the nature of Royalty under Article 13 of the India-UK DTAA and under Section 9(1)(vi) of the Income Tax Act. The AO noted that the AAR had ruled that the said consideration was taxable as Royalty irrespective of the fact whether the assessee had a Permanent Establishment (PE) in India or not. Thus, the AAR had held that the consideration received by the assessee in respect of giving a right to benefit from the computer software would attract a withholding tax under Section 195 of the Income Tax Act.

The AO noted that in view of Section 245S of the Income Tax Act, the order pronounced by the AAR was binding on the assessee and the income tax department. Hence, the AO accordingly passed an assessment order holding that the Software License and Maintenance Charges, Global Technology Charges and the GWAN Connectivity Charges received by the assesssee were taxable as 'Royalty'. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)).

The CIT(A) held that the appeal was not maintainable since the order passed by the AO only gave effect to the decision of the AAR. The CIT(A) ruled that its office was subordinate to the AAR and therefore, it could not decide the grounds of appeal on the issues which were decided by the AAR. Against this, the assessee filed an appeal before the ITAT.

The assessee EYGSL (UK) submitted before the ITAT that after the said order challenged by the assessee was passed by the revenue authorities, the Delhi High Court passed an order in the case of EY Global Services Limited (EYGSL) versus the Assistant Commissioner of Income Tax (2021), wherein the ruling of the AAR was reversed and the matter was decided in favour of the assessee.

The ITAT observed that the Delhi High Court had ruled that the agreement between the assessee, EYGSL (UK), and its member firm, the EYGBS (India), did not create any right to transfer the copyright in the software procured by the assessee and hence, the same would not fall within the ambit of the term 'Royalty', as held by the Supreme Court in the case of Engineering Analysis Centre versus Commissioner of Income Tax and Anr. (2021).

The Delhi High Court had ruled that under the agreement, the EYGBS (India) merely received the right to use the software procured by the assessee EYGSL (UK) from third-party vendors and thus, the consideration paid for the use of the same could not be termed as 'Royalty'. Therefore, the Delhi High Court had held that the payment received by EYGSL (UK) for providing access to computer software to its member firms of EY Network located in India, i.e., EYGBS (India), did not amount to 'Royalty' and hence, it was not liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA. The Delhi High Court had thus set aside the order passed by the AAR and had ruled that the payments received by assessee towards Software License and Maintenance Charges, Global Technology Charges and GWAN Connectivity Charges were not taxable in India.

Thus, the ITAT observed that the Delhi High Court has reversed the order of the AAR. The ITAT noted that the said order passed by the High Court was not in existence when the revenue authorities passed the order challenged by the assessee. Hence, the ITAT remitted the matter back to the AO to give effect to the order passed by the High Court.

The ITAT thus allowed the appeal.

Case Title: EY Global Services Ltd. versus ACIT

Dated: 01.06.2022 (ITAT Delhi)

Representative for the Assessee/ Appellant: Mr. Rajan Vora, CA

Representative for the Respondent/ Revenue Department: Mr. Sanjay Kumar, Senior DR

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