2017 (2) TMI 634 - AT - Income Tax

Tribunal rules in favor of Assessee on tax grounds: No PE, software not 'royalty,' TDS credit granted

HITT Holland Institute of Traffic Technology B.V., Kolkata Versus D.D.I.T. (Intl. T) -1, Technology B.V., Kolkata Kolkata.

HITT Holland Institute of Traffic Technology B.V., Kolkata Versus D.D.I.T. (Intl. T) -1, Technology B.V., Kolkata Kolkata. - TMI Issues Involved:1. Taxability of revenue from separate and distinct transactions under a single composite contract.2. Taxability of income from on-shore supply of software and licenses as 'royalty'.3. Classification of income from on-shore services as 'fees for technical services' (FTS).4. Attribution of income to a Permanent Establishment (PE) in India.5. Taxability of income from off-shore supply of equipment.6. Taxability of income from Annual Maintenance Contract (AMC) services.7. Taxability of income from extra work contracts.8. Levy of interest under sections 234A and 234B.9. Credit for taxes deducted at source (TDS).Issue-wise Detailed Analysis:1. Taxability of Revenue from Separate and Distinct Transactions Under a Single Composite Contract:The Assessee was awarded contracts by the Airports Authority of India (AAI) for Supply, Installation, Testing & Commissioning (SITC) of systems at various airports. The AO attributed 50% of the receipts from providing services as income chargeable to tax in India under Sec.44DA. The DRP held that the PO was not involved in business activity related to the project, hence no profits could be attributed to the PO. The Tribunal dismissed this ground as infructuous since the PO was not operational.2. Taxability of Income from On-shore Supply of Software and Licenses as 'Royalty':The Assessee argued that the software supplied was embedded in the hardware and could not operate independently. The Tribunal held that the software and licenses were part of the hardware and not taxable as 'royalty' under Article 12(4) of the India-Netherlands DTAA, relying on judicial precedents like DIT v. Ericsson AB.3. Classification of Income from On-shore Services as 'Fees for Technical Services' (FTS):The Tribunal found that the services provided by the Assessee, including installation, testing, and commissioning, did not 'make available' technical knowledge or skills to AAI. Therefore, the income could not be classified as FTS under Article 12(5) of the India-Netherlands DTAA.4. Attribution of Income to a Permanent Establishment (PE) in India:The Tribunal examined whether the Assessee had an Installation PE in India under Article 5(3) of the India-Netherlands DTAA. It concluded that no installation activity was carried out during the relevant previous year, and hence, there was no Installation PE. Therefore, the income from off-shore supply of equipment could not be taxed in India.5. Taxability of Income from Off-shore Supply of Equipment:The Tribunal held that since the Assessee did not have a PE in India, the profits from off-shore supply of equipment could not be brought to tax in India. The supply was on a high-seas sales basis, and the title passed outside India.6. Taxability of Income from Annual Maintenance Contract (AMC) Services:The Tribunal found that the AMC services were performed post-completion of the installation and involved only maintenance activities. These services did not constitute 'installation activity' and therefore did not create an Installation PE. The income from AMC services could not be taxed in India.7. Taxability of Income from Extra Work Contracts:The Tribunal held that the income from off-shore provision of services related to the extra work contract with ONGC could not be classified as 'royalty' or FTS. Since there was no PE in India, the income could not be taxed in India.8. Levy of Interest Under Sections 234A and 234B:The Tribunal noted that the AO had deleted the levy of interest under sections 234A and 234B pursuant to a rectification application. This ground was dismissed as infructuous.9. Credit for Taxes Deducted at Source (TDS):The Tribunal directed the AO to consider the TDS certificates produced by the Assessee and allow credit for prepaid taxes after verification, even if the TDS was not reflected in Form 26AS.Conclusion:The Tribunal partly allowed the appeal, providing relief on several grounds, including the non-existence of a PE, non-taxability of embedded software as royalty, and directing the AO to grant TDS credit based on certificates provided.