TaxTMI 
TaxTMI 
2013 (4) TMI 513
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....containing the CD, dongle and the user manual are imported by the assessee from various concerns outside India from whom it has taken distributorship to sell them in India. On their import into India, the assessee pays custom duty. The assessee also sells the hardware i.e. the interface card and data cables and other connected accessories required for the printing industry. The hardware is imported along with the CD boxes and customs duty is paid thereon. The assessee has taken distributorships from non-resident entities situated in various countries such as USA, Taiwan, Malaysia, Hongkong and is basically a reseller of hardware and software. 2.2 In the period relevant to Assessment Year 2007-08, as per details on pages 13 to 15 of paper book filed, the assessee imported software (viz. boxes containing CD, dongle and user manual) amounting to Rs.96,40,196; hardware amounting to Rs.58,91,407 and payment of Rs. 46,514 for certain services availed to a non-resident totally amounting to Rs.1,55,78,117 (viz. Rs.96,40,196 + 58,91,407 + 46,514) This sum of Rs.1,55,78,117 was shown as 'Import of Software' under Schedule 12 of financial statements for the year under consideration and the....
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....definition given in the Income Tax Act, 1961 and that even if software is considered as 'goods', the definition of 'royalty' does not exclude goods from its ambit. Accordingly, the Assessing Officer held that the impugned payments constituted 'royalty' and hence liable for deduction under section 195 of the Act since the payment to non-residents were made without deduction of tax at source, the Assessing Officer disallowed the entire sum of Rs. 1,55,78,117 under section 40(a)(i) of the Act. 2.4 Aggrieved with order of the Assessing Officer, the assessee went in appeal before the CIT(A) who vide his order dt.18.2.2011 concurred with the views of the Assessing Officer and dismissed the assessee's appeal. The assessee is now in appeal before this Tribunal against the order of the CIT(A). 3.1 At the outset the learned counsel for the assessee submitted that payments made for import of hardware amounting to Rs.58,91,407 and payment for services amounting to Rs.46,514 had also been treated as 'royalty' by the Assessing Officer. It was submitted that the said payments cannot be regarded as royalty under section 9(1)(vi) as the definition of the term 'royalty' therein does not cover ....
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.... term, as per Explanation 2 to section 9(1)(vi), the said payments would be outside the scope of section 9(1)(vi) of the Act by virtue of the second proviso to section 9(1)(vi). To support the fact/claim that the import of software was along with hardware, the learned Authorised Representative drew our attention to a sample of invoices at pages 22, 24 and 26 of the paper book. He submitted that to fall within the second proviso to section 9(1)(vi), what is required to be shown is that the software is imported along with hardware. The learned Authorised Representative contended that the accompanying of the software along with hardware is sufficient and it is not a further requirement that the software has to be embedded in or form an intrinsic part of the hardware. 3.3 In respect of the issue as to whether payment towards import of software would constitute royalty, the arguments of the learned Authorised Representative were as follows : a) The learned Authorised Representative drew our attention to the definition of 'royalty' under Explanation 2 to section 9(1)(vi) which is as under : " Explanation 2 : For the purposes of this clause, "royalty" means consideration (includi....
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.... terms and conditions of the 'End User Licence Agreement.' It was submitted that there was a transfer of right or grant of licence directly by the non-resident in favour of the end user and there is no transfer of any right or grant of any licence in favour of the assessee. Therefore, it was submitted that payments towards import of software cannot be regarded as 'royalty' under section 9(1)(vi) of the Act. d) The learned Authorised Representative submitted that assuming without admitting that the impugned payments constituted 'royalty' under the Act, the said payments would not be regarded as 'royalty' under the Treaties, since only 'use' of copy rights gives rise to 'royalty' under the Treaties. Since the assessee in the instant case was a reseller of the software and there being no transfer of any right in copy right or grant of licence in its favour, the question of 'use' of copy right by the assessee did not arise. The learned Authorised Representative drew our attention to the OECD commentary on this aspect, the relevant quote of which is as under : " Arrangements between a software copyright holder and a distribution intermediary frequently will grant to the distributi....
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....oftware and in consideration thereof received commission of 2% (page 137 of the decision). b) Revenue's arguments before the Hon'ble Karnataka High Court were in respect of licence to use the software by an Indian entity by copying the software on the hard disc of the computer (page 124 of the decision). Apart from this, Revenue also argued on the non-applicability of the decision of the Hon'ble Apex Court in the case of Tata Consultancy Services (page 126 of the decision) and the applicability of section 9(1)(vi) even in the absence of a Permanent Establishment (page 138 of the decision). In other words, the learned Authorised Representative argued that Revenue did not substantiate as to how payments made by a re-seller or distributor of software and in the instant case of the assessee, for import of software, would constitute 'royalties.' c) The findings of the Hon'ble Karnataka High Court from pages 139 to 160 of the decision contain the discussions on the observations of the Apex Court while remanding the case back to the High Court and the decision in the case of Sun Engineering Works P. Ltd. (198 ITR 297). Pages 168 to 170 of the decision contain the discussion on the c....
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....onfer any right upon the end user and the purpose of the CD is only to enable the end user to take a copy of the software and to store it in the hard disc of the designated computer if licnece is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright." 3.5 The learned Authorised Representative emphasizing the conclusion of the Hon'ble High Court at pages 184 (supra) of the decision submitted that in the present case, the assessee was selling dumb CDs to end users since the boxes containing the CD, dongle and the user manual are never opened but sold to end users as it is. It is submitted that it is the end user who enter into end user licence agreements with the non-resident in the process of copying the software to the hard disc of the computers. The learned Authorised Representative thus argued that the conclusions of the Hon'ble High Court at page 184 of the decision (supra) support the case of the assessee and as a result, it is contended that the payment made to non-resident by the assessee cannot be regarded as 'royal....
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.... the suits or that the determination of the suits rests mainly on a common question, it is open to the court to try them as analogous cases. When consolidated for the purpose of trial, the primary consideration is convenience and for avoiding conflicting decisions involving identical questions. He further submitted that before the Hon'ble High Court the issue involved for determination was common but the factual background was different. In such cases, it is important to decide the matters one by one or atleast group by group. As discussed earlier, the various appeals involved concerned three classes/ segments. They were distinct. Their respective modus operandi was not uniform. Consolidation of these diverse classes for a decision was inappropriate. A single conclusion may not hold good for all the cases in consideration. In view of the above submission, the learned Authorised Representative argued that the decision in Samsung Electronics case (supra) was not applicable to the instant case of the assessee. 3.6 The learned Authorised Representative contended that the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Synopsys International Old Ltd. (ITA Nos.11 t....
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....egarded as payments made towards use of patent, design, copy right, etc. Thus, payment made for import of hardware and payment for services are outside the purview of section 9(1)(vi) of the Act. 5.2 We find that the Assessing Officer and the CIT(A) have not examined whether payments to non-residents in the instant case consisted only for import of software or whether payments were also made for import of hardware. Even though the figures of import of hardware and payment for services are on record, we are of the opinion that the Assessing Officer is required to examine the details of import of hardware, software and payment for services. It is also seen that the Assessing Officer has not properly examined provisions of the Treaties in deciding whether the impugned payments constitute 'royalty'. In view of the foregoing, we are of the considered opinion that unless the facts of the case are clearly examined by the Assessing Officer, the quantum and to whether payment for imports of software amounts to 'royalty' cannot be decided. We, therefore, set aside the order of the CIT(A) and remit the matter back to the file of the Assessing Officer with the following directions : i) T....