TaxTMI 
TaxTMI 
2011 (6) TMI 153
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....eputy Director or Income-tax, Circle 2(1), International Taxation, New Delhi ("Assessing Officer"), while initiating proceedings under section 147 of the Income-tax Act, 1961 ('Act') constituted sufficient reasons for arriving at a belief that income of the appellant has escaped assessment during the assessment year under consideration. 2. Erred in holding that the Assessing Officer has rightly rejected the objections filed by the appellant in response to the notice issued under section 148 of the Act. Treating separate supply and service contracts on indivisible one contract 3. Erred in holding that the two separate contracts for supply of equipments and for installation services and training entered into by the appellant and Airport Authority of India ('AAI') represents a single indivisible turnkey contract for services, installation, commissioning and supply. 4. Erred in holding that the Assessing Officer was correct in arbitrarily bifurcating revenue earned by the appellant during the previous year, between income from supply of equipment and royalty in the ratio of 30 per cent and 70 per cent, respectively. 5. Erred in holding ....
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....l) of the India-US DTAA, during the previous year. 12. Erred in holding that the contract for offshore supply of equipment is an integral part of the activities carried out by PE in India and the income from supply of equipment is attributable to the said PE in India. Taxability based on completed contract 13. Erred in holding that the accrual of income in the case of the appellant has to be determined according to completed contract method, and the income from the contract dated 19.3.1993 should be assessed as the contracts were completed during the previous year. 14. Erred in holding such lump sum consideration for supply of equipments has accrued to the appellant after completion of contract and not at the time the title in the equipments along with embedded software passed to AAI on delivery abroad. 15. Was not justified in holding that 100% of the installation revenues relatable to Mumbai and Delhi airport are attributable to installation PE in India, during the previous year, disregarding the fact that both supplies and services under the above contracts were substantially completed prior to April 1, 1998. Estimation....
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....ce u/s 143(2) on 31.08.2006. This notice was followed by other notices and questionnaires. On the basis of facts gathered in the course of the proceedings and the representations made by the assessee, the tax payable was determined at Rs.33,98,99,441/- as under:- "Income from supply of hardware The contract price as stated in para 4.1 describes it at accumulative of USD 82.011 million. In the discussion made above, it has been inter-alia held that a. Income of the assessee arising from the contract is taxable in the assessment year under consideration. b. Royalties and FIS constitute 70% of total value of contract and remaining 30% is towards supply of equipment. Therefore 70% of the total value of contract i.e., USD 82,011,600 is held taxable on gross basis at the rate of 15%. Total value of royalties/FIS = USD 57,408,120 Tax @ 15% thereof as per DTAA = USD 86,11,218 Converted into INR @ 35.16 the same comes to INR 31,12,95,530........A The assessee did not submit the profit margin in respect of equipment supplied to India. By the global accounts submitted by the....
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....eve that the income escaped assessment. It is further mentioned that he erred in holding that the AO was right in rejecting the objections filed by the assessee to the issuance of notice u/s 148. In this connection, the ld. counsel drew our attention towards the reasons recorded by the AO and placed in the paper book on page nos. 230 and 231, which read as under:- "The assessee is a company incorporated in USA. The assessee has entered into a contract with Airport Authority of India (AAI) on 04.02.2003 entitled "Contract for Software Maintenance Support". The stipulates: "WHEREAS Raytheon had supplied to the AAI the MATS-BD System and AAI is in possession of the said systems since March 1998 for Delhi and June 1999 for Mumbai and WHEREAS the AAI has been operating and maintaining the said system independently and WHEREAS the software supplied by Raytheon under the said system need anomaly resolution/modification from time to time. and WHEREAS Raytheon has proposed to resolve the anomalies and modify the software outside India. NOW this Contract sets forth the terms and conditions for Raytheon to resolve the anomaly/modify the software of the MATS-BD Sy....
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....have reasons to believe that income chargeable to tax has escaped assessment for the relevant assessment year within the meaning of Section 147 r.w.s. 148 of the Income-tax Act, 1961." 5.1 It is submitted that the AO referred to Software Maintenance and Support Contract dated 4.2.2003 in respect of MATS- BD system, which was set up by the assessee for the Airport Authority of India ("AAI" for short) in March, 1998, in Delhi and June, 1999, in Bombay. On the basis of this contract, he was of the view that after supplying the system, the assessee was carrying on maintenance operation, more so because the system required anomaly resolution and modifications from time to time. Therefore, although the contract was formally entered into on 4.2.2003, the system has been consistently handled by the assessee. The value of the contract is placed at six million US$ and, thus, the amount relatable to this year will not be less than Rs.1 lakh. It is further mentioned that on the same day, AAI entered into another contract with Gintex India Ltd. for in-country maintenance of the system, which takes note of another contract between the assessee and the AAI for hardware repair support of....
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....f common prudence could have come to the conclusion that the assessee would have earned revenues from the AAI in respect of anomaly resolution, modification and maintenance of the MATS-BD system, as it is the proprietary of the assessee and it is the assessee alone who could render such services. Therefore, it is strongly contended that the reasons recorded by the AO have direct nexus with the escapement of income. 5.3 We have considered the facts of the case and submissions made before us. From the reasons recorded by the AO, it is clear that he was of the view that income arising on account of software maintenance, anomaly resolution and modification of the software pertaining to MATSBD systems escaped assessment. In this connection, he referred to the contract dated 4.2.2003, which also includes a short history of supply of MATS-BD system to the AAI. In particular, it is mentioned that the system for Delhi was supplied in March, 1998, and for Mumbai in June, 1999. It is further mentioned that the software requires anomaly resolution and modification from time to time. It is also mentioned that the assessee made a proposal to resolve the anomaly and to carry out modific....
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.... the assessee. Therefore, the assessment was reopened u/s 147(a), as it then existed. This provision requires as pre-condition for assuming jurisdiction that -(i) the AO has reason to believe that the income had escaped assessment, and (ii) such escapement is by the reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Hon'ble Court held as under:- "We may point out that, in fact, the statements of account of Deo Dutt Sharma with the assessee for the relevant accounting year as also the previous years were with the ITO at the time of original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account, he had made a gift of Rs.12,550/- to the son of Ganga Saran Sharma on 31st July, 1957, and given a loan of Rs.2,25,000/- to Ganga Saran Sharma on 25th August, 1958, and the ITO was fully aware that Ganga Saran Sharma was the managing director of the assessee. It is possible and we may assume it in favour of the revenue, that the subsequent gifts made by Deo Dutt Sharma to the wife and daughters-in-law of Ganga Saran Sharma were no....
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....r gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment procee....
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.... under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year." 5.8 The provision contained in this section is materially different from the provision contained in section 147(a) as it existed prior to the amendment of section 147 by Taxation Laws (Amendment) Act, 1987, coming into force from assessment year 1989-90. This change has been taken note of by the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. 5.9 Coming to the relevant facts, the assessee had not filed the return of income u/s 139(1). Therefore, the provision contained in clause (a) of Explanation 2, referred to by the AO, is applicable provided the income of the previous year exceeds the maximum amount not chargeable to income-tax. The assessee is a company and, therefore, it is liable to pay tax on any income and the provision regarding 'maximum amount which is not chargeable to income-tax" is not applicable. Since the assessee has not filed the return u/s 139(1) and no assessment has been made prior to this assessment, the p....
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.... notice issued u/s 148. There is no question of disclosure of information in such a situation. Further, the validity of issuance of notice u/s 148 does not depend upon disclosure of all material facts as it has been held earlier that the only condition to be seen is whether the AO had the "reason to believe". In the case of Rajesh Jhaveri Stock Brokers (P) Ltd., the court distinguished between the provision contained in section 147 as applicable now and the provision contained in the omitted section 147(a). It has been held that so long as ingredients of section 147 are fulfilled, the AO is free to initiate proceedings u/s 147. In that case, the return filed by the assessee had been processed u/s 143(1) before recording of reasons u/s 147 and, therefore, it was held that since no opinion is formed while processing the return u/s 143(1), there is no question of change in opinion. In this case, no return of income had been filed by the assessee prior to recording of reasons and issuance of notice u/s 148. Therefore, the case of the revenue stands on stronger footing than the case of aforesaid Rajesh Jhaveri. We have already held that recitals to agreement dated 4.2.2003 will lead any....
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....tem Site Acceptance Test ("SAT" for short) as specified in terms of this contract beyond 30 days after its specified completion date, the NAA shall be entitled to recover from the assessee or deduct from the payment due to the assessee as liquidated damages an amount equal to 1% of the contract price for each week of delay beyond the aforesaid 30 days specified for completion of the work, up to a maximum of 7.5% of the contract price. It is also mentioned that the assessee agrees to provide the necessary information to operate, maintain and repair the equipment delivered under the contract. The documents furnished by the assessee to the NAA which are in the possession of the assessee prior to the date of this contract, or which are deployed mainly on the basis of proprietary concept contained in these documents, shall be the property of the assessee. The NAA shall be entitled only to use such documents and copies in connection with operation, repair and maintenance of the ATS. All other documents and copies thereof developed independently by the assessee in connection with the work shall be the property of the assessee. The NAA may however use such documents and copies for any purp....
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....nt a plan for transferring software technology for the radar data processing system ('RDPS' for short) and the flight data processing system ('FDPS' for short). The plan shall include a transfer of technology to the NAA staff and to Indian industry. The contractor shall train six NAA system software engineers at its facilities in the United States for a period of six months. These engineers shall participate in a series of software courses covering computer languages, UNIX, and software development methodology. NAA engineers will work directly with the contractor's personnel on the software development and testing. In addition, the training programme includes a three week course of instruction, which is to be given in India. This course includes a discussion on the system architecture, design and implementation. Topics relating to aspects of software maintenance shall be included. A team of four engineers drawn from Indian industry will also receive similar training. In respect of software source code, it is agreed that as a part of transfer of technology, the assessee shall deliver the computer source code for the RDPS and FDPS software. Usage of software source and any resulting ....
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.....6 Article 9 inter-alia deals with the transfer of property, and it is provided that the property in equipments, sub-systems, systems to be applied to the NAA shall pass to it when the same are dispatched for delivery. Thereafter, the assessee shall be in possession of and will have the custody of equipments, sub-systems and systems for the purpose of transportation to site, its installation and site acceptance test. It shall hold the same on behalf of NAA and shall not deal with the same in any manner except for the purpose of this contract. The assessee shall hold the equipments etc. handed over to him by NAA as trustee on behalf of it without having any lien or charge against the equipment at any stage. It is also provided that notwithstanding the transfer of property in the equipments, the systems etc., the assessee shall not be absolved from responsibility to execute the works in its entirety as if the contract was an entire and indivisible turn-key basis work contract. 6.7 As mentioned earlier, another agreement, termed as "service contract" by the assessee, was entered into between the assessee and the AAI on the same day, i.e. 19.3.1993. Recital to this contract i....
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....see. It has been held that the payments made to the assesseecompany in respect of software and providing services of installation, testing and training are taxable in India both under the Act and the DTAA. These rulings were furnished on 4.3.2003, 26.4.2006 and 20.2.2007. It is clarified by the ld. CIT(A) that the finding of nonexistence of the PE is only in respect of these agreements only. Finally, it has been held that the two agreements constitute one agreement in the nature of a works contract for hading over functioning ATS at Delhi and Bombay to the AAI. The payments received by the assessee are, thus, to be considered for taxation in India on the basis of aforesaid finding. 6.9 Before us, the ld. counsel submitted that the assessee entered into two contracts with the AAI on 19.3.1993. The first contract is for supply of equipments, materials and software for the ATS. All the supplies were to be made from abroad for a consideration of US$82 millions. The consideration was also payable outside India. The second contract is for the purpose of installation of the ATS and training of the personnel. The consideration of this contact was about US$ 2.3 millions. The AO an....
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....rt in the case of Ishikawajima Harima Heavy Industries Ltd. (supra), in which there was a composite turn-key project for setting up a liquefied natural gas receiving, storage and regasification facility in Gujarat to be carried out by a consortium. The responsibility of each member of the consortium was fixed and separate consideration was also fixed for each one of them. Coming to the case at hand, it is submitted that under the two contracts, the assessee was to modernize the existing ATS. The assessee was assigned this work and the parameters were mentioned in the tender floated by the AAI. There was an existing ATS which was to be modernized to meet the present requirements of the AAI. Under Article 4, the assessee was responsible for providing equipments, installation, testing and support to the commissioning of MATS-BD system. For this purpose, it was responsible for establishing, implementing and maintaining a project management plan. Further, it was responsible for providing a monthly project status report to the AAI. It was also responsible to attend a quarterly progress review meeting for presenting a project status report. It was also responsible for conducting technical....
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....nce test completion, installation and site acceptance test. Therefore, it will be difficult to segregate this contract from installation/service contract. It is another matter that two separate contracts were executed for the sake of some convenience of both the parties. However, the essential purpose was to set up the ATS at Delhi and Bombay, for which hardware and software was supplied by the assessee, installation was carried out leading to site acceptance test. The training for the personnel of the AAI as well as Indian industry was also to be carried out for preparing them to handle the ATS. Accordingly, we are of the view that the two contracts constitute one contract. Having come to the aforesaid conclusion, we may point out that the contact is a complex one which requires designing, supply of hardware and software, installation and training. Therefore, the following analysis mentioned in the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) will have to be kept in mind while coming to the conclusion about the taxability of the consideration received by the assessee:- "For the purpose of taxation, the authority had p....
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....nded to the contract which includes supply of equipment, materials and facilities. The said exhibit spells out different systems to be set in place. It imposes an obligation on the contractor to supply equipment required therefor. It was to arrange for the engineering services in relation thereto. It was also required to render various other services within India. Exhibit D, however, provides for the prices to be paid in respect of offshore supplies and offshore services, onshore supply and onshore services, construction and erection. The payment schedule has also been separately specified in respect of each of the components separately. It is not in dispute that title in the equipment supplied was to stand transferred upon delivery thereof outside India on high-seas basis as provided for in article 22.1. Similarly, article 13.1 provides for a lump sum contract price, whereas article 13.3.2 specifically refers to the cost of offshore supplies. The provisions with regard to offshore supplies and offshore services were to be read with the provisions contained in exhibit D which formed the basis of customs duty. Clause 13.4 refers to exhibit D as the basis for price escalation. ....
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....tantial presence in India. The market and support services were provided by the liaison office of the group company. The installation work continued for more than 120 days. The personnel of the assessee stayed in India for more than 90 days. Therefore, it has been held that the assessee had PE in India under article 5(2) of the DTAA. 7.2 The ld. CIT(A) has dealt with this issue on page nos. 35 to 53 of the impugned order. He referred to the findings of the AO and the provision contained in article 5 of the DTAA. Thereafter, he examined the issue in the light of provision contained in paragraph nos. (1), 2(a), 2(k) and 2(l) of the DTAA. It is mentioned that the assessee was engaged in the activities of supply of equipment and software, installation and commissioning thereof for modernizing the ATS in Delhi and Mumbai. According to the AO, these activities have been carried on from the ATS at Delhi and Mumbai, which are fixed places. These places may not belong to the assessee or may not be rented by the assessee but what is required is that the assessee should have a fixed place of business so that its personnel have access to carry out activities of the business. The plac....
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....or this work, the assessee was required to carry out the works of designing, manufacturing, supplying, installing, testing and commissioning of the equipment. It was also to provide training to the personnel of AAI and private companies for handing the ATS. Thus, the first stage of the work was the designing of the confugration of the upgraded ATS as per requirement of the AAI. After deciding this matter, the requirement of equipment had to be ascertained. This required various reviews mentioned in exhibit A of the supply contract, i.e., conducting technical systems reviews and meeting with the NAA for system specification review, PDR and CDR. The assessee was required to attend a quarterly progress review meeting also for the purpose of presenting project status report. For this purpose, the NAA was to provide assistance to the assessee. The case of the ld. DR is that various reviews were to be conducted so as to collect preliminary data about the requirement of the equipment and software. Such reviews could be done at the ATS located in Delhi and Mumbai airports. In this situation, the pre-existing ATS at the airports became the fixed place available to the assessee, which consti....
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....he assessee, but all the work in relation thereto, after initial inspection, was conducted outside India. On the other hand, the case of the ld. DR is that since ATS were available to the assessee, the same constituted the PE under article 5(1) from the day system specification review started. We are of the view that system specification review, PDR and CDR do not require any prolonged stay of the employees of the assessee in India. The system specification review requires data from the AAI regarding the capacity to be installed. The design reviews can be carried out outside India which may require subsequently approval of the AAI. There is no evidence on record that apart from inspection, the ATS were made freely available to the assessee to be occupied by its personnel for system specification review, PDR or CDR. Therefore, in such a situation it cannot be said that the assessee had a PE in India from the date of first meeting held for system specification review, being the ATS at Delhi and Mumbai airports. 7.7 It is also the admitted fact that the goods were shipped from outside India to the AAI. The property in the goods, as per agreed terms, passed to the assessee at....
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.... fees for included services, representing the right to use copyright of computer software and services, without appreciating that the contract was predominantly for supply of equipment in which the software was embedded. It is also mentioned that he erred in upholding the finding that royalty etc., as aforesaid, was taxable under Article 12 of the DTAA and 50% of the balance amount representing profit from supply of equipment was taxable in India. It is also mentioned that he misunderstood the fact that the assessee (and not the AAI) had obtained ruling in the matter from the Authority for Advance Ruling. It is also mentioned that he erred in supporting his decision from three other rulings of AAR based upon subsequent agreements between the assessee and the AAI. It is also mentioned that he erred on relying on the ruling of AAR dated 28.07.2008. 8.1 At this juncture, it is essential to describe the findings of the lower authorities. The ld. CIT(Appeals) referred to the two contracts entered into by the assessee with the AAI on 19.03.1993. The important points regarding these contracts have been mentioned on page nos. 14 to 22 of the impugned order. Thereafter, he summari....
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.... the ruling of the AAR in the case of Mitsubishi Corporation, (2005) 279 ITR 165. 8.2 On consideration of the findings of the AO and the submissions of the assessee, it is mentioned that the rulings of the AAR throw important light on the facts of the case and the legal position except in regard to the existence of PE. The finding of the AAR is that since the personnel of the assessee stayed in India for less than 40 days, the PE will not come into existence. This is a finding under Article 5(2)(k) of the DTAA. The Authority also ruled out the existence of PE in respect of supply of hardware. However, the instant contract is for supply of equipment and software as well as for installation thereof. It also provides for support services. The remuneration for patent rights and royalties etc. covering the material and processes has been included in the contract price. Therefore, it is held that the AO correctly proceeded to determine the taxation of revenues received in respect of supply of hardware and software. He was also justified in bifurcating the revenues in terms of hardware and software. The assessee relied on a number of decisions that revenue for software was not t....
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.... profit therefrom is liable to be taxed in assessment year 1999-00. Such profits are to be taxed under Article 7 of the DTAA in terms of completed project basis. The assessee has not followed any regular system of accounting in respect of Indian operation. In view thereof, the finding of the AO regarding taxation of profit on project completion basis has been upheld. 8.4 Before us, the ld. counsel submitted that in order to decide these grounds it is necessary to refer to the contents of the two contracts. In so far as supply contract is concerned, the terms are similar to the case of Motorolla Inc. vs. Dy. CIT, (2005) 95 ITD 269 (Del) (SB). The title of the contract, namely, modernization of air traffic control system...." Is not conclusive of the fact that it is purely a works contract. A modernization project like this will necessarily involve supply of machinery and equipment forming part of the system, installation, commissioning and testing of the system as a whole. The machinery may include flight monitoring radar etc. When we look to the contract, it is found that the statement of work defines the equipment to be supplied and the services to be performed. It inclu....
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....PE envisaged by the ld. CIT(Appeals). 8.5 Coming to the bifurcation of the consideration towards the supply of equipment and royalty on software, it is submitted that the contract does not contain any stipulation regarding separate prices of the equipment and the software. Therefore, no such allocation can be made. The software was loaded on to the equipment and it formed part and parcel of the equipment. Therefore, the whole of the supply contract was an integrated contract of supply of equipment with software. In such a situation, no price can be allocated to the software. Further, the assessee had not parted with the right in software as AAI is entitled to use the software, copy it, modify it etc. only for the purpose of ATS, i.e., working the equipment. The AAI is not entitled to sell any right in the software to any one else and can also not use it for any purpose other than working the ATS. Therefore, even if the bifurcation could be made, the price received for the use of software, as allocated by the ld. CIT(A), does not amount to royalty. Again, since the assessee did not have any PE till the time of shipping the goods, the profit attributed as royalty is not tax....
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....tivities are also performed. Therefore, the property in goods passes only when all these activities have been completed. These activities were completed in India and not outside India. Further, the supply was made under CIP (As per INCOTERMS) at Delhi and Mumbai airports. According to the contract, the property in equipment etc., passes to the NAA at the time of shipment of the goods. Thereafter, the possession of the goods was given to the assessee again to be held for and on behalf of the NAA. In these circumstances, it is not correct to say that the property in goods passed outside India. The reason is that even after dispatch of goods, risks and responsibilities continued to vest in the assessee. The assessee was under obligation to maintain insurance to protect its interest and the interest of NAA against all risks. The assessee was to bear any loss or damage to the equipment during clearance, transportation, installation, testing etc. till such time the system was taken over by the NAA. The transfer of the title did not relieve the assessee of its responsibilities. Therefore, the assessee continued to bear substantial risks even after shipping the goods. Under the Sale of Goo....
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.... for supply, installation, commissioning of the ATS as per the requirements of tender document. The process involved establishing the PDR so as to ascertain the requirement of hardware and software. This was to be discussed with AAI to come to the final requirement of software and hardware designs, i.e., establishing CDR. Once the CDR was agreed upon, the requirement of hardware and software was frozen. The hardware was manufactured outside India. The assessee was also in possession of requisite software being its own property or obtained under license from others. The software was loaded on to the equipment. The whole system was examined by the AAI outside India for its approval. Thereafter, the equipment loaded with software was shipped to India under CIP (INCOTERM). The AAI cleared the goods in India and handed it over to the assessee for installation and commissioning. Under the contract, the assessee had to bear insurance costs not only at the time of shipment but also after clearance of goods in India till the commissioning and handing over the ATS to the AAI after conducting performance test. The insurance cost formed part of overall contract. However, the assessee was respo....
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.... that if profits are to be ascertained on the basis of milestones in execution of the contract, then the consideration in respect of equipment and software will have to be segregated because they are quite distinct assets in nature and their taxability has to be decided on different considerations. We may add here that in the course of hearing, the assessee was asked as to whether segregation as aforesaid has been made by the assessee for its own internal purpose or for the purpose of payment of customs duty or any other purpose. It was submitted that no such exercise was undertaken. The assessee was also not able to produce any order from customs authorities passed at the time of clearance of the equipment and the software at the customs port in India from which we could have an idea whether that authority had segregated the consideration in terms of equipment and software due to differential rate of duty. 11.1 In the case of Rotem Company (2005) 279 ITR 165 (AAR), relied upon by the ld. DR, the facts are that a consortium, of which Mitsubishi Corporation is the leader, filed a tender for manufacture, supply, testing and commissioning of passenger rolling stock for Delhi....
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....e nature of a turn-key contract although of a smaller amount. The contract trifurcates the consideration towards hardware, software and installation etc. This shows that in a contract of the kind undertaken by the assessee, if there is a composite consideration, the same can be conveniently segregated in different components. Therefore, on the facts of the case and subsequent contracts of the assessee with the AAI, we do not find any difficulty in coming to a conclusion that the consideration for equipment and software could have been segregated. Since as per arguments made before us, if profits from supply contract are held to be taxable separately, as the supply is a milestone in the whole contract, then the treatment meted out to profits on sale of equipment and consideration received for supply of software will have to be different, as the two assets are of different nature involving different profitabilities. This necessitates the segregation of consideration into equipment and software. Accordingly, we are unable to agree with the ld. counsel that the consideration for equipment and software cannot be segregated in a contract where a composite price is placed on these two com....
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.... to supply the equipment and the software and also install them, the profit should be taxed on completion of each milestone or at the time of handing over the functioning system to the contracting party? We have already furnished the summary of the contract in various sub-paragraphs of paragraph no. 6. The details of payment to be made to the assessee in different countries have also been furnished in paragraph no. 6.4. It has also been mentioned that the payments are to be made on 10 different dates between 30.11.1993 and 30.09.1995, upon completion of a particular activity starting from completion of PDR and ending with performance of site acceptance test. The ATS at Delhi was tested in March, 1998 and the ATS at Mumbai was tested in June, 1998. The previous year for this assessment year comprises the period 1.4.1998 to 31.3.1999. Therefore, the work regarding Mumbai ATS only was partly carried out in this year. The work regarding Delhi ATS had been completed in the immediately preceding year. The assessee has not maintained separate India specific accounts. In other words, only worldwide accounts have been maintained in which the results of India operations have been merged. The....
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....re were a number of other parties in the consortium who performed different parts of the contract, while in the case at hand the responsibility vests solely in the assessee to carry out all parts of the transaction. According to us, this distinction does not make any difference to the taxability of amounts received as consideration for different identifiable activities for which consideration is payable separately. Since the activities are distinct and consideration for supply of equipment and the software has been separately mentioned, the ratio of the aforesaid decision will be applicable to the facts of this case. In that case, there were two parts in the same contract regarding supply and services, whereas there are two separate contracts in this case regarding supply and services. However, we have already concluded that the two contracts are inextricably linked so as to form a single contract. Nonetheless, in this single contract separate considerations have been fixed for supply and services at two different places. Such was also the situation in the case of Ishikawajima Harima Heavy Industries Ltd. Accordingly, it is held that the profits will become taxable on completion of....
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....rvices which make available to AAI the technical knowledge, experience and skills possessed by Raytheon in the field and the provision of software system is only part of that exercise. The delivery of software and the specification of the cost of software cannot be viewed in isolation. Software is a part of the package of setting up upgraded automation system and as stated earlier, it has no value unless the supplier shares the technical knowledge, informations and experience with the user and suitably equip the personnel of AAI to handle the system by themselves. It needs training and imparting of valuable informations and instructions. Viewed in this background, we are of the view that the payment made towards software can be legitimately brought within the fold of Art. 12(4)(b) of the Tax Treaty, if not Art. 12(3). As regards installation services, there is no dispute about its taxability." 13.1 However, in ruling AAR 821/2009 dated 29.01.2010 in the case of Dassault Systems K.K., the ld. AAR mentioned that the reproduction and adaptation envisaged under the agreement can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. The....
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....nal Sales Corporation vs. ACIT, (2011) 8 ITR (Trib.) 522. In this case, it has been held that a computer programme is a literary work under Copyright Act, 1957, and if any or all rights (including granting of a license) are transferred for a consideration, the amount received will be in the nature of royalties. It is also mentioned that a programme is in the nature of a process which executes instruction in the given order. Therefore, any consideration received would amount to royalty under the Act and the DTAA. The case of the ld. DR is that the aforesaid decision supports the case of the revenue. The decision deals with the license granted in respect of shrimp wrapped software, which is sold across the counter. The software in this case is highly specialized one and, therefore, the facts of this case stand in a stronger footing. On the other hand, the ld. counsel for the assessee distinguished the case by stating that the ratio of the decision is not applicable to the facts of this case because the software is peculiar to the equipment supplied by the assessee and, thus, it cannot be sold off the shelf. 13.4 With the aforesaid discussion, we now proceed to decide variou....