The Delhi High Court on a writ petition filed by PARADIGM GEOPHYSICAL PVT LTD held that the supply of software and other services are not Royalty/ Fees for Technical Services(FTS) and therefore, the same is subject to pay tax under Section 44DA of the Act.
The Petitioner-assessee is a company incorporated under the laws of Australia and is a tax resident of that country. It is engaged in the business of developing and providing customized software-enabled solutions and annual maintenance services. The solutions provided by the Petitioner are used by the oil and gas industry in relation to excavation, extraction, production activities and seismic analysis.
The assessee opted to be taxed on presumptive basis under section 44BB(1) of the Act, whereby 10% of the aggregate of receipts is deemed to be profits and gains of business and is subjected to tax.
The assessee filed its return for the assessment year 2012-2013, declaring a total income of Rs. 19,71,61,430/- arising inter alia, from the business of providing services or facilities in connection with the extraction or production of mineral oils. on completion of the assessment proceedings, the Assessing Officer held that in accordance with terms of the contract, the nature of services provided by the Petitioner fell within the purview of Royalty/ Fees for Technical Services and is liable to be taxed under section 44DA instead of section 44BB and proposed to compute the total income of Petitioner at Rs. 4,92,90,360/- as against total income of Rs. 1,97,16,140, offered to tax by the Petitioner.
On 05.03.2015, a draft assessment order was issued by the AO under Section 143(3)/144C (1) of the Act proposing to tax the revenues received by the Petitioner under section 44DA of the Act, estimating 25% of gross receipts as “business income” taxable under section 28 to 43C of the Act. Thereafter, the final assessment order was passed confirming the addition/adjustment proposed in the Draft Assessment Order.
The assessee neither filed any objection before the Dispute Resolution Panel against the Draft Assessment Order nor did it file an appeal before the Commissioner of Income Tax (Appeal). Instead, it choose to exercise the alternate remedy by filing a Revision Petition under Section 264 of the Act before Commissioner of Income Tax (International Taxation) claiming that the assessee was wrongfully denied the benefit of assessment under the Section for computing income arising inter alia on account of providing services or facilities in connection with oil and gas operations.
The CIT declined to interfere with the final assessment order and rejected Petitioner’s revision petition, primarily on the ground of maintainability, without dealing with the merits of the case. The writ petition impugning the said order was allowed, the order of the CIT was quashed and the matter was remanded to the Respondent with a direction to examine the case on merits, with the liberty to the assessee to challenge the same in case of an adverse outcome.
Subsequently, vide order dated 01.11.2018, the case was decided on merits and Petitioner’s claim of taxation on presumptive basis under Section 44BB was rejected, and the view of the AO that Petitioner’s case would fall within the ambit of section 44DA of the Act was upheld.
The division bench comprising of Justices, Vipin Sanghi and Sanjeev Narula observed that whether the software/renewal of license or warranty services or maintenance of software are inextricably and essentially linked to the supply of the software and are ancillary services is a question of fact that would require determination after examining the dominant purpose of such contracts.
The bench further opined that the no factual clarity on this aspect and also did not find any such distinction/segregation that can be inferred with respect to the receipts in the hands of the assessee under the contracts executed by it, referred. The CIT being a fact-finding body has failed to give a reasoned order with respect to the nature of income and its subsequent application.
In the light of the judgment in Oil and Natural Gas Corporation Ltd (ONGC) v. CIT as well as CBDT Circular No. 1862 dated 22.10.1990] since it is excluded from the definition of Fees for Technical Services under the Explanation 2 to section 9(vii) of the Act, being covered under the exception relating to mining and like activities provided in the definition of FTS.
While allowing the appeal, the bench also said that the income of the assessee would not be taxable under section 44DA but section 44BB since it is excluded from the definition of Fees for Technical Services under the Explanation 2 to section 9(vii) of the Act, being covered under the exception relating to mining and like activities provided in the definition of FTS.
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