TaxTMI 
TaxTMI 
TaxTMI 
2011 (12) TMI 91
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....; 2. RPG Cellular Services Limited : 27-06-1995 3. Bharti Cellular Limited : 15-12-1994 4. Birla AT & T Communication Ltd. : 05-04-1996 5. Cellular Communication India Ltd. (RPG Cellecom Ltd.) : 29-05-1996 6. J.T. Mobile Limited : 02-07-1996 7. Bharti Televentures Limited : 23-08-1996 8. Hexacom India Limited : 25-09-1996 9. Huchinstom Max Telecom Ltd. : 29-10-1996 10. Reliance Telecom Private Ltd. : 13-02-1997" 2. Pursuant to the aforesaid contracts, the assessee has supplied various hardware and software to the above mentioned cellular operators during the relevant assessment year. In regard to tax liability in India, the assessee claimed that it is not liable to tax under the provisions of the Income-Tax Act, 1961 and the Double Taxation Avoidance Agreement between Sweden and India (the "DTAA"). It is necessary to highlight that the assessee, as stated above, is a wholly owned subsidiary of the L.M. Group of Companies with whom the cellular operators had entered into supply agreements.....
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....was a continuous process. In accordance with the contract, the equipment was not to be accepted till it was finally tested through a test known as Acceptance Test (A.T.). Such Acceptance Test was to be carried out by EFC in the first three months and by the ECL in the last nine months of the relevant year. The contracts were signed in India and till delivery to the port in India was the responsibility of the supplier. The supply was on CIP basis and after supply, the defective parts were to be replaced by the assessee. 7. On the aforesaid facts, the Assessing Officer after considering the provisions of the Income-Tax Act, 1961, and in particular Section 9 thereof, held that the assessee had a business connection in India and income of the assessee must be deemed to accrue or arise in India and as such was taxable in India. 8. The Assessing Officer also considered the question whether the assessee's income was taxable in India in view of Article 7 read with Article 5 of the Double Taxation Avoidance Agreement between India and Sweden and concluded as follows:- "1. The assessee has a permanent establishment in the form of a dependent agent establishment which is ....
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....44C of the I.T. Act and therefore the net taxable income of the assessee is computed as follow: - 1. Total Sales of hardware = US $ 3,80,74,540/- converting into INR @ 36.15 = 38074540 * 36.15 = 137,63,94,621/- Taxable profit @ 26% = 35,78,62,601/- Less: H.O. expenses allowed u/s 44C @ 5% = 1,78,93,130/- Taxable Income = 33,99,69,471/- Tax @ 55% = 18,69,83,209/- ................ I Total consideration for software - US $ 1,10,72,708/- Converted into INR @ 36.15 - 40,02,78,394/- Tax @ 30% = Rs/12.00.83.513/- ............... II Total tax = (I) + (II) = 30,70,66,727/- Assessed. Issue necessary forms. Charge interest Penalty proceedings u/s 271 (1) (c) is initiated separately." 11. In an appeal filed against the aforesaid order of the DCIT, Non-Resident Circle, New Delhi on 28.03.2000, the Commissioner of Income-Tax (Appeals) examined the matter. The appellant had taken five grounds of appeal, apart from taking up two additional grounds subsequently as follows:- (i) Ground No.1 was that the learned A.O. had erred in holding that the income chargeable to tax in India accrued or arose to the assessee. This ground was held to b....
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....relief was granted to the assessee. These appeals and cross-appeals alongwith cases of other assessees namely Nokia and Motorola were referred to the Special Bench. The Special Bench has decided the issues in favour of the assessee resulting in dismissal of the appeals of the Revenue and allowing the appeal of the assessee. Challenging that order of the Special Bench, the Revenue has filed appeal which is registered as ITA 507/2007. ITA 508/2007 arises from the order passed by the Tribunal disposing of the cross-objections of the assessee and ITA 511/2007 arises from the order of the Tribunal disposing of the appeal of the Revenue. Thus ITA 507/2007, ITA 508/2007 and ITA 511/2007 relate to one assessment year i.e. 1997-98. In the next assessment year, the ITAT followed the aforesaid order and challenging that order ITA 504/2007 is filed by the Revenue. These first three appeals were admitted on the following questions of law:- ITA 507/2007 "1. Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessment was invalid inasmuch as it was framed pursuant to a notice issued under Section 142 91)(i) of the Income-Tax Act, 1961, which notice was issued be....
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....of which it is held by the Tribunal that levy of interest was not justified, inasmuch as the assessee had no obligation to pay any advance tax as tax was deductable at source on its income that was chargeable to tax in India. This very issue has been discussed in detail by this Court in CIT v. Mitsubishi Corporation in ITA 491/2008. Relying upon the judgment of Bombay High Court in DIT v. N.G.C. Network Asia LLC, 313 ITR 187, this Court reached the conclusion that no interest can be levied. 15. The circumstances of the present case are virtually similar. In fact, we may record that there was hardly any resistance by the Revenue to the aforesaid position. We thus answer this question in favour of the assessee and against the Revenue. 16. It is now the stage to deal with the basic issues raised in these appeals which are:- (1) Whether the assessee has business connection in India? (2) Whether the assessee has permanent establishment in India? (We may clarify that if the assessee has business connection in India, then this question may not even need to be considered). (3) Whether hardware and software components of the equipment can be segregated fo....
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....lar operator for the supply of the goods and the other between the installation contractor and the cellular operator and the Tribunal for the reasons given in para 118 of its order found, on a construction of the relevant provisions of the two agreements, that the contracts could not be treated as turnkey or a works contract. The Tribunal also did not accept the argument that by virtue of the overall agreement the income that arose to the assessee was chargeable to tax in India. As regards the overall agreement, the Tribunal held that the overall agreement was executed as a matter of commercial prudence as the cellular operator needs to be instilled with confidence that the project would ultimately take off and, therefore, he would insist on a single point responsibility. The Tribunal also noted that this was a common practice and Instruction No. 1829 issued by the Central Board of Direct Taxes which was in force on the first day of the assessment year also takes cognizance of the commercial necessity for having such overall responsibility. The Tribunal further found that no payment accrued either to the assessee or the installation contractor under the overall agreement, but the o....
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....rrangement is for the setting up of a GSM system and the same could not have been set up without the overall supervision, direction and decision making power exercised by the assessee. It was the submission of Mr. Prasaran that a plain reading of the terms and conditions of the three contracts, all entered into on the same day and at the same place in India, viz., Bangalore, indicates that they are all interlinked, inter-twined and inseparable. He pointed out that the assessee and its associated sister concerns had entered into contracts with the Indian buyers for the setting up of a GSM system in India. For the aforesaid purpose, the hardware and software was to be supplied/licensed by the assessee, the installation through a sister concern of the assessee was to be overseen by the assessee and the overall responsibility of the three contracts also was upon the assessee. He drew our attention to the salient features of the three Agreements which according to him conclusively show that they are, in effect, one integrated business arrangement. He specifically referred to the following features of these Agreements: Supply Agreement ♦ Preamble: Agreement ....
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....g Officer as well as CIT (A) were entirely justified in coming to the conclusion that the contracts formed an Integrated Business Arrangement on the part of the assessee to provide the Indian buyers with a GSM system. The assessing officer made the following pertinent findings with respect to the integrated nature of the contract:- ♦ Overall responsibility was on the assessee for supply, erection and after sales services as evidenced by the Responsibility Matrix between the assessee company and JT MOBILES (as well as the other customers): Responsibility Matrix between Ericsson and JT MOBILES s per their contract JT Mobiles Ericsson Shipment CIP to agreed port in India X Management of Store X * Site packing in the store X * Delivery of documentation according to Annex 11. X Delivered on CD-ROM only as built documentation, MSC/BSC & BTSs X Delivered as hard copies only correction of remarks on as built documentation X Digitalization of maps....
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....ax Appellate Tribunal regarding the interpretation of the Supply Agreement, Installation Agreement and the Overall Agreement entered into between the assessee, its associate companies and Indian customers. His submission in this behalf was that the scope of the agreement has been decided and interpreted by the ITAT on the basis of the Preambles to the Supply Contract and the Installation Contract, without giving adequate weight to the preamble of the Overall Agreement, which indubitably shows that there was only one integrated agreement whereunder: "The Supply Contractor and the Installation Contractor have agreed to work on a coordinated basis under two separate contracts, being one between JT MOBILES and the Supply Contractor for Hardware and Software Supply and the other between JT MOBILES and the Installation Contractor for the Installation of the system" so as to supply the system and install and commission the system. 23. According to him, another error in the order of the Tribunal was that while interpreting the scope of the contracts, even the other provisions of the Overall Agreement were not given adequate weight especially Article 6 of the Overall Agreement, which rea....
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....achinery and software but had contracted to provide the full system which required supervision over the Installation Contractor and other services necessary to set up and maintain the GSM System. Accordingly, the ratio of the judgment of the Supreme Court in Hindustan Shipyard Ltd. (supra) is clearly inapplicable. The consequential finding that no income accrued to the assessee either from the Overall Agreement or from the Installation Agreement or from the Marketing and Business Promotion Agreement and thus it cannot be said that there was "intimate connection between the parties" is also erroneous. 27. His next proposition, on this aspect, was that under the above contracts income had accrued and arisen to the assessee in India and therefore it was taxable in India. In this behalf Mr. Prasaran made following submissions: - (a) Under Section 5 (2) (b) the income of a non-resident is includible in that income subject to tax under section 4 if the said income accrues or arises or is deemed to accrue or arise in India. (b) Income is said to accrue or arise in India to an assessee if the assessee had a right to receive the money that can be traced to India. (c) Whether or ....
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....ccrue or had arisen in India which was taxable in this Country. He submitted that the assessee was a non-resident and, therefore, could be subjected to tax only of that income which was covered by Section 5 (2) of the Act. Mr. Dastur argued that the income from the supply of equipment accrues outside India where the equipment is manufactured outside India and the property therein passes outside India and the place of execution of the contract is not relevant. 29. In this regard reliance was placed by him on the judgment of the Supreme Court in Ishikawajma Harima heavy Industries Ltd. v. DIT, 288 ITR 408 where the Court has held that the fact that the contract was signed in India is of no material consequence since all activities in connection with the off shore supply were carried on outside India. This judgment has been followed by the Authority of Advance Rulings in Hyosung Corporation, 314 ITR 343, where the fact situation was even less favourabe than the assessee's case. 30. He also submitted that the decision in Ishikawajima's case completely covers the issue as to whether any part of the profit arising from the supply of the equipment by the assessee is chargeable to ta....
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....e only such part of the income as is reasonably attributable to operations carried out in India. It is submitted that the assessee has no business connection in India and in any event has not earned any income in India through or from any business connection. The cellular operators, who are independent contracting parties, can never be regarded as the assessee's business connection. The law is well settled that there must be something more than a mere transaction of sale and purchase between principal and principal to spell out a business connection such as management control or financial control or by way of sharing of profits for a business connection to come into existence. In support, he referred to the decision in the case of CIT v. Hindustan Shipyard Ltd. 109 ITR 158, CIT v. Gulf Oil Great Britain Ltd. 108 ITR 874 and Circular No.23 dated 23rd July, 1979. 33. His further submission was that the installation contractor also cannot be regarded as a business connection through which the assessee has earned any income in India, as the income of the assessee arises as a consequence of the supply contracts entered into with the cellular operator. There is no contract between the....
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....red. As per the judgment of Supreme Court in Ishikawajima's (supra), such agreement would not be taxable in India. In Ishikawajima's, the Supreme Court held that no part of profit arising from the supply of equipment outside India would be chargeable to tax in India. Mr. Dastur is right in his analysis of the present case on the basis of the ratio of Ishikawajima's inasmuch as :- (i) In both the cases the property in the equipment passed outside India and in the assessee's case even the risk passed outside India; (ii) In the case of Ishikawajima's even though it was to perform onshore services including the erection and commissioning of the equipment supplied by it, nevertheless, the Supreme Court held that no part of the profit on the offshore supply of the equipment was taxable in India as a consequence of the performance of such activities in India. In the assessee's case the assessee does not perform any service in India in connection with the installation of the equipment or otherwise; (iii) the performance of the acceptance test in India was not considered a relevant circumstance whilst determining whether any part of the profit on the offshore supply was charg....
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....Additional Solicitor General was conscious of the aforesaid legal position and, therefore, the limitation of Revenue's case if the same was to be determined on the examination of the Supply Contract per se and de hors the Installation Agreement and Overall Agreement. It is for this reason that his line of argument proceeded on the basis that the three agreements are to be taken to form an 'Integrated business arrangement' between the parties which was governed by the Overall Agreement. As noticed above, this submission proceeded on the basis that the assessee had entered into contracts with cellular operators in India for setting up of GSM system in India, the hardware and software for which was supplied by the assessee, and the installation thereof was also over-seen by the assessee who was to ensure that it was carried out to the satisfaction of Indian buyer in accordance with the terms of the contract. Various clauses of Overall Agreement as well as Installation Agreement have been relied upon as already noticed above. Article 15 of the Installation Agreement deals with acceptance test made by the Installation contractor which "includes the integrity of whole system and certific....
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....journey was that of the assessee and it paid for the same : even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are "goods" within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India." 42. We may also usefully referred to the judgment of the High Court in Mahavir Commercial Company v. CIT, 86 ITR 147 wherein following principle was enunciated: "Even though the property in the goods may pass to the buyer when the documents are handed over, the buyer may yet retain the right to examine and repudiate the goods but this right generally which a buyer has in c.i.f. contract does....
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....ound to be so in the present case) supply has to be segregated from the installation and the only then would question of apportionment arise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India. 45. The judgment of the Supreme Court in Performing Rights Society Ltd. v. CIT 106 ITR 11 has no relevance for determining where the profits on the supply of equipment accrues when title to the goods passes outside India. In the case before the Supreme Court the activity which gave rise to the income, namely, the activity of broadcasting took place in India, and it was in these circumstances the Court held that the royalty earned by the assessee therein accrued in India even though the agreement pursuant to which such royalty was earned was executed in England. Merely because the activities, namely, the supply activity and the installation activity are to be carried out by two separate Companies who are part of the same Group cannot result in the transaction being treated as one composite transaction. This is more so when both the entities perform their own independent obligations, receive approp....
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....nd in the instant case in favour of the non-resident company; (ii) the sales are made on a principal-to-principal basis and at arm's length - an aspect on which Mr. Joshi wanted us to consider the matter in the light of the facts and circumstances of the case; and (iii) the subsidiary does not act as an agent of the parent - again an aspect which will have to be considered in view of the facts and circumstances obtained in the instant case. There is no doubt that the Indian subsidiary is a hundred per cent. subsidiary of the non-resident, but the Tribunal has found as a fact that all the contracts regarding the have been made in U.K. principally on the basis that the indents which were placed by the India subsidiary with the non-resident company were accepted by the non-resident company in U.K." Permanent Establishment (PE): 49. We, therefore, hold that the assessee did not have any business connection in India. In view of this, it is not necessary to go into the issue whether the assessee had any Permanent Establishment in India or not during the relevant period in India or not. Whether the Income from the supply contract can be treated as 'Royalty....
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....e customs duty purposes (vi) The software provided under the contract is goods and therefore no royalty can be said to be paid for it. 53. Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Supply Contract uses the term 'licence' and the same term is used in the context of software throughout the three Agreements, indicating that it is not an outright sale of goods, or a full transfer of rights from the assessee to the Indian company. He also submitted that the software is a computer programme, which is treated differently from a book, not only in the Copyright Act, 1957 but also the Income Tax Act itself. His submission was that Section 52(1) (aa) of the Copyright Act only deems that certain acts will not to amount to infringement in the light of various concerns, where otherwise such acts would amount to infringement under Section 51 of the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place, since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifical....
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....the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed woul....
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....ssee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. 57. It is also to be borne in mind that the supply contract cannot be separated into two viz. hardware and software. We would like to refer the judgment of Supreme Court in CIT v. Sundwiger EMFG Co., 266 ITR 110 wherein it was held: "A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the am....
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....submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. 61. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. Effect of Amendment to section 9 of the Finance Act, 2010 62. We have to determine as to whether amendment made to Section 9 of the Finance Act, 2010 whereby Explanation to sub-Section (2) has b....
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....pra) had not interpreted the provision as containing the "source rule" in order to rectify this situation created by the aforesaid judgment, the Parliament introduced the aforesaid Explanation to clarify that irrespective of where the services were actually rendered, so long as they were utilized in India, income obtained from such services by a non-resident would be treated as income accruing or arising in India. 65. To buttress this submission, the learned counsel for the Revenue relied upon the Memorandum explaining the following provisions in the Finance Bill, 2010:- "Vide Finance Act, 1976, a source rule was provided in Section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty or fees for technical services respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provid....
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....v) or clause (vi) or clause (vii) of sub section (1) of Section 9 and shall be included his total income, whether or not, (a) the non-resident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India. This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years." 66. It was argued that a plain construction of the Explanation shows that income received by a non-resident from interest, royalty, or fees for technical services will be deemed to accrue or arise in India in accordance with Section 9 (1) (i) irrespective of the place of business, residence or presence of business connection in India. Moreover, in the specific context of royalty and fee for technical service, the second half of the Explanation makes it clear that services for which royalty or fee is being paid need not be rendered within the territory of India in order to be deemed as income accruing or arising in India. As per the learned counsel for the Revenue the scope of the said provisions is made clear when one examines the relevant....
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....esent case the finding of the Tribunal is that both the transfer of the property in goods as well as risk has passed outside India and, therefore, having regard to the provisions of the Act, the consideration receivable for the supply of such equipment is not chargeable to tax in India. According to the assessee, the judgment of the Supreme Court in the case of Ishikawajima insofar as it deals with the taxability of the offshore supplies is in no manner affected by the amendment made to section 9 by the Finance Act, 2010 as it only impacts the issue as to when income by way of fee for technical services can be deemed to accrue or arise in India. As it is nobody's case that the respondent has rendered technical services which are deemed to accrue or arise in India when it supplies the equipment or the software, the insertion of the Explanation below section 9 and the addition of clause (ii) in the said Explanation by the Finance Act, 2010 has no relevance insofar as the appeals before this Court are concerned. 68. In our opinion on the facts of this case, it may not even be necessary to go into this issue for the reason that in respect of clauses (v),(vi), and (vii) of sub Sectio....