Income Tax Appellate Tribunal Mumbai Galatea Ltd, Mumbai vs Assessee on 24 February, 2016 IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA no.749/Mum./2015 (Assessment Year : 201011) Galatea Limited, P.O. 1156 Industrial Area Dalton, Israel c/o Vaish Associates, Advocates 106, Peninsula Centre ................ Appellant Dr. S.S. Rao, Parel Mumbai 400 012 PAN AADCG8396D v/s Dy. Commissioner of Income Tax International Taxation, Range ................ Respondent 2(3)(2) Mumbai Assessee by : Shri Bomi Daruwala a/w Ms. Priyanka Jain, CAs Revenue by : Shri Jasbir Chauhan, CITDR Date of Hearing 13.01.2016 Date of Order 24.02.2016 2 Galatea Limited ORDER PER ASWANI TANEJA, A.M. This appeal has been filed by the assessee against the final assessment order dated 20th January 2015, passed by the Assessing Officer (in short 'AO') under section 143(3) r/w section 144C(13) of the Act, for the assessment year 201112 and also challenging the order dated 16th December 2014, passed by the Dispute Resolution PanelIII (in short 'DRP'), Mumbai, under section 144C(5) of the Income Tax Act, 1961 (in short 'the Act'), on the following grounds: "1. That on the facts and circumstances of the case, the impugned assessment completed vide order dated 20.01.2015 under section 143(3) read with section 144C of the Incometax Act, 1961 ('the Act'), is illegal and bad in law. 1.1. That the assessing officer erred on facts and in law in completing the assessment vide order dated 20.01.20 15 under section 143(3) rws 144C of the Act at an income of Rs. 17,39,01,465/ as against returned income of Rs. Nil. 1.2 That the DRP erred on facts and in law in the affirming the draft assessment order by passing a cryptic and nonspeaking order, without judiciously considering the entire material and the submissions/ objections filed by the appellant. 2. That the assessing officer erred on facts and in law in holding the payments received by the appellant 3 Galatea Limited towards supply of software to the customers in India, as income in the nature of "royalty" within the meaning of Explanation 2(v) of section 9(1)(vi) of the Act and Article 12(3) of the Double Tax Avoidance Treaty between India and Israel (the Treaty') and liable to tax in India @ 10% of gross amount. 3. That the assessing officer erred on facts and in law in not appreciating that software formed integral part of the Galatea machines supplied by the appellant to customers in India without which such machines could not function and thereby the supply of the software like the payment for supply of the hardware was in the nature of business profits not liable to tax in India in the absence of permanent establishment of the appellant in India. 4. Without prejudice, the assessing officer erred on facts and in law in not appreciating that the software supplied to the customers in India only resulted in their acquiring a copyrighted article and not a copyrighted right and that the payment was the same did not constitute royalty as defined in Article 12(3) of the Treaty and was hence not liable to tax in India. 5. That the Assessing Officer erred in facts and in law in not appreciating that the definition of royalty in section 9(1)(vi) of the Act is not applicable in the case of the appellant owing to Article 12(3) of the Treaty, which has a separate definition of royalty. 6. That the assessing officer erred on facts and in law in not allowing credit of TDS amounting to Rs.8,52,664/ while finally computing the income tax liability, although the same was directed to be allowed in the assessment order. 7. That the assessing officer erred on facts and in law 4 Galatea Limited in levying interest under section 234B of the Act. 8. That the assessing officer erred on facts and in law in initiating penalty proceedings under Section 271(1)(c) of the Act." 2. During the course of hearing, arguments were made by the Ld. Counsels Shri Bomi Daruwala, a/w Ms. Priyanka Jain (Chartered Accountants), on behalf of the assessee and Ld. Departmental Representative, Shri Jasbir