TaxTMI 
TaxTMI 
2014 (10) TMI 463
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....ware and Systems Private Limited (FSS for short), is an Indian company. It is engaged in providing software and related services in Banking and Financial Service Sector. The assessee-company particularly provides services in electronic payment transactions under different modules. Usually, it provides a wide range of solutions for ATM/Point of Sales(POS). It delivers services relating to driving, switching, mobile banking, internet commerce gateway, electronic bill payment and presentment etc. 3. In the course of carrying on of its activity, the assessee company has made payments to two non-resident entities. They are ACI Worldwide Singapore (Pte) Limited ('ACI Singapore' for short) and Integrated Research Pvt. Ltd., Australia ('IRPL Australia' for short). The former company, ACI Singapore is a resident of Singapore and the latter company, IRPL Australia is a resident of Australia. The assessee company has been making payments to these two non-resident companies towards procurement of standard software. The assessee company operates under a distribution model, wherein software products are procured from the two non-resident companies namely, ACI Singapore and IRPL ....
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....company being a distributor of software products of the non-resident companies, has to be treated as a Permanent Establishment(PE) of the non-resident companies. This conclusion was arrived at by the Assessing Officer in view of Article-V of India - Singapore Treaty. The Assessing Officer, therefore, held that even if the argument of the assessee that the payments were made towards sale of software products is accepted, still the assessee is bound to deduct tax at source as the non-resident companies have a PE in India. 6. The Assessing Officer has also made partial disallowance of deductions under sec.10A/10B of various items for different assessment years. The Assessing Officer has reduced the expenses from export turn over without corresponding deductions made from the total turnover. He has also reduced foreign exchange loss from the export turnover of the assessee. 7. The Assessing Officer has also made partial disallowance of deductions under sec.10A/10B on the ground that foreign exchange corresponding to the exports made by the assessee were not realized within the time prescribed by the statute. That part of the export turnover has been reduced by the assessing authority....
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.... The first issue to be considered is the validity of income escaping assessments completed by the assessing authority for the assessment years 2003-04 to 2006-07. The contention of the assessee company is that reopening of an assessment in the absence of any fresh material is bad in law. It is the case of the assessee company that the Tax Audit reports were already available before the Assessing Officer in the course of original assessments and the necessary details are available in the said reports and as such, considering a TDS for the first time in the course of assessment proceedings for the assessment year 2007-08 cannot be considered as a fresh material to initiate reassessment proceedings for the four assessment years, 2003-04 to 2006-07. It is the case of the assessee that as the assessments for the assessment years 2004-05 and 2006-07 were completed under sec.143(3), the reassessments for those two assessment years should be considered as reassessments made on a change of opinion. 15. The learned counsel appearing for the assessee has relied on the following judicial pronouncements to support his arguments against reopening of assessments for the assessment years 2003-04 ....
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.... payment systems, Automated Teller Machines(ATMs) etc. These software products are mostly used by banks and financial institutions. The agreements authorize the assessee company to enter into distribution agreements with the customers in India. The agreement entered into between the assessee company and ACI Singapore has been renewed from time to time. The main software products procured from ACI Singapore are BASE 24/BASE24 eps. The agreement between the assessee company and IRPL Australia was entered on 16th July, 1998 for a period of six months, which was not renewed. The software products purchased from IRPL Australia were software for ATM and system monitoring services. In respect of software sold by IRPL Australia, it was available only in object code and no modification was done on the software by the assessee company. In the case of software products purchased from ACI Singapore, the assessee company was authorized to enter into software license and maintenance agreements with the customers of ACI Singapore. The software procured by the assessee from ACI Singapore is a vanilla software. Implementation of the software requires detailed understanding of the customer environme....
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....its customers. The agreements between the assessee company and ACI Singapore and also between the assessee company and its customers consist of two components; consisting of provision of software license and the annual maintenance contract. The assessee company charges its customers an annual maintenance fee for the above services and pay back to back to ACI Singapore. The annual maintenance fee is charged as a percentage of the licence fees. 25. On the aforesaid payments made to the assessee company for installation of software and the annual maintenance fee, the customers deduct tax at source. Likewise, the assessee company also deducts tax at source on the payments made to ACI Singapore for the services rendered by it towards maintenance. 26. The assessee company has adopted a stance that the payments made by the assessee company to ACI Singapore and IRPL Australia for purchase of software products are not taxable in India, as they are payments made for purchase of software products and it is not necessary for the assessee to deduct tax at source under sec.195 of the Act. The assessee company held a view that those payments made for the procurement of software products are not....
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....ight to copy the products purchased from ACI Singapore and IRPL Australia. The fact is that installation of software by the assessee company for its customers does not, ipso facto, bestow any copyright on the assessee on the products supplied by the foreign companies. The right to copy the products of the non-resident companies arises from specific approval and it is not in any way linked to the source code of the product. The assessee company neither had the authority to create or supplement the software that can be used with the products purchased from them. Copyrights always rested with ACI Singapore and IRPL Australia. The right given to the assessee company is a limited one, so as to cater to the customer requirements while operating within a broad frame work outlined by the non-resident companies. 30. The learned counsel concluded his argument regarding the nature of payments made by the assessee company to non-resident entities in the following manner: ♦ The assessee company acquires copyrighted articles from ACI Singapore and IRPL Australia and the assessee company does not have a right to use copyright. ♦ Therefore, the payments made by the assessee company ....
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....old to resellers for a consideration based on the standard price list and resellers, in turn, will sell such product to end users at a price independently determined by it. Resellers get orders from end users and places back to hack order on the assessee. On acceptance of order by the assessee, it will provide a licensed key via e-mail so that customer will directly download products through web link. After examining the business model in the present case, Authority for Advance Ruling held that no rights in relation to copyright have been transferred nor any right of using copyright, as such has been conferred on licensee and, therefore, payment received by the assessee from resellers on account of supplies of software products to end customers does not result in income in nature of royalty to the assessee. (ii) CIT vs. Dynamic Vertical Software India (P) Ltd, 332 ITR 222(Delhi): The finding of the Hon'ble Delhi High Court in this case is that where the assessee is purchasing software from Microsoft and sells it further in Indian market, by no stretch of imagination becomes a transaction resulting in payment of "Royalty". The assessee in such circumstances, acted as a dealer o....
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....cientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. After the retrospective amendment brought in sec.((1)(vi) by Finance Act, 2012, "Royalty" includes also the consideration paid for transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which light is transferred. 35. In the above scenario, the learned counsel submitted that still in the present case the assessee company has purchased copyrighted articles and has not acquired any right for use or right to use a computer software. The standard software owned by ACI Singapore and IRPL Australia is purchased by the assessee and thereafter sold it to its customers in India. Therefore, nowhere in the course of this business model, the assessee company acquires any right of software either to use or to resell or to copy or to transmit to others in any manner. The learned counsel further submitted, without prejudice to the position explained by him, that there is stil....
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....prevail upon the provisions of the Income-tax Act in that case. Therefore, he submitted that as no change has been made in the expression "Royalty" in both the DTAAs, the expression "Royalty" as explained in DTAAs will prevail upon the amended definition of Royalty in the present case. He further submitted that in view of the above, the transactions made between the assessee company and foreign companies are only sale of copyrighted article and, therefore, the payments made thereto, do not come under the purview of Royalty. 38. The learned counsel also placed reliance on the relevant concepts reflected in Indian Copyright Act, 1957, so as to establish that by procuring software products, the assessee has not acquired any copyright so as to qualify the payments made by it to be Royalty. He pointed out that one of the prescribed rights in a copyright is exclusive right to resell software including storage of electronic machine. In the instant case, the assessee has a non-exclusive right to distribute the product of the non-resident companies and the assessee does not have ownership right in the copyright. The assessee is not authorized to make copies of the existing software, except....
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....so for the impugned assessment years that the transaction of obtaining the software from non-resident companies for use of the assessee's customers in India, is in fact the right to use the software with all inherent rights and privileges and not a trading transaction, as argued by the assessee. Therefore, the payments made by the assessee to ACI Singapore and IRPL Australia are nothing but Royalties. 42. The learned Commissioner has relied on the order of the ITAT, Mumbai 'L' Bench in the case of Dy. DIT (IT) v. Reliance Infocom Ltd. 98 DTR(Mumbai)(Trib) 66, wherein the Tribunal has considered in detail the law stated in 9(1)(vi) both, before and after the amendment. The Tribunal has clearly held that similar transactions entered under various agreements is only license to use the copyright belonging to the non-resident companies, subject to the terms and conditions of the agreement while the non-resident supplier continues to be the owner of the copyright and all other intellectual property rights. Still the transaction would amount to transfer of part of the copyright and transfer of right to use copyright. Therefore, the payments in that case were made for the use ....
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....ask or achieve a particular result and what has been procured by the assessee is exactly the same which enables the assessee to perform the task according to the customers' requirement within the frame work of the software programme. 46. He, thus, concluded that the Assessing Officer as well as the Commissioner of Income-tax(Appeals) are justified in law in holding that the payments made by the assessee company to ACI Singapore and IRPL Australia were in the nature of Royalty and the assessee was bound to deduct tax at source under sec.195. As the assessee has not deducted tax at source, the Assessing Officer has rightly disallowed the payments under sec.40(a)(i). 47. We heard the detailed arguments advanced from both sides and perused the judgments and orders and also the notes placed before us on the technical aspects of software. 48. On going through the facts and details of the case before us, we find that the assessee company has entered into agreements with ACI Singapore and IRPL Australia for supply of standard software products, which in turn, are to be sold in India to the customers of the assessee company mainly, Banks and Financial Institutions. The software trans....
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....el appearing for the assessee support the above stated position of the case. In the decisions of Dassault Systems K.K. (supra), Dynamic Vertical Software India (P.) Ltd. (supra), Ericsson A.B. (supra), the courts have held that where the assessee is purchasing software from the vendor and selling the same further in Indian market, the consideration paid for such purchase could not be termed as "Royalty". It is held that in order to constitute Royalty, what is contemplated, is a payment that is depending on user of copyright and not a lump sum paid for the acquisition of copyrighted article. 51. In the present appeals also, what has been purchased by the assessee from ACI Singapore and IRPL Australia was only copyrighted articles and not copyright, proper. Within the meaning of Indian Copyright Act, 1957, a copyright is an exclusive right to reproduce software including storage of the same in electronic machines with exclusive right to sell it. In the present case, the assessee does not have ownership of the software and does not have right to reproduce the said software. It is in fact only procuring copyrighted software product meant for a particular customer in India. The technic....
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....e of payment. Therefore, there is no change in the concept of Royalty either before or after the amendment. 54. Anyhow, even if the amendment brought in sec. 9(1)(vi) by Finance Act, 2012, is considered as a milestone, the judgment rendered by the Hon'ble Delhi High Court in the case of Infrasoft Ltd. (supra), really supports the argument of the assessee. In the said decision, even after the amendment, the Hon'ble Delhi High Court has held that the amount received by the assessee from a non-resident company for granting license to use copyright software to its own business purposes could not be brought to tax as Royalty under Article 12(3) of Indo-US DTAA. The court observed that where it is a case of mere transfer of right to use copyrighted material like software programme, the consideration paid by the assessee does not give rise to Royalty in the hands of vendees. The judgment of the Hon'ble Delhi high court in the case of Infrasoft Ltd. (supra) itself supports the view that no change has been brought in sec. 9(1)(vi) by Finance Act, 2012, in the concept of Royalty. 55. The learned Commissioner relied on a recent decision of ITAT, Mumbai Bench, rendered in the cas....
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....ilar facts, it was held in the said decision that an assessee could not be held liable to deduct tax at source relying on subsequent amendment in the Act with retrospective effect. The Tribunal observed that the assessee cannot foresee future change of law and therefore, there is an impossibility of performance on the part of the assessee as on the date of incurring such expenditure. 58. We find much force in the above contention advanced by the learned counsel appearing for the assessee. Here also, it is a subsequent amendment with retrospective effect. As held by ITAT, Mumbai Bench, in such cases, the assessee is constrained by impossibility of performance. The dictum impossibiliun nulla obligation est, states that there is no obligation to do impossible things. It is to be seen that the law does not compel to do the impossible as enshrined in the principle lex non cogit ad impossibilia. The jurisprudence has also accepted as a basic dictum, impotentia excusat legem, that impossibility is an excuse in law. 59. When the assessee is constrained with the impossibility of performance, it is futile to argue that the assessee ought to have deducted tax at source in the assessment yea....
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....sessee company is carrying on business on its own status as an independent entity and the transactions entered into between the assessee company and non-resident companies are on a principal-to-principal basis. It is already stated in earlier paragraphs of the order that the assessee company bears the risk of failure of the contracts. The assessee functions on an independent basis. The non-resident companies transfer all the risk and rewards associated with software to the assessee company. As per the agreement, the assessee does not have any authority to procure/conclude contracts on behalf of ACI Singapore and IRPL Australia. The assessee company is also not engaged in identifying customers or securing contracts in India for foreign suppliers. 64. In the above circumstances, it is very difficult to hold that the assessee is a dependent agent of ACI Singapore and IRPL Australia. The result is that the assessee company does not create a PE in India for ACI Singapore and IRPL Australia. 65. Thus, the issue of PE is decided in favour of the assessee by holding that Singapore Company and Australian Company do not maintain any PE in India through the medium of the assessee company. ....
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.... amount of TDS. In this regard, the assessee has relied on instruction No.5/2013 dated 8th July, 2013 issued by the CBDT stating that when an assessee approaches the assessing authority with requisite details and particulars in the form of withholding tax certificate as evidence for any mismatched amount, the Assessing Officer should verify whether or not the deductor has made payment of the withholding tax to the Government account and if the payment has been made, credit of the same should be given to the assessee. 68. In the above circumstances, we direct the Assessing Officer to give the appropriate withholding tax credit to the assessee company on the basis of withholding tax certificate produced by the assessee. The Assessing Officer is also directed to make necessary enquiries in this regard and grant appropriate relief to the assessee company. 69. This issue is treated as allowed for statistical purposes. 70. Next, we have to consider partial disallowance made by the Assessing Officer in computing relief under sec.10A/10B. 71. The first set of such disallowances included the expenses relating to travel and communication. In view of ITAT, Special Bench decision in the ca....