Income Tax Appellate Tribunal Mumbai Galatea Ltd., Mumbai vs Dcit (Intl. Tax) Range 2(3)(2), Mumbai on 15 February, 2019 IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA no. 6122/Mum./2016 (Assessment Year : 201314) Galatea Ltd. Vaish Associates, Advocates 106, Peninsula Centre ................ Appellant Dr. S.S. Rao Road, Parel Mumbai 400 012 PAN AADCG8396D v/s Dy. Commissioner of Income Tax (I.T) ................ Respondent Range2(3)(2), Mumbai Assessee by : Ms. Priyanka Jain Revenue by : Shri Anand Mohan Date of Hearing 26.11.2018 Date of Order 15.02.2019 ORDER PER SAKTIJIT DEY, J.M. Aforesaid appeal has been filed by the assessee challenging the assessment order dated 21st September 2016, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short ―the Act‖) for the assessment year 201314, in pursuance to the directions of the Dispute Resolution Panel1 (DRP), Mumbai. 2 Galatea Ltd. 2. In grounds no.1 to 6, the assessee has challenged the decision of the departmental authorities in bringing to tax the amount received by the assessee towards supply of software to customers in India by treating them as royalty. 3. Brief facts are, the assessee is a foreign company and is a tax resident of Israel. The assessee is involved in the business of developing, manufacturing, selling and servicing machinery, equipments, tools, support software, accessories, equipments and materials for diamond, gems and jewellery industry. The assessee in turn is a 100% subsidiary of Sarin Technologies Ltd., Israel. For the assessment year under dispute, the assessee filed its return of income declaring nil income. During the assessment proceedings, the Assessing Officer after calling for necessary information relating to revenue earned during the year and examining them found that the assessee has given right to use periodic software license and application software to various clients in India. He noted that the software rights were transferred to its Indian AE, Sarin India. Besides, the assessee has given license to use the software directly to various customers in India. He also noted that a number of customers had deducted tax at source @ 10% on the payments made by them to the assessee by treating the payment made towards software as royalty under Article12(3) of IndiaIsrael tax treaty. After examining the 3 Galatea Ltd. invoices furnished by the assessee he noted that the assessee was giving license to use the software and payment was received on periodical basis for use of such software which can be treated as royalty both within the meaning of Income Tax Act, 1961 as well as IndiaIsrael tax treaty. Referring to the agreement between the assessee and the Indian AE, the Assessing Officer observed that as per the agreement, the assessee has proposed to supply internal diamond mapping and scanning machine and software. Accordingly, he issued a show cause notice to the assessee to explain why the amount received towards sale of software should not be treated as royalty. In response, it was submitted by the assessee that software forms an integral part of the machines sold and cannot be used on standalone basis. Therefore, the amount received towards sale of software cannot be treated as royalty. 4. Further, it was submitted, since the assessee has no Permanent Establishment (PE) or business connection in India, amount received towards sale of software is not taxable in India. In support of his contention, the assessee relied upon a number of judicial precedents. The Assessing Officer, however, did not find merit in the submissions of the assessee and held that the amount received by the assessee towards sale of software is in the nature of royalty as per section 9(1)(vi) of the Act as well as Article12(3) of IndiaIsrael tax treaty. 4 Galatea Ltd. Thus, the Assessing Officer ultimately concluded that the amount of ` 46,99,67,277, received by the assessee from sale of different kind of software is in the