TaxTMI 
TaxTMI 
2010 (8) TMI 759
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....product/software. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the payment made to AISL can neither be said to be as 'Royalty' nor is covered under the provisions of 'Fees for Technical Services'. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the assessee is not liable to deduct tax at source on the payment made to AISL as the income of AISL is not liable to tax in India for the above payment. 4. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer restored." 3. Briefly the facts of the case are that the Assessee, formerly known as 'Tata Telecom Ltd.', is engaged in the business of selling Converged Communication Solution to its Customers. The assessee had entered into agreement dated 20-11-2001 with Avaya International Sales Ltd., Ireland (AISL). Under the agreement, the assessee purchases 'converged communication solution' from AISL and sells the same to the various customers in the Territory of India. The assessee explained that the converged communication solution comprises of Hardware, w....
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....and. 5. The CIT(A) examined the definition of the term 'fees for technical services' in the light of Explanation 2 to section 9(1)(vii) and Article 12 of the DTAA of India and Ireland Treaty. The CIT(A) was of the view that the provision for activation of software embedded in the hardware was part and parcel of the equipments supplied by AISL to the assessee. Since the assessee gives option to its customer to activate certain features as per their requirement, only some basic features are activated at the time of sales and the other features are activated later on as per the request of the customers. However, the software sold cannot be also be termed as customized also as no additional facility is provided and only the standard software/feature as purchased from AISL is sold to the customers. The finding of CIT(A) is reproduced below :- "1.3.11 Thus it is held that the activation charges paid to AISL should not be considered in isolation and should be considered as part and parcel of the equipment supplied by them to AGCL. Accordingly, in my view, such payment can be a payment for buying a standard product/software and not 'fees for technical services'. Thus, considering the....
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....s enhance the value and functionality of hardware and cannot operate without hardware. The additional features embedded in the hardware are inextricably linked to the hardware. The learned AR reiterated following submissions and the example, which was given before the CIT(A), reads as under :- "For example, the hardware may be for Rs. 5,000 while other features may be activated for Rs. 1,000 each. The customer raises a single purchase order for the hardware and the desired features. Later on separate requests are made for the purpose of activation of the desired features. AGCL raises separate invoices at the time of supply of hardware and subsequent activation of desired features. In order to activate the features, an order is placed by AGCL to the overseas supplier, AISL for provision of activation code. This activation code is then keyed by AGCL into the hardware of the customer for activating the features. The code can be keyed into the hardware of the Customer via internet (the customer has to give access to AGCL into the hardware), by visiting the customer premises or via telephone line. Since the Customer cannot use these features unless the same is activated, he is not ch....
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....s instruments/ equipment (hardware) from AISL which contains the basic and enhanced features and sells the same to various customers in India. The equipment purchased from AISL comprises of basic features and additional features (enhanced features). The basic features would mean the call landing at the main system, forwarding the same call to an extension, Direct Call to the extension from outside, Voice Mail, Interactive Voice Recording (IVR) etc. The basic features are those features which are inbuilt in the system instrument, imported from AISL. There are certain enhanced features of ECRM, Call Centre Work Force Management, Call Satus Display, Video Conferencing etc. which add value to the features of the solution offered to the customer. The enhanced features inbuilt in the instrument (hardware) can be activated as per the requirements of the end customer. The assessee offers end to end converge communication solution and conduct centre/CRM solution to enterprise customers. To appreciate the issue it will be useful to refer some abstracts of the invoice issued by the assessee in respect of original sale and at the time of sale of additional features. The contents of the bill wh....
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.... A/R VAT Payable 4.00 % 4118.12 Additional VAT 1.00 % 1028.70 Net Value of Item 108128.80 Total basic price 90000.00 Total A/R Basic Excise 12,300.00 Total A/R Education 282.00 Cess Total A/R Higher 128.00 Education Total VAT 4118.12 Total additional VAT 1028.70 Total cess on VAT 100.00 Item Total 108128.80 Total invoice amount 108128.80 Advance paid 13. The case of the revenue is that activation charges to be remitted to AISL are on account of 'fees for technical services'. The contention of the assessee....
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....es' means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personal but does not include payments for services mentioned in Articles 14 and 15 of this Convention." 15. From the relevant provisions and articles regarding terms 'fees for technical services, we find that treaty provisions of Article 12(3)(b) correspond closely to the provisions of section 9(1)(vii) of the Income-tax Act. The meaning of technical services as given in Oxford Dictionary is adjective, as under :- "1. of relating to a particular subject, art or craft or its techniques: technical terms (especially of a book or article) requiring special knowledge to be understood: a technical report. 2. of involving, or concerned with applied and industrial sciences: an important technical achievement. 3. resulting from mechanical failure: a technical fault. 4. according to a strict application or interpretation of the law or the rules: the arrest was a technical violation of the treaty. Having regard to the fact that the term is required to be understood in the context in which it is used, ....
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....e the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the revenue." Finally the Court held that 'technical service' referred in section 9(1)(vii) contem- plates rendering of a 'service' to the payer of the fee. Mere collection of a 'fee' for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. Similarly, the Hon'ble Delhi High Court in the case of Bharti Cellular Ltd. (supra) while examining the term 'fee for technical services' held that services rendered qua inter-connection/port access did not involve any human interface and, therefore, the services could not be regarded as 'technical services'. The expression 'technical service' was not to be construed in the abstract and general sense but in the narrower sense as circumscribed by the expressions 'managerial service' and 'consultancy service' as appearing in Explanation 2 to section 9(1)(vii) of the Act. The expression 'technical service' wo....