ITO cannot bypass the SC decision of Engineering Analysis while considering Sec 197 application: Delhi HC
Milestone Systems A/S (WP No. 3639/2022)
- 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 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.
Hon Delhi HC held as below:
- 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.
- As long as the judgment of the Supreme Court in Engineering Analysis (2021) is in force, the concerned income tax authority could not have side stepped the judgment on the ground that the revenue department has filed a review petition against the said judgment.
- The order which rejected the petitioner’s application seeking a certificate for “NIL” rate of withholding tax as well as the certificate which provided a withholding tax rate of 9.99% is set aside. The concerned income tax officer is directed to reconsider petitioner’s application under Section 197 afresh.