TaxTMI 
TaxTMI 
TaxTMI 
2010 (8) TMI 759
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....ircumstances 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, which is an EPABX, and standard Software loaded/embedded....
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....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 provisions of section 9(1)(vii) of the Act and on the basis ....
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....ate 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 charged for the same. But as and when the customer requires activatin....
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....nced 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 when original sale was made are reproduced below from page 31 of assessee's paper....
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....; 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 is that the payment is nothing but part and parcel of the sale price of the original product sold. Whether the impugned payment is on account of 'fees for technical services' or not, for that purpose, we have to examine the relevant provision of IT Act as well as relevant Article of DTAA Agreement between India and Ireland. The definition of 'royalty and fees for technical services' given in section 9(1)(vii) along with Explanation, read as under :- "Income by way of fees for technical services payable by: (a)The Government; or (b)A person who is a resident, except where the fees are payable in respect of services utilized in a business ....
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....echnical 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, 'fee for technical services' could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with 'technical' is 'involving or concerning applied and industrial science'." 16. Explanation 2 to section 9(1)(vii) introduced by the Finance (No. 2) Act with effect from 1-4-1977; products of technology had not been in such a wider use as they are today. Any construction of the provisions of the Act must be in the background of realities in day-to-day life in which the product of technology play important role in making life simpler and more convenient. In the modern day world, every facet of one's li....