2008 (12) TMI 248 - AT - Income Tax

Tribunal Rules Lucent Technologies Has Permanent Establishment in India; Software Payments Classified as Business Profits.

The Tribunal partly allowed the appeals of both the assessee and the Revenue. It determined that Lucent Technologies International Inc. (LTII) had a ... Permanent establishment (service PE) - dependent agent/fixed place of business - inclusive definition of personnel under Article 5(2)(1) of the Indo US DTAA - classification of software receipts - copyright versus copyrighted article - royalty under Article 12 of the Indo US DTAA - binding precedents of a Special Bench - tax deduction at source and advance tax - effect on interest under s. 234BPermanent establishment (service PE) - inclusive definition of personnel under Article 5(2)(1) of the Indo US DTAA - dependent agent/fixed place of business - whether LTII had a permanent establishment in India in the form of its subsidiary LTIL (service PE) - HELD THAT: - The Tribunal found that the contracts with the Indian operator created reciprocal turnkey obligations on LTII and LTIL so that each could be held responsible for completion; LTIL undertook installation, testing, commissioning and operational responsibility while LTII supplied hardware and software. LTIL used expatriate personnel (employees of affiliates under control of LTII) for installation and support, and those personnel were in India for periods exceeding 90 days within 12 months. Reading Article 5(2)(1) inclusively, 'other personnel' controlled by the enterprise fall within the service PE concept. On these facts the Tribunal held that LTIL constituted a service PE of LTII and reversed the CIT(A)'s finding to the contrary. [Paras 7]LTIL was a service permanent establishment of LTII; the CIT(A)'s finding that there was no PE is reversed.Classification of software receipts - copyright versus copyrighted article - royalty under Article 12 of the Indo US DTAA - binding precedents of a Special Bench - whether amounts received by LTII under software license agreements were royalty (transfer of copyright) or business profits (transfer of copyrighted articles) - HELD THAT: - The Tribunal examined the license terms and held they were materially similar to those considered by the Special Bench in Motorola Inc. The licenses granted non exclusive, restricted rights, prohibited commercial exploitation and did not confer the bundle of rights that constitute a copyright under s.14 of the Copyright Act. Applying the Special Bench's reasoning (which is binding on the Tribunal), the payments were for the copyrighted article (the software copy/license as an article) and not for transfer of copyright rights attracting Article 12/royalty treatment. Consequently, the receipts are business profits and not royalties. [Paras 25, 26]Software receipts are business profits (transfer of copyrighted article) and not royalty; the CIT(A)'s classification of the receipts as royalty is set aside.Tax deduction at source and advance tax - effect on interest under s. 234B - whether interest under s. 234B could be levied where entire tax liability was subject to deduction at source - HELD THAT: - Relying on the Supreme Court decision in Sedco Forex, the Tribunal held that where the whole tax liability in India is discharged by deduction at source, there is no liability to pay advance tax and consequently no liability to attract interest under s.234B. The CIT(A)'s cancellation of the interest was upheld. [Paras 27]Interest under s. 234B cancelled; Revenue's ground seeking levy of s. 234B interest is dismissed.Notice under section 142(1) - limitation - challenge to validity of assessment on ground that notice under section 142(1) was barred by limitation - HELD THAT: - The assessee did not press this ground at hearing before the Tribunal; accordingly the Tribunal dismissed it as not pressed. [Paras 28]Ground challenging notice under s.142(1) on limitation grounds dismissed as not pressed.Final Conclusion: For assessment years 1997-98, 1998-99, 1999-2000 and 2000-01: the Tribunal holds that LTIL constituted a service permanent establishment of Lucent Technologies International Inc.; software license receipts are business profits and not royalties (following the Motorola Special Bench); interest under s.234B is cancelled in view of Sedco Forex; the limitation challenge to the s.142(1) notice was not pressed and is dismissed. Appeals are partly allowed in accordance with these conclusions. Issues Involved:1. Existence of Permanent Establishment (PE) of the assessee company in India.2. Treatment of payments received under the license agreement for use of computer software as 'royalty' or 'business profits'.3. Validity of assessment based on the notice issued under Section 142(1).4. Mistake in quantification of royalty income.5. Levy of interest under Section 234A and 234B.Detailed Analysis:1. Existence of Permanent Establishment (PE):The primary issue raised by the Revenue was whether the assessee, Lucent Technologies International Inc. (LTII), had a PE in India. The Assessing Officer (AO) concluded that LTII had a fixed place of business in India through its Indian subsidiary, Lucent Technologies India Ltd. (LTIL), and that LTII's employees conducted significant activities in India, such as network surveys, negotiations, and training. The AO held that these activities constituted a PE under Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA, making the profits from hardware and software supplies taxable in India. The CIT(A) disagreed, stating that LTII did not have a PE in India. However, the Tribunal reversed the CIT(A)'s findings, concluding that LTIL was a service PE of LTII under Article 5(2)(1)(i) of the DTAA, as LTII's personnel provided services in India for more than 90 days within a 12-month period.2. Treatment of Payments for Software Use:The second issue was whether the payments received by LTII under the license agreement for the use of computer software were 'royalty' or 'business profits'. The AO and CIT(A) considered these payments as royalty under Article 12 of the DTAA, asserting that LTII transferred copyright rights to Indian operators. The Tribunal, however, relied on the Special Bench decision in the case of Motorola Inc., which distinguished between transfer of copyright and transfer of copyrighted articles. The Tribunal held that LTII's payments were for copyrighted articles, not for the transfer of copyright, and thus constituted business profits, not royalty. Consequently, these payments were not taxable in India under the DTAA.3. Validity of Assessment under Section 142(1):The assessee challenged the validity of the assessment on the grounds that the notice issued under Section 142(1) was barred by limitation. This ground was not pressed by the assessee during the hearing, leading to its dismissal.4. Mistake in Quantification of Royalty Income:The assessee raised an alternative plea regarding a mistake in the quantification of royalty income. This issue became infructuous due to the Tribunal's decision that the software receipts were business profits and not royalty.5. Levy of Interest under Section 234A and 234B:The Tribunal addressed the issue of interest levied under Section 234B, referencing the Supreme Court decision in Sedco Forex International Drill Inc. & Ors. vs. CIT & Anr., which held that if the entire amount received by a non-resident assessee in India is subject to tax deduction at source, there is no liability to pay advance tax, and thus no interest under Section 234B. The Tribunal upheld the CIT(A)'s decision to cancel the interest levied by the AO under Section 234B. For Section 234A, the Tribunal directed the AO to allow consequential relief to the assessee.Conclusion:The Tribunal concluded by partly allowing the appeals of both the assessee and the Revenue, based on the detailed analysis and findings on each issue. The key determinations were the existence of a PE in India for LTII through its subsidiary LTIL and the classification of software payments as business profits, not royalty, under the DTAA.