TaxTMI 
TaxTMI 
2006 (7) TMI 349
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....issioner of Income-tax, Non Resident Circle, New Delhi (hereinafter referred to as 'Ld. Assessing Officer') to the assessee on November 3, 1999. Pursuant to the notice, the assessee filed a letter (dated November 17, 1999) submitting that it did not constitute a Permanent Establishment ("PE") in India under the provisions of the Avoidance for Double Taxation between India and United Kingdom ("Treaty") and is not taxable in India. Subsequently, on January 21, 2000, the ld. Assessing Officer issued another notice to the assessee under section 142(1) of the Act, in reply to which, the assessee filed return of income declaring taxable income at NIL. 2.1 In response to the queries of the Assessing Officer, the assessee furnished the details of software and hardware supplied by the assessee to Indian customers during the assessment year 1997-98, the details of which were as follows :- Financial Year 1996-97 [April 1, 1996 to March 31, 1997] Supply of Software : Name of party and address Particulars Amount In GBP Bharti Cellular Ltd. Qutab Ambience H-5/12, Old Mehrauli Road, New Delhi - 110 030. Supply of Software Planet, automatic frequency planning module and Dat....
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....ia is not taxable for the following reasons. That under the provisions of section 9(1)(i) of the Act, income derived by the assessee from supply of hardware to Indian customers would be taxable in India only where the same has arisen to the assessee from a 'business connection' in India. Further, as per Explanation (a) to section 9(1)( i) of the Act, only so much of the income would be taxable in India as is attributable to operations carried on by the assessee in India. The assessee referred to Circular No. 23 [F. No. 7A/38/58-IT(A-II)], dated July 23, 1969, issued by the Central Board of Direct Taxes regarding the applicability of section 9 of the Act, wherein it has been clarified that income derived by a non-resident exporter selling goods to Indian importers would not be deemed to accrue or arise in India and consequently not be subject to tax in India provided the some conditions are satisfied. The assessee submitted that the assessee does not carry on any business operations in India. The hardware in question is supplied by the assessee to Indian third party customers directly from overseas. Title in the hardware is transferred outside India i.e. before the hardware reaches ....
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....dware was sold by the assessee to customers in India. No hardware sales have been made to customers in India subsequent to this date. Accordingly, the India joint venture company had no role to play in the sale of hardware effected by the assessee. Accordingly, the assessee did not constitute a PE in India and, hence, income derived by the assessee from such activity is not liable to Indian taxes even under the provisions of the India-UK tax treaty. 2.6 The assessee also submitted that its income from supply of software should not be taxed as "Royalty". The assessee had during the relevant financial year supplied software called, "Planet" to Indian telecommunications operators, in form of single-user site licence for internal use. The assessee took a stand that since the supply of software by the assessee to its customers in India is in the nature of sale of software from overseas, for the same reasons outlined earlier while discussing the taxability of sale of hardware, income derived by the assessee from supply of software to Indian customers is not taxable in India either under the domestic law or based on the provisions of the India-UK tax treaty. The assessee also further s....
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....he public, not being copies already in circulation; u To perform the work in the public, or communicate it to the public; u To make any translation/adaptation of the work; u To sell or give the software on hire. 2.9 It was contended by the assessee that a person can be said to have acquired a copyright or the right to use the copyright in a product, where he is authorized to do all or any of the above acts. Accordingly, where a payer does not acquire any of the above rights, including the right to further sell or give the software on hire, but is merely permitted to use the subject-matter of the copyright (software in the instant case), it cannot be said that the payer has acquired the copyright or the right to use the copyright of the software supplied, but has in fact merely acquired the right to use the subject-matter of the copyright (i.e. the product). The assessee pointed out that the software acquired by its customers does not give any right to the customers to reproduce and commercially distribute them. In other words, the customers have no right to exploit the underlying copyright but are merely permitted to use the subject-matter of the copyright. Accordingly,....
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....lly : (k)the furnishing of services, including managerial services other than those taxable under Article 13 (royalties and fees for technical services) within a Contracting State by an enterprise through employees or other personnel, but only if : (i)activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-months period; or (ii)the services are performed within that State for an enterprise [within the meaning of paragraph 1 of article 10 (associated enterprises)] and continue for a period or periods aggregating to more than 30 days within any 12 months period. 5. The Assessing Officer concluded that the assessee had a PE in the form of its employees as per article 5(k) of the treaty and that these employees were carrying on the business for the assessee in India and have stayed in India for more than one year. The Assessing Officer held that the salaries of these employees were paid by the assessee. The Assessing Officer also held that the assessee-company had been deputing expatriates for negotiations and finalizing the contracts and for after sale services and that these visiting expatriates were ....
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....he sole property of the licensor and the licensee has no right in the licenced software other than the right to use it in accordance with the expressed terms and conditions." It further says "All copyright and other intellectual property rights in the licenced software in all times remain vested in the licensor." There is a further restriction that the licensee cannot alter, amend, modify, reverse engineer, interrogate, compile, disassemble or decode the licenced software. Form the above it is clear that the software has not been sold to the customer as per the Sales of Goods Act. The right to use the software has been granted which is covered under article 13 of the Indo-UK Treaty. The assessee has given detailed submissions why the same should not be taxed as royalty and has submitted that since the software is not a customized software and is available off the self and the customer has not been granted right to use the copyright, the payment is not covered under royalty. However the assessee has no reply to the fact that the software is not sold but licenced. The licence is granted for the use of the software. Further it can neither be sub-licenced nor can be altered or so....
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....held as follows :- (a)With regard to the stand that no income accrued or arose in India, the CIT (Appeals) concurred with the view of the Assessing Officer. The CIT (Appeals) noticed that the assessee was required to file copies of contracts and bills of lading and these were not filed by the assessee. He held that the facts were within the special knowledge of the assessee and the onus was, therefore, on the assessee to bring facts and evidence on record. In the circumstances, the CIT (Appeals) was of the view that adverse inference had to be drawn against the assessee. From the fact that the sales have been made in India of software and hardware the CIT (Appeals) held that there was presumption of accrual or arising of income in India. He, therefore, held that income accrued and arose to the assessee in India; (b)With regard to the assessee having a permanent establishment in India the CIT (Appeals) held that the assessee again failed to furnish details and admittedly two employees for the assessee stayed for the whole year in India and thus they constituted its PE under article 5(2)(k) of the DTAA. He also held that the transfer of ownership in goods both with regard to ha....
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....) property in the IPR is not passed, but positively retained by the licenser, (iii) the rights of the acquire of licenses to alienate the licence or underlying IPR are totally curtailed. The mere right to use an article under an agreement does not lead to inference of sale of goods. Thus, the issue requires deeper discussion. Nonetheless, AP High Court has held that the transaction of licence of branded software as one of sale. Respectfully, following this decision, it is held that the instant transaction is one of sale leading business profits and not royalties. Therefore, this ground of appeal is allowed." 10. There was also another issue with regard to the charging of interest under sections 234A and 234B of the Act. On this issue the CIT (Appeals) held that in the case of Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 the Hon'ble Delhi Bench of the Tribunal has held that where any payment is made to a non-resident, the same is subject to deduction of tax at source. Wherever there is an obligation to deduct tax at source in the case of a non-resident there was no liability to pay advance tax. Thus the CIT (Appeals) held that the interest for non-payment ....
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....ascertainment of profits attributable to PE in India, which had supplied hardware in India. In fact in the case of Motorola Inc. (supra ) there were three activities attributable to the PE, namely, (i) network planning; (ii) negotiations in connection with the sale of equipment; and (iii) the signing of the supply and installation contracts. The Tribunal sustained 20 per cent of the net profits in respect of the Indian sales as income attributable to the PE. In the present case, as we have already stated the PE was merely doing the job business of negotiations. From the material available in the present case, we are of the view that the CIT (Appeals) was justified in reducing the profits attributable to PE to 8 per cent. The above percentage would also meet the requirements of rule 10(ii) of the I. T. Rules. We find no merits in the first ground of appeal of the Revenue and consequently, the same is dismissed. 13. The next issue that arises for consideration is as to whether the consideration received by the assessee on licensing of software should be taxed as the business income or as royalty. This issue has again been elaborately dealt with in the case of Motorola Inc. (supra)....
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....sidered as royalty within the meaning of Explanation 2 below section 9(1) or article 13.3 of the DTAA with Sweden." The definition of royalty under Indo-Sweden DTAA and Indo-UK DTAA are the one and the same. 13.3 The assessee has also filed before us a chart indicating as to how the facts of his case are identical to the case of Motorola Inc. (supra). The learned Departmental Representative, however, submitted that the software was a tailor made software to suit the assessee's requirement and was, therefore, not an off the shelf product. 13.4 In the assessee's case a copy of the software 'PLANET' (an "off the shelf" software) is stored on a CD and sold to the buyers. In order to protect its copyright in this software and enable the buyer to use it, the assessee executes a licence agreement (which is customary) with its clients. The typical rights and obligations of the assessee's clients by virtue of the transaction are as follows :- u Article 3 of the contract envisages that the software can be used in perpetuity; u The client is free to exploit the software for the purpose of its business. The same is however subject to certain restrictions e.g. use on specific com....
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.... not to make copies of or duplicate the licensed software by any means for any purpose whatsoever; 5.2 The licensee hereby acknowledges and agrees that all copyright and other intellectual property rights in the licensed software will at all times remain vested in the licensor; 5.5 The Licensee will ensure that all copyright and other proprietary notices contained on such original version also appear on any such copy; 4.2 The licensed software shall not be used for any other purpose including but not limited to providing a data processing service to any third party whether by trade or otherwise; 5.3 The Licensor shall retain the exclusive right to the copyright and to reproduce, publish, patent, sell, license and otherwise make use of all such inventions, discoveries, improvements, enhancements, methodologies, techniques and know-how." 14.1 A comparative chart of the various clauses of the agreements in the case of the assessee and that of the Agreements in the case of Motorola Inc. (supra ) has also been filed before us by the learned counsel for the assessee. We are of the view in the light of the similarity of facts as it exists in the case of the asse....