2018 (5) TMI 1758 - AT - Income Tax

Tribunal Decision: Software Payments Not Royalty, No Permanent Establishment, AO Directed on TDS

M/s. Lucent Technologies GRL LLC C/o Price water house Coopers PWC House Versus Addl. Director of Income Tax International Taxation, Range-4, Mumbai

M/s. Lucent Technologies GRL LLC C/o Price water house Coopers PWC House Versus Addl. Director of Income Tax International Taxation, Range-4, Mumbai - TMI Issues Involved:1. Computation of Income and Tax Demand.2. Taxability of Income as Royalty.3. Existence of Permanent Establishment (PE).4. Attribution of Income to PE.5. Non-granting of TDS Credit.6. Levy of Interest.7. Initiation of Penalty Proceedings.Detailed Analysis:1. Computation of Income and Tax Demand:The assessee contested the computation of income at Rs. 30,72,21,521 and the consequent tax and interest demand. The tribunal noted that the assessment order for multiple years was issued on 19 August 2010, leading to a tax demand of Rs. 6,45,16,519 and an interest demand of Rs. 10,01,61,895, while the assessee sought a refund of Rs. 4,60,83,230 with interest.2. Taxability of Income as Royalty:The tribunal examined whether the amounts received from the supply of software to Reliance Communications Limited were 'Royalty' under the Income Tax Act and the DTAA between India and the USA. The tribunal referenced its earlier decision and the decision in the case of Reliance Communications Ltd., concluding that the payments for software did not constitute royalty. The tribunal held that the software was an integral part of the wireless equipment and did not involve the transfer of copyright, thus not qualifying as royalty under the Act or the DTAA.3. Existence of Permanent Establishment (PE):The tribunal assessed whether Lucent Technologies Hindustan Private Limited (LTHPL) constituted a PE for the assessee in India. The AO had argued that LTHPL acted as an agency PE, performing substantive functions like negotiations and contract entry. However, the tribunal found no evidence of the assessee deputing personnel to India or LTHPL acting on behalf of the assessee. Consequently, the tribunal ruled that there was no PE in India, negating the attribution of business profits to a PE.4. Attribution of Income to PE:Given the tribunal's finding that there was no PE in India, the issue of attributing income to a PE did not arise. The tribunal upheld the assessee's grounds, stating that the entire receipts from the supply of software were not taxable in India as business profits.5. Non-granting of TDS Credit:The tribunal addressed the AO's refusal to grant TDS credit of Rs. 4,60,83,230. It referenced a previous decision in the assessee’s favor, directing the AO to grant TDS credit based on original certificates, as the refund to the tax deductor (Reliance) did not impact the assessee's right to claim TDS credit.6. Levy of Interest:The tribunal considered the levy of interest under sections 234A, 234B, and 234D. It held that since TDS was already deducted, the levy of interest under section 234B did not arise. Interest under sections 234A and 234D was deemed consequential and required no further adjudication.7. Initiation of Penalty Proceedings:The tribunal noted that the initiation of penalty proceedings under section 271(1)(c) was premature and not subject to appeal at this stage.Conclusion:The tribunal allowed the appeals partly, ruling that the payments for software did not constitute royalty, there was no PE in India, and directed the AO to grant TDS credit. The levy of interest under section 234B was dismissed, while sections 234A and 234D were deemed consequential. The initiation of penalty proceedings was not adjudicated as it was premature.