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2015 (5) TMI 726
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....e agreed that the appeal for the A.Y. 2007-08 in ITA 221/Del/2013 be taken as the lead case and the decision in this appeal can be applied for all the other appeals. Hence we first take up the appeal for the AY 2007-08, i.e. ITA No 221/Del/2013. ITA.No.221/Del/2013- AY 2007-08 For the subject AY, Assessee has raised 13 grounds out of which, ground No.1 is general in nature and therefore does not require adjudication. The other grounds are briefly summarized by the assessee as below:- (a) Ground 2, 2.1 and 2.2 The learned DRP and the AO erred in holding that the revenue earned from supply of software to customers in India as "Royalty" under section 9(1)(vi) of the Act and under Article 12 of the DTAA between India and USA ('Tax Treaty') (b) Ground 3 and 4 The learned DRP and the AO erred in holding that the revenue earned from rendering of implementation services and maintenance services to customers in India as "Royalty"/"FTS" under Section 9(1)(vi)/(vii) of the Act and under Article 12 of the Tax Treaty. (c) Ground 5.1, 5.2 and 5.3 The learned DRP and the AO erred in holding that the assessee has a Fixed place, Installation and Dependent Agent Permanent Est....
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....e and rendering of support services that enable call centre companies, to better manage customer interactions via voice, email, web and fax. The assessee derives its revenue primarily from supply of "contact solutions", software license and provision of services including, installation, maintenance and professional services. The assessee has also provided installation/ implementation and maintenance of the supplied hardware and software. 2. Aspect US had two subsidiaries in India - Aspect Contact Center Software India Private Limited (hereinafter referred to as 'ACC' or 'Aspect India') and (ii) Aspect Technology Center (India) Private Limited (hereinafter referred to as 'ATC'). ACC is involved in business of installation of the equipment and providing marketing support to the assessee. ATC is the R&D entity, which involves as well as provides, testing, providing maintenance support to the assessee. 3. For the year under appeal, the assessee has earned revenues from the Indian customers as follows: * Licensing of software: USD 65,84,468 * Sale of hardware: USD 35, 24,795 * Implementation Services : USD 4,91,174 * Maintenance Services: USD 28,79,639 * Professiona....
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....Cross Objections have no merit. 6. We have heard Mrs. Rashmi Chopra, the learned Counsel for the assessee and Shri. Sanjeev Sharma, the learned CIT, D.R. on behalf of the Revenue. We have also gone through elaborate written submissions filed by both the parties from time to time and perused the materials on record. We now proceed to dispose of the grounds raised by the assessee issue wise: Ground No 2, 2.1 and 2.2 7. Ground 2 deals with revenue earned from supply of software taxed as "Royalty" under the Act and the Tax Treaty. The Assessee sells contact solutions to the customers in India which is combination of software and compatible hardware that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The software and hardware both are integral parts of the solutions which the assessee sells to the customers and channel partners in India. While the hardware is sold, the software is licensed. With respect to software, the customer is granted partial rights permitting the use of software for internal use. The Assessee has submitted before the AO that, the revenue received from sale of software embedded with hardware is not ta....
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....d to as "product" or "contact solutions"), to the call center companies in India and other countries. The contact solution is a combination of both hardware and software components that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The customer buys a complete solution which is manufactured outside India. The software and hardware are both integral parts of the contact solutions which the assessee sells to the end user and Channel Partners in India. The contract is between Aspect US and the customer directly. The software is provided on a Compact Disk and is shipped directly to the end user/ Channel Partner as the case may be. In support of her submissions, the learned Counsel invited our attention to the invoices raised on customers and to Clauses 1 and 5 of the agreement between Aspect US and Infovision Information Services (P) Ltd (page 83 to 116 of PB 1) forming part of paper book-I, to demonstrate that what is sold to the customer, is product comprising of hardware and software embedded in it. It was also submitted that the hardware and software sales are made outside India by Aspect US and the title and risk of goods....
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....ogramme, in order to utilise the computer programme for the purposes for which it was supplied; or to make back-up copies purely as a temporary protection against loss, destruction or damage, in order only to utilise the computer programme for the purpose for which it was supplied; or making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use does not amount to infringement of copyright. It was further submitted that right to use a copyright in the software is distinct from right to use the programme embedded in the software. She contended that payments made for acquisition of rights in relation to the copyright which are limited to rights which are necessary to enable the user to operate the program, classify as "Business profits". 14. Further the Ld.Counsel submitted that, for the purpose of classifying the nature of revenue stream to the Assessee as "royalty", the Assessee should have granted at least, any one of the rights stated in Sec.14 of the Indian Copyright Act. In the present case, there is no grant of any such rights mentioned in Sec. 14(a) clause (i) to (vii) of the Indian Copyright Act to the cus....
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....the learned Counsel submitted that in the instant case, the customers are merely provided with the object code and not the source code to the software (where the information or knowledge resides). The object code is sufficient to carry out the desired function i.e. operate the software but does not convey the technical knowledge or trade secrets of the Appellant. Accordingly, no rights in a "secret process" can be said to be transferred. Further, she submitted that a computer software programme cannot be classified as equipment. She invited our attention to the report of Technical Advisory Committee constituted by the OECD to state that digital products such as software cannot be considered as "equipment" since the word "equipment" can apply only to a tangible product. In the instant case, the customers are given a computer software programme and there is no equipment of the assessee which is used by the Customer. 18. Further, she argued that despite the amendments made by the Finance Act 2012 to the definition of "royalty", the revenues arising from the sale of software are not taxable under the provisions of the Tax Treaty as the said amendment shall not have any impact on the....
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....ferent from software (clause 1 of page 83 of PB-I). Ownership on rights other than the licensed rights remains with the assessee. Title in the software is neither transferred in India nor outside India. The user of the software gets only partial rights in the software to use it and the channel partner got right to sublicense the software. He further submitted that the Assessee has not provided a copy of the agreement between the Channel partner and the end user of the software. However, based on available documents it is explicitly clear that the end user gets rights to use the software and they must return or destroy the software copy after agreement is terminated. (b) He argued that the transaction is in the nature of license and not that of a sale. The license agreement between the assessee and the end user provides that in case of termination of the license, the end user shall promptly remove all copies of the software from its systems and discontinue the use or destroy or return of the software. License agreement also provides that software cannot be sub-licensed assigned or transferred without the permission of the right holder. Referring to section 4 of the Sale of Goods ....
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....er section 14 of the Copyright Act, "copyright" means the exclusive right to do or authorize the doing of any of the specified acts in respect of a work. Therefore, only the copyright holder possesses the "exclusive right" to do the specified acts in respect of a work and only he can authorize someone else to do those acts. No one else can exercise the specified acts. The channel partner is granted the right to give on commercial rental (i.e. right to sub-license) a copy of the computer program. The owner of the copyright can assign either wholly or partially such rights to any other person. There is no requirement under the Copyright law that the owner of rights should grant exclusive right to the other to do all or any of the acts to which the author/ owner is having exclusive rights. 22.1. The Ld. D.R. pointed out that the Government of India Publication "Handbook on Copyright Law" states that the expression "reproduce" as used in Section 14(a)(i) of the Copyright Act, mean the right to make " one or more copies". Therefore, he contended that there is no requirement that the reproduction take place only when mass copies are produced or only if these are produced for sale or c....
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....ct. 26. The Learned CIT DR submitted that the taxability of revenue from all sources is required to be decided based on the provisions of the Income Tax Act only, since the assessee is not eligible to claim the benefits of tax treaty in view of specific provisions in Article 24 "Limitation of Benefits" of the Indian DTAA with the USA. Article 24 of the Tax Treaty denies the benefits of the tax treaty to tax resident of the USA if such tax payer does not satisfy the requirements of Article 24 and in the instant case, it was submitted that the assessee is a wholly owned subsidiary of a Cayman Islands based company (page 20 of PB I) therefore the condition for eligibility of benefits is not satisfied. We find that this fact is not emanating from the orders of the lower authorities and further that this issue was not considered by any one of the lower authorities. Hence, we have not considered it necessary to adjudicate this issue. 27. He further submitted that a tax treaty is interpreted on the basis of the definition of the terms available in the treaty. The definition of terms is normally given in the respective Articles. Article 3 of the Tax treaty deals with definition of ge....
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....39 to 252 shows that the software is not embedded in hardware. It is submitted that the software and hardware are shipped separately for custom purposes and all these invoices show sale of both hardware and software which is essential for the solution to work. (b) Some customers purchased license for the software from the assessee without purchase of the equipment: Only 8 customers out of a total of 63 customers have been sold software exclusively, implying majority of customers having purchased both hardware and software. Even this minority pertains to certain upgrades etc. which have been provided at cost. A selective sampling by the learned DR cannot be the basis to argue that software is being sold independently. Even otherwise, the question of whether software is embedded or not, becomes academic as in either situation the jurisdictional High Court in Nokia, Ericsson and Infrasoft decisions (SUPRA) has held that the payment cannot be royalty. (c) Software is not sold but licensed: This issue has been dealt by the Hon'ble Delhi High Court in the case of Infrasoft, where also the software was licensed- Para 6 of the ruling. (d) Equipment is different from software- The ....
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.... of "contact solutions" to the customers in India which is a combination of software and the compatible hardware that enables the customers to better manage customer interactions via voice, email, web and fax. All the contact solutions are manufactured outside India in USA and the supplies are made from outside India to various customers on Ex work/ FOB basis. The title and risk is passed outside India on shipment. 34. For the year under appeal, the assessee has contracts with 63 customers in India for supply of contact solutions and licensing of embedded software. The products are sold to customers in two ways: (i) directly to end users and (ii) through channel partners (i.e. resellers and distributors). Further, 8 out of 63 customers have been sold software exclusively, implying a majority of customers having purchased both hardware and software. Sample copies of the agreement with the end user and the channel partners along with invoices have been filed before us. 35. Considering the business model of the assessee with respect to supply/ licensing of software, we have considered the following sample agreements relied by both the parties during the course of the hearing: ....
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.... Equipment- "Equipment" means Aspect proprietary hardware and third party hardware purchased from Aspect as specified on a Quotation. Software- "Software" means Aspect's proprietary computer program in object code form described on a Quotation. Software (and Ancillary Programs where applicable) also includes all fixes and new releases provided by Aspect (or its representatives) to customer, as well as copies thereof. Ancillary Programs- "Ancillary Programs" means a third party computer program(s) in object code form which is provided by Aspect for use with the software and Equipment. Clause 8- Termination clause (Page 90 of PB-I) Aspect may at its discretion terminate the license by written notice upon happening of following events; (i) if the customer breaches material license provision herein; or (ii) the customer fails to cure any other material breach of the terms of this agreement with 30 days after receipt of written notice from Aspect. Upon expiry or termination of the license, the customer shall immediately return or destroy the software and ancillary programs and all copies thereof as directed by Aspect. Clause 10- Ownership rights (Page 91 of PB-I)....
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....Equipment, Software, Ancillary programs and Documentation. Upon notice to Partner, Concerto may add new products to its offerings or delete existing products subject to Partner's binding Product orders accepted by Concerto prior to the date of such notice. Partner shall become authorized to distribute and service only those new Product offerings for which Partner has received authorization. (bb) "Services" means System Implementation Services, Training Services, Professional/Enterprise Solutions Services, Support (Maintenance) Services, Equipment Relocation Services, and/or Time & Materials Services (each of which is described more fully in the Guide). (cc) "Software" means Concerto's proprietary computer programs, in object code form, for which Partner has received appropriate Documentation, fixes, modifications, updates, upgrades, new versions and/or copies of the Software provided to Partner pursuant to Concerto's obligations under this Agreement, including, without limitation, Service deliverables provided hereunder. (c) "Software Sub-Licensing" :- (i) Partner shall promote, solicit and accept orders for the Software and Ancillary Programs subject to the provisions ....
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....Partner for any general, special, direct, indirect, consequential, incidental or other damages arising out of or relating to the Ancillary Programs. Partner hereby acknowledges that each such Third-Party Licensor fully accepts such rights as a third party beneficiary of this Agreement and that such rights were irrevocable. (v) Partner will effectively enforce against all its End-Users the Minimum License Terms, specifically including, without limitation, those provisions that affect proprietary or confidentiality rights of Concerto or its Third Party Licensors. If Partner learns that any End-User has breached any such provision, Partner will immediately notify Concerto and Partner shall take, at its expenses, all steps that may be available to enforce the Minimum License Terms, including availing itself of actions for seizure or injunctive relief. If Partner fails to take these steps in a timely and adequate manner. Concerto or its Third Party Licensors may take them in its own or Partner's name and at Partner's expense. (vi) In the event Partner obtains or uses any item of Software and/or Ancillary Programs for its own internal use. Partner shall be deemed to be an End-User ....
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....oftware and Ancillary Programs shall at all times remain vested in Concerto or its licensors and will not, under any circumstances, pass to Partner or its End- Users. (vi) Partner may direct Concerto to make Delivery, on Partner's behalf, to a specific shipping agent in the United States for re-shipment, as applicable, within the Territory. Partner shall provide such special shipping instructions either in the Order or otherwise in writing to Concerto at least 30 days prior to the scheduled shipment date. In the absence of such special shipping instructions, Concerto shall select a common carrier on behalf of Partner, in no event shall Concerto be liable for shipment by common carrier nor shall such common carrier be construed to be an agent of Concerto. 36. From the above clauses, it is evident that what is sold to the end customer is a product comprising of both hardware and software. The software is not separately licensed. Further, Aspect US retains all the intellectual property rights in the software and the end user is merely provided with limited right to use the licensed product solely for internal use. 37. Further, the learned Counsel for the assessee has filed be....
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....the definition copyright under the Copyright Act, 1957 held that what was sold by the non- resident was a copyrighted article and payment to the non -resident was not for copyright. On further appeal by the Revenue, the Hon'ble Delhi High Court held that income did not accrue to the non-resident by virtue of a business connection in India and therefore the question of the Nonresident having a permanent establishment in India did not arise for consideration at all. On the issue whether the payment to the non resident was of the nature of royalty which could be brought to tax in India, the Hon'ble Delhi High Court held as follows: "WHETHER THE INCOME FROM THE SUPPLY CONTRACT CAN BE TREATED AS 'ROYALTY' UNDER SECTION 9(1)(vi) OF THE ACT: 50. Section 9 (1) (i) of the Act which deals with the taxability of "royalty income" reads as under:- "Section 9 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) The following incomes shall be deemed to accrue or arise in India :- (i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or sou....
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.... 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, specifically Article 13, para 3 of the DTAA (Article 12, para 3 of the Model Convention) which defines royalties to mean "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work". The ITAT, it was submitted, has not appreciated that the royalty is for the use or right to use any copyright. According to him, since title of the software continued to vest with the assessee as provided in clause 20.2 of the Supply Agreement and the assessee wa....
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....ery 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 would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or fi....
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....nto 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 amounts reimbursed by Midhani under a separate contract for the technical services rendered by a nonresident company, it must be deemed that there was a "business connection", and it attracts the provisions of Section 9(1)(vii) of the Income Tax Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfillment of the main contract entered into principal to principal.....
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....ork. 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." 39. Similar view is expressed by the Hon'ble Jurisdictional High Court in the case of Nokia Networks OY (supra). 40. As far as the cases where only the software is separately licensed (i.e. with respect to 8 out of 63 customers to whom the assessee has licensed only the software), the issue is squarely covered by the decision of the Hon'ble Jurisdictional High Court in the case of Infrasoft Ltd. (supra), wherein their Lordships held as under:- "86. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the sof....
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.... limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be constr....
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....e to the end users (i.e. eight out of 63 customers), we are of the view that the terms of license agreement is similar to the facts of Infrasoft Ltd (Supra). Accordingly, we hold that there was no transfer of any right in respect of copyright by the assessee and it was a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article. Hence, the payment for the same is not in the nature of royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/ PE in India as per adjudication on Ground No 5. Ground No 3 and 4 43. The above grounds deal with revenue earned from rendering of implementation services and maintenance services to customers in India as "Royalty/ FTS/ FIS" under the Act and the Tax Treaty 44. Aspect US provides the following services which enable the call center companies to better manage customer interactions via, email, web and fax: (i) Implementation services - These services include providing specifications of the system server and en....
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....nder the Tax Treaty for the reason that there would not have been any maintenance expenses if the soft ware in question is shrink wrapped soft ware. The action of the AO was confirmed by the DRP. 46. The learned Counsel for the assessee submitted that the implementation services have been accepted by the AO to be incidental to the supply of software. Implementation services would acquire the nature of software itself and does not qualify as FIS under Article 12(4)(a) of the Tax Treaty since the supply of software itself does not qualify as royalty. Further, the implementation services would also not fall within the ambit of Article 12(4)(b) of the Tax Treaty as these services do not make available technology, skill or experience, etc to the end users i.e. such service are not geared towards enabling the end user's personnel to undertake similar activities independently in future. 47. On maintenance services, it was argued that these services are provided remotely to the end users and only in rare cases, where end users/ channel partners insist on onsite support, the Indian AEs of the assessee provides the same. The services are not rendered in India and hence not taxable u/s ....
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....ices, and/ or time and material services" (clause1 (bb) on page 97 of PB-I). Further he referred to Clause 3(b) and 3(c) on page 97 of the PB-I and submitted that Channel Partners obligations include equipment and service sale. Regarding pricing of the products and related services, the Partner will establish the prices that it charges to the end user within the territory for the products and related services distributed by the Partner. This suggests that 90% of the services are provided by Channel Sales Partner. Implementation and maintenance services are technical services and these services can only be provided by employees of channel sales partners which in fact are provided by employees of Aspect India. The description of maintenance services indicate that such services can only be provided through trained personnel of customers. While providing the services through the involvement of customers, Aspect India in fact makes available the services to Channel sales partner and customers. 51. He submitted that, in the present case, available facts explicitly indicate that maintenance services encompasses providing new release of software, provide tracking tool that enable the cu....
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....s not defined under the Tax Treaty. The Memorandum of Understanding ('MoU') to the Tax Treaty explains the term as under :- "Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly the use of a product which embodies technology shall not per se be considered to make the technology available". 56. In the present case, the undisputed fact is that the implementation service is inextricably and essentially linked to the supply of software. In view of our decision in Ground No 2 that the supply of software is not taxable as "royalty" under the Tax Treaty, the provision contained in clause (a) to Article 12 (4) would not apply to both Implementation and maintenance services. Further there is nothing to show that these services provided by the assessee actually made available to the End User/ Channel Partners any technical knowledge,....
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....ssee. The DRP rejected the objections of the assessee in this regard and confirmed the finding of the AO. 61. The learned Counsel for assessee presented the following facts: (a) Aspect US does not have any fixed place at its disposal in India. The premises of ACC is solely for the personnel of ACC and is not available to Aspect US at its disposal. The personnel of Aspect US have visited the office of ACC to occasionally use certain facilities however, the premises of ACC cannot be said to be available for Aspect US as per its convenience. (b) The employees of Aspect US have visited India only for short trips for a total duration of 109 days. The purpose of the visits was to conduct business overview to understand the requirement of the existing customers, analysis of Indian markets etc. The travel log of the employee visits on sample basis and travel days of the employees to India was filed before us. (c) The assessee has not carried on any business operations in India. All the contracts for supply of soft ware, hard ware and services are concluded outside India. The terms of contract are negotiated and concluded by Aspect US through an i- approach system loaded on the ....
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....mentation services primarily involves uploading of software providing specifications to customers for environmental conditions/ systems (server) specifications etc. required for system set-up etc. (b)It was submitted that the nature of implementation services in this case primarily involves implementation of software which is an intangible property, as distinguished from installation of tangible property/equipment as envisaged under various commentaries to constitute installation P/E. 68. Under the Treaties, the term 'installation project' is used for projects which requires substantial effort in terms of time, money, technical enterprise planning subsidiary and hence the nature of services of the assessee cannot be called installation services as contemplated in the Treaties. The implementation services rendered by the assessee do not involve time/effort/physical activity. 69. On the finding that the assessee has a dependent agent PE, it was argued that: (a) ACC, the Subsidiary company of the assessee is not categorically dependent on the assessee. This contention is borne out from the record where the facts are as follows: (i) In the agreements there is "a limitati....
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....ed that the assessee does not have a P/E in India in terms of the Act. 72. The Ld.CIT, D.R. on the other hand listed out the revenues received by the assessee from Indian customers in this year as follows: a) Sale of software $ 6585468 (48.10%) b) Sale of hardware $ 3524795 (25.74%) c) Implementation services $ 0491175 (3.58%) d) Maintenance services $ 2879639 (21.03%) e) Professional services $ 207083 (1.51%) 73. The Ld. D.R. further contended that no revenues were shown for training services though such training has been provided. He pointed out that 50% of the revenues are on account of licensing of software. 74. He referred to the assessment order in installation/implementation services as well as maintenance services and pointed out that the maintenance services are provided for a period of one year as a part of the licensing of software and sale of hardware and this can be renewed each year thereafter. The services listed out by the Ld.DR are: a) Resolving bugs b) New release of software c) On line Pass Word protection, reporting, tracking tools and self help environment. d) On site support as per applicable policies and procedures. e....
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....o how from the revenue's point of view, the sales are made and the licensing of software was done. For this purpose he relied on the assessment order and argued that the information on the activities and role of Aspect India, with respect to the business of the assessee in India was not forthcoming and hence the AO issued notice u/s 133(6) of the Act. 82. Thereafter the Ld.D.R. submits that Aspect India the Indian Subsidiary or the channel partners identified the customers, under the specifications or requirements and for this purpose, it involves meetings, presentations etc. to suit the customer requirement. He alleged that Aspect India prepares a comprehensive proposal including prices and sends to customer, channel partner who in turn submits its quote and a purchase order from the customer to the sale team of Aspect India. 83. The Ld.DR submits that based on these proposals by the subsidiary, the channel partner submits its report and purchase order from its customer to the sales team of Aspect India. Aspect India enters the requisite specification on the "I Approve" system, which is a platform where in all the information about the sale is entered into by the subsidiary,....
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....services during the year without acquiring any hardware or software. Some customers purchased license for the software from the assessee without purchase of the equipment {page 186, PB-2}. This claim of the assessee is factually correct and substantiates the Revenue position that software is not embedded in the hardware and can be licensed independent of purchase of hardware. * The claim that channel partners are independent could have been proved by submitting information that they purchase products on their account for a price and in turn sell to the customer for a price decided by them. From the facts discussed above, the channel partners make purchases for the customers and the prices are negotiated by Aspect India. Purchase orders are placed by the customers that are secured by Aspect India. Assessee has not submitted information on sale of equipments and licensing of software that are done directly by Aspect India to customers and those done through channel partners. * Claim that Aspect India acts as a communication channel between the assessee and the customers is factually incorrect, as to act as a communication channel, Aspect India should have acted as a post office....
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....t in India through Aspect India and carries business in India, Sri Lanka and Middle East. The assessee could have submitted the travel expenses detail of Aspect India to demonstrate that employees of Aspect India did not visit these countries. * Claim that customer directly contact with the assessee is factually incorrect as no customer has ever directly interacted or corresponded with the assessee. Similarly the assessee has never come in contact with the customer. * It has been claimed that majority of sales are made to channel partners. Information on all the channel partners, date of agreement and sales made through them is not submitted, therefore, this claim is in vacuum. * The claim that Aspect India provides support to the assessee in rendering services is also contrary to facts as all services are provided by Aspect India. Assessee may have rendered services directly to Indian customers while employees of assessee were present in India. Aspect India provides support to the assessee but majority of these services are provided by Aspect India to customers. * Claim that assessee does not play any role in performance evaluation of employees of Aspect India could ha....
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....loyees who actually perform the sales functions; * the assessee's product is being sold in India as Aspect India and this business is supervised by the assessee's employees during the visits Addressing the issue of existence of a Fixed Place P.E., the Ld. CIT, D.R. submitted that:- * The employees of the assessee stayed in India during the F.Y. for the duration of 157 days; * Some of them stayed for very long periods, e.g. the Manager Technical Support stayed for 29 days; * Aspect India provide office premises/sets the employees of the assessee company; * transfer pricing analysis of the assessee for FY 2002-03 and 2003-04 referred to tangibles owned by it and that the Indian subsidiary has used an ITC system of the assessee for the business in India and this international transaction is not recognized in the report that the assessee's assets are used by the Subsidiary in India free of cost; * In TPO's order the fact of earning commission of hardware sale is not identified as international transaction; * Thus as the Ld.DR contends that as the business of the assessee is carried out through the premises of Aspect India and through employees of Aspect India it is....
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....icer. Installation PE: The revenue contends that since installation and support services are provided by Aspect India, there exists an installation PE of the assessee in India. As per Article 5(2) of India - USA Treaty, the term 'Permanent Establishment' includes especially the following: (i) Clause (j): An installation or structure used for the exploration or exploitation of natural resources, but, only if so used for a period of more than 120 days in any twelve-month period; (ii) Clause (k): A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period. There is no dispute that clause (j) above is not applicable. The dispute is with regard to existence of PE under clause (k) above. As per Article 5(2)(k), a building site or construction, installation or assembly project or supervisory activities in connection therewith is regarded as PE is such project or activities (together with other such sites, projects or activities, if any) continue for....
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....ng State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph." Paragraph 5 lays down conditions as to when can an agent; broker is regarded as dependent agent or independent agent. If the agent is devoted wholly or almost wholly on behalf of the enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, the agent is not considered as agent of 'independent status'. In such circumstances, the agent would be regarded as 'dependent agent'. Further, the dependent agent has to satisfy any of the tests laid down in (a), (b) or (c) above in order to constitute a dependent agent PE of the non-resident. Coming to the facts of the present case, the assessee has ar....
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.... under Article 12 of the Tax Treaty. Further, the AO also attributed 15% of the revenue earned from supply of software and hardware and 57.5% of the revenue from provision of support services from the said customers to the alleged PE in India. The DRP has confirmed the addition. 95. The learned Counsel for the assessee submitted that the revenues from supply of software and rendering of services are from the customers located in Sri Lanka and Middle East is not taxable in lieu of her submissions made while arguing ground nos. 2 to 4 in this appeal. 96. Alternatively and without prejudice to the above submissions, she submitted that the revenues were earned outside India and the services were also rendered outside India i.e. Srilanka and Middle East. Hence, the same is not taxable in India. She drew our attention to the provisions of Sec.5 of the Act and Article 12 of the Tax Treaty and submitted that as per Sec.5 of the Act, the 'total income' of a non-resident tax payer would be the income which has been received in India or has accrued or arisen or deemed to accrue or arise in India. Sec.9 of the Act which deals with Income deemed to be accrued or arise in India provides th....
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....orne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 99. She submitted that in view of the provisions Article 12 of India-USA tax treaty, royalties/ FIS paid to a resident of US may be taxable in India only if the same is arising in India. Article 7(a) of the India-USA tax treaty provides that the Royalties and FIS shall be deemed to arise in India only where the payer is resident of India or has a PE or fixed place in India and such royalties/ FIS are borne by such PE or fixed place. 100. In the instant case, even if the consideration from sale of software and services is construed to be in the nature of "royalties and FIS ", the consideration received for the sale of software and services from the payer based in Middle East and Sri Lanka cannot be taxed in India as the same has not arisen/ deemed to arise in India. The provisions of the India-USA tax treaty clarifies that once it is construed that the US enterprise has a PE in India, royalty and fees for included services shall be taxable as per the provisions of ....
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....the Act. We state our reasons below: 104. In the present case the revenue is received by the assessee from customers located outside India (i.e. Sri Lanka/ Middle East). Therefore, the taxability of the transaction is governed by provisions of Sec. 9(1)(vi)(c )/ 9(1)(vii)(c ) of the Act. Thus, to tax the royalty/ FTS income earned from such customers in the hands of Aspect US, the transaction should fall within the provisions of Sec 9(1)(vi)(c )/9(1)(vii)(c) of the Act. 105. Sec. 9(l)(vi)(c)/ 9(1)(vii)(c) of the Act are deeming provisions and have to be construed strictly. A plain reading of both the sections shows that any income earned by a non-resident tax payer (i.e. Aspect in the present case) by way of royalty / FTS is taxable in India, if such royalty/FTS is payable by a non-resident (i.e. customers located in Sri Lanka/ Middle East) in respect of any right, property or information used or services utilized: (a) for the purposes of business, or profession carried on by such person (i.e. customers located in Sri Lanka/ Middle East) in India; or (b) for the purpose of making or earning any income from any source in India. Thus to tax the income earned by Aspect ....
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....The learned CIT-DR submitted that assessee's claim to be taxed at the tax rate of 10% in view of the provisions of Section 115A of the Act could have been correct, had it opted to be taxed under the provisions of the Act and not under the Tax Treaty. The assessee cannot do shopping of the royalty provisions under the Tax Treaty for the purpose of scope of royalty and then turn to the Act for the purpose of tax rate. Since the asseessee has made a choice of taxation under the provisions of Tax Treaty and it needs to stick to it. Tax rate is provided in paragraph 2 of Article 12 of the DTAA. Accordingly, this ground of appeal is required to be rejected. He placed relied on the decision of the Delhi ITAT in the case of Pizza Hut International (22 Taxmann.com 111, Delhi ITAT) where in the co-ordinate Bench of this tribunal has held that the assessee is not eligible to choose the tax rate under the Tax Treaty and then claim the exemption from gross up of tax under the Act, in that case tax rate under the Act would apply. 110. We have heard both the parties. In view of the decision given in ground No.2, 3, 4 and 6 on taxability of revenue earned from supply of software and support ser....
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....mers either directly or through agents, the income of the non-resident arising in India would be limited to the amount of profit attributable to the services of the agent. Even though the circular has been withdrawn by the CBDT presumably to prevent its un-intended misinterpretation, the principle as held by the Supreme Court (as discussed above) in various decisions still holds good and what can be attributed to a business connection can only be with reference to the activities performed in India. Hence, without prejudice to the contention that Aspect US does not constitute a PE in India, it is submitted that even where Aspect US is held to be taxable in India on the grounds of it having a PE as per Article 5 of the tax treaty, what can be taxed in India are only those profits that have been earned from operations carried out in India. (d) The Act does not prescribe any specific methodology for attribution of income. Rule 10 of the Income-tax rules, 1962 ('the Rules') relevant to Section 9(1 )(i) of the act inter alia specifies that where the actual amount of income accruing or arising to any nonresident, whether directly or indirectly, through or from any business connection i....
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....a case nothing further would be left to attribute to the PE. (g) In view of the provisions of the section 7(2) of the Tax Treaty and the judicial precedents, it can be inferred that as long as the PE is being remunerated at arms' length price, nothing further may be attributed to the operations/activities carried on by the PE of the foreign enterprise in India. Applying the above principles to the facts of the present case, it was submitted that no profits are attributable to the alleged PE of the Appellant in India, on account of following: * Aspect US has not carried on any business operations in India; * All the contracts for supply of hardware, software and services are concluded by Aspect US, outside India; * The property in the products supplied to the Indian customers also passes on outside India; * The terms of the contract are negotiated and concluded by Aspect US through 'i-approve' system, loaded on the server that is located outside India; * The onsite implementation services provided by the Aspect US through Aspect India are incidental to the contract for supply of hardware and software and thus, would partake the character of sale of hardware and ....
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....pellant in India, it was submitted that even if income is sought to be attributed, the same should be done having regard to the net income derived by Appellant from Indian operations, further restricted to the amount which can be attributed to the functions carried out in India. It was submitted that the following are the various functions performed /risks associated with the hardware/software sales are affected by assessee: * Research and Development in relation to the product * Purchase/ procurement of raw material * Manufacturing using plant and machinery in USA * Sales and Marketing * Ancillary services viz, installation service * Support services viz, trouble shooting, updates, etc. * Administrative and overall management function * Credit risk The functions performed in India are restricted to undertaking limited marketing function and providing ancillary services in the context of installation of software supplied. All the other functions/risks were exclusively carried out/undertaken in USA. In fact, the sales function involving conclusion of contracts and all decision making regarding pricing and terms were also undertaken in USA. The necessary su....
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....o Systems A.B. (Supra) - The HC has also made an observation that 20% attribution appears to be higher than what is warranted under these circumstances while remanding the matter back for fresh adjudication. * Convergys (Supra) - The ITAT has attributed the 'Profits' and not simply restricted to attribution of 'Revenue'. * Huawei Technologies (Supra) - 20% attribution of Profits has been held for similar allegations. * Annamalais Timber Trust and Co. vs. (41 ITR 781, Mad HC) - Confirmed the Tribunal's decision that 10% of the income can be attributed to trading operations in India. * CIT vs. Bertram Scott Ltd. (31 Taxman 444,Cal HC) - The HC held the same percentage as income attributable to the signing of the contracts in India in the case of. 117. The learned CIT-DR submitted that the profits on account of sale of hardware would be taxable to the extent attributable to the PE in India. The income from licensing of software and support services is taxable as royalty/ FTS. Up to FY 2003-04, Aspect India was rendering distribution, maintenance and support services to assist implementation of global contracts. Aspect India was receiving commission at 11% on the sales v....
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....to this position, if the title to the equipments and risk of loss to the products passing to the Customer upon shipment which is FOB Aspect's shipping location (Clause 5(c) on page 86 of the PB, in that case income may not accrue or arise in India but income will still deem to accrue or arise in India on account of operations in relation to sales being carried out in India and business connection of the assessee and income in relation to such operations is taxable in India as per provisions of Section 5(2)(b) of the Act. In this regard, reliance was placed on the decision of the Hon'ble Apex Court in the case of Anglo French Textile Company Limited Vs CST (25 ITR 27). 120. Explanation 1 to clause (i) of Section 9(1)(i) provides for attribution of income based on operations carried out in India. Equipments are no doubt not manufactured in India but operations in regard to sales have been undertaken in India. Therefore, the income on account of these operations is taxable in India as per the provisions of section 5(2) of the Act. 121. On the assessee argument that in absence of a PE no profits on account of sale of hardware can be attributed to the alleged PE, it was submitted ....
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.... Worldwide Limited (203 Taxman 554) and the OECD guidelines. 125. In a recent decision, the Jurisdictional High Court in the case of DIT Vs. E Funds IT solutions (226 Taxman 44) reiterated the principle laid down in Morgan Stanley (supra) on attribution of profits to a PE and held that where a PE is held to exist, subject to the application of the force of attraction rule, only profits in relation to the assets and activities of the PE may be attributed to it and that an arm's length payment to a subsidiary PE as per FAR analysis would be sufficient for such attribution. 126. In view of the above, we agree with the learned counsel of the assessee that where an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk taking functions of the multinational enterprise, nothing further would be left to attribute to PE. 127. For A.Y.2003-04, 2004-05 and 2005-06, the transfer pricing analysis of Aspect India was referred to the Transfer Pricing Officer, TPO - 1(4), New Delhi u/s 92CA(3) of the Act. The TPO after due consideration of the services rpvided by Aspect India to Aspect US has held that the services were pro....
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....AO has allowed the deduction and the DRP has also held that the AO rightly deducted the compensation paid by the assessee to ACC but however while passing the final assessment order the AO did not give the deduction for the said expenditure 131. The Learned CIT-DR submitted that the DRP in paragraph 6 of the order had held that the amount paid by the assessee to Aspect India qualifies as a deductible expenditure for the assesee. He argued that the issue of deduction of expenses is essentially and inextricably linked to the attribution of profits. In case, the Hon'ble Tribunal rejects the appeal of the assessee with respect to taxation of revenue from licensing of software and services then the revenue is taxable on gross basis both under the Act and the Tax Treaty and do not call for any deduction of expenditure. In such a situation only payments made to Aspect India for marketing of products shall be allowed as deduction and such deduction may be in line with the income that is attributed to the PE. 132. He further submitted in case of services the provisions of Article 12(6) will trigger and the provisions of Article 7 would apply since the support services are rendered thr....
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....d by section 92E of the Act. It was also obliged to maintain the documentation as required by section 92 of the Act. 138. The assessee has objected to rejection of TP analysis of Aspect India. The AO has dealt this issue in detail and demonstrated that the TP analysis in case of Aspect India has not captured the FAR in regard to the international transaction between assessee and Aspect India. The information on functions performed has been obtained by the AO based on enquiries and statements employees of Aspect India recorded during the course of assessment proceedings. Most glaring omission in the TP analysis was with regard to functions performed by employees of Aspect India in regard to marketing and sales including deciding of prices of products of the assessee that are sold in India, Sri Lanka and the Middle East. The fact that Aspect India supports sales operations in countries outside India was unearthed during the enquiries conducted by the AO. Therefore, the AO has rightly rejected the TP analysis in case of Aspect India so far as it concerns Aspect software Inc. He argued that the findings of the AO stands on very sound footing and are based on unassailable reasons. Th....
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....lhi High Court in the case of Alcatel Lucent USA Inc (330 ITR 578, Del HC). 143. The Learned CIT-DR opposed the contentions of the assessee and submitted that the assessee has not cooperated with the revenue authorities during the proceedings in assessment as well as proceedings before the DRP. He drew the attention of the Bench to the observations of the DRP in para 3. Ld.DR pointed out that the tax was deducted at source by the customers and payers in India on payments made to the assessee company and the assessee company is claiming refund of this tax deducted. The determination hinges on factual verification whether tax was deducted by payers on all amounts including purchase of hardware. Further, where tax is deducted and there is short deduction, it needs to be examined whether the assessee had any role in such short/ non deduction of tax. 144. He further submitted that it is not in dispute that the assesee has not offered the income from software licensing, sale of equipments and service fee to tax. It is disputing the taxability of these sources of income and continues to dispute even before the Hon'ble Tribunal. The facts of the present case are covered by the decisi....