TaxTMI 
TaxTMI 
2007 (8) TMI 717
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....on 201(1) and Section 201(1A) of the Income-tax Act, 1961. 2) The Commissioner of Income-tax (Appeals) on the facts and the circumstances of the case ought to have held that there was no business connection in India, and that IGTL had not earned any income taxable in India, making it mandatory for the appellant to deduct tax on the payment made to IGTL. The finding of the Commissioner of Income-tax (Appeals) that the provisions of Section 9(1)(vi) of the Income-tax Act applies is erroneous and incorrect. 3) The Commissioner of Income-tax (Appeals) ought to have appreciated that the appellant along with others was user of equipment known as 'MUX' that belonged to IGTL, and that the appellant was not obtaining any service whatsoever from IGTL. The agreement entitled the appellant only to non-exclusive use of the equipment, and could not be termed as an agreement for provision of any service by IGTL to the appellant. 4) The Commissioner of Income-tax (Appeals) erred in applying the ratio of the decision in Asia Satellite Telecom Company Limited v. Deputy Commissioner of Income-tax 78 TTJ 489 (Del.) without appreciating that the facts were entirely di....
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....Section 9(1)(vi) & (vii) of the Act. 5. Payments made to IGTL were towards availing the connectivity facility to enable the appellant to generate and to cater to outbound PSTN calls within USA through co-located equipment comprising of multimodal switches (MUX) belonging to IGTL and located in that country with a certain bandwidth. IGTL provided MUX and ancillary equipment in USA which it owned and maintained for specific use of the appellant company. The agreement entered into with IGTL were of two types, one for availing the connectivity facility and the other for availing maintenance services like fault rectification services etc. The Assessing Officer, however, was of opinion that: (i) Payments towards use of the co-located equipment comprising of multimodal switches belonging to IGTL and for using the mux and ancillary equipment in USA was of the nature of royalty paid for the use of or right to use of an industrial commercial or scientific equipment falling under the provisions of Section 9(1)(vi) of the Act read with Article 12(3)(b) of the DTAA with USA. Similarly payments towards maintenance of these equipments in USA were in the nature of fees paid for technic....
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.... Hence, the question of considering the claim that the recipient non-resident party had no permanent establishment in India did not arise. vii) The payment made to IGTL we chargeable to tax in India s per the provisions of Section 9(1)(vi) and Section 9(i)(vii) of the Act read with Clause 3(b) and Clause 4(a) of Article 12 of the DTAA. Further Article 7 of the DTAA had no application to the facts of the present case. The rate of 10% prescribed in Article 13 the DTAA being more beneficial to the overseas parties, tax was deductible Under Section 195 @ 10% of the gross payments, keeping in view the provisions of Section 90(2) of the Act. Hence, according to the Assessing Officer, the assessee having not made any deduction of tax at source without making any application Under Section 195(2) before the Assessing Officer (TDS) and without ensuring that an application Under Section 195(3) was filed by the recipient to obtain necessary exemption was liable to be treated as an assessee in default, in terms of the provisions of Section 201(1) of the Act. In this regard, the Assessing Officer referred the decision of the Hon'ble apex court in the case of Transmission Corporat....
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....meaning of the term 'royalty' as defined in Explanation 2. The C.I.T. has also distinguished the decision of the ITAT, Bangalore Bench cited by the assessee in the case of Wipro Limited observing as under: In that case, the Hon'ble ITAT held that when an assessee utilizes the services for link up from India through VSNL and down link the same through telecom companies outside India, most of the services are provided through customer based circuits (CBC) which are like hot lines between the assessee and its customers abroad. Though the CBC I one service, it is commercially divided into two portions viz., the Indian portion and the international portion. The services with regard to the Indian portion are provided by VSNL are STPI. The international portion is handled by the foreign companies. However, in the present case, facts are different and services rendered by the non-resident recipient are of a different kind. Hence the aforesaid decision has no application to the facts of the present case. Moreover, the appellant company, in any case, deducts tax at source Under Section 195 from payments made towards hiring of international bandwidth for transmission of d....
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....ndustrial, commercial or scientific equipment. Thus the case of the assessee is directly covered by this clause. The learned D.R. submitted that decisions relied upon by the learned D.R. are distinguishable, as in those decisions the Clause inserted to Explanation 2(iva) to Section 9(1)(vi) has not been considered. The learned D.R. further submitted that for the purpose of Section whether income is taxable in India or USA is immaterial. The assessee is liable to deduct tax at source as per Section 195. If the assessee wants no tax to be deducted at source, he is to make a request to A.O. Under Section 197. The learned D.R. in support of his contention relied upon the decision of the Apex Court in the case of Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal 33 ITR 245. The learned D.R. further submitted that since fund is going out of India, the tax has to be deduced even income is not chargeable to tax because that income may not come back to India. The learned D.R. further submitted that when the entry in the books of account made, tax has to be deducted at source. The learned D.R. in support of his arguments relied upon various decision including the decision of the Apex ....
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....f such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode whichever is earlier, deduct Income-tax thereon at the rate in force The condition laid down in this provision is sum should be chargeable to tax Section 9 of the Act provides certain circumstances where income deemed to accrue or arise in India which is sum chargeable to tax The AO invoked Section 9(1)(vi) & (vii) which reads as under: Section 9(1)(vi) Income by way of royalty payable by- (a) the Government, or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India, or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in Ind....
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....me of the recipient chargeable under the head 'capital gains' for- (i) the transfer of all or any rights (including the granting of a license in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark of similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use of or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB (highlighted by us) v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literacy, artistic or scientific work including firms or video tapes for use in connection with television or tapes for use in connection with ratio broadcasting, but not including consideration for the sale distribution or exhibition of cinematographic films; or (vi) the rendering of any services in co....
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....or skill. Lump sum consideration paid which is in the nature of income chargeable under the head 'capital gains' is excluded from the meaning of royalty. 12. The term 'Royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grant of that right. 13. By the Finance Act 2001, Clause (iva) has been inserted in Explanation 2 in Clause 9(1)(vi) to wide the definition of the expression 'Royalty' w.e.f. 1.4.2002. As per this clause, royalty would include consideration in respect of the use or right to use any industrial, commercial or scientific equipment. 14. In the light of the above discussion, first of all we examine the facts of the case under consideration in the light of insertion of Clause (iva) in Explanation 2 in Section 9(1)(vi) which is with effect from 1.4.2002. In the case under consideration, IGTL engaged in the business of providing connectivity. The assessee approached IGTL to provide it the connec....
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....d CRM software loaded on equipments in 'IGTL Node', necessary for using IGTL Connectivity, are in working condition. 3. The Customer shall either itself or through its Campaign Provider, completes the relevant formalities under various US/India Laws which shall enable the Customer to carry out Call Center Business using IGTL Connectivity. 4. The Customer shall comply with all laws, rules, and Licenses (Indian as well as US) as applicable for the IGTL Connectivity. From above, it is clear that IGTL was having exclusive right over equipments and allowing assessee to make use of it. Those equipments are commercial or scientific equipments. The Hon'ble ITAT, Delhi (C-Bench) in the case of Asia Satellite Telecommunications Co. Ltd. (ITA Nos. 166/Del/2001 and 861/Del/2001 dt. 01.11.2001) had occasion to examine the scope and applicability of Section 9(1)(vi) of the Act. The Hon'ble Tribunal, in that case, interpreted the provisions in an elaborate manner. While explaining the import of the word 'use', the Hon'ble Tribunal held that it would be unfair to restrict the meaning of the word 'use' to only physical use'. The plain con....
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....Royalty' as per Section 9(1)(vi) of the Act. Further the Bangalore Bench had no occasion to consider Clause (iva) inserted to Explanation 2 of Section 9(i)(vi) of the Act as same is inserted w.e.f. 1.4.2002 as the assessment years involved in that case were Asst. Years 1999-2000 to 2001-02. Similar is the position of the decision in the case of Wipro Ltd. v. Income Tax Officer (supra) wherein above inserted Clause has not been considered. In case of Software Technology Parks of India v. Income-tax Officer (supra), the decision of Bangalore Bench in the case of Wipro Ltd. v. Income-tax Officer 80 TTJ (Bang) 191 has been followed. 17. The argument of learned A.R. that entire activity relating to availing facilities took place in USA and at no stage such activities were conducted in India does not help the assessee after insertion of Clause (iva) to Explanation 2 of Section 9(1)(vi) of the Act. The business activities done outside India of recipient party have no permanent establishment in India, such argument have no force in view of the insertion of the above Clause (iva) to Explanation 2 of Section 9(i)(vi) of the Act. 18. Now we examine the Double Taxation Avoidance Agre....
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....ia is chargeable under the provisions of this Act. Section 195 provides that any person responsible for paying to non-resident any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force. We find that the impugned transaction under consideration satisfied all the conditions stipulated in section, therefore, the assessee is liable to deduct tax at source from both types of payments for availing connectivity facility and for availing maintenance services as both payments are in the nature of 'Royalty'. We confirm the order of C.I.T.(A) though on different reasons and grounds. 21. The grounds No. 6 & 7 pertaining to deduction of tax at source from ' payments made to TDT. The assessee made payments to True Dial Technologies, Florida i.e. NRI for use of true Dial Software for or 60 simultaneous network connections. The assessee claimed that the Software was purchased. The A.O. treated as 'Royalty' Under Section 9(1)(vi) and und....
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....een defined in the Agreement to mean, inter alia, the payment of any kind including rentals received as a consideration for the use of or the right to use any patent, trade mark design or model, plan, secret formula or process. It is important that, in order that a payment may be treated as royalty for the purposes of Article XIII of the agreement for avoidance of Double Taxation between India and the U.K., the person who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In other words, where the transferor retains the property right in the designs, secret formula, etc. and allows the use of such right, the consideration received for such user is in the nature of royalty. Where, however, there is an outright sale or purchase, the consideration is for the transfer of such designs, secret formula, etc., and cannot be treated as royalty. (relevant headnote) 2) C.I.T. v. Ahmedabad Mfg. & Calico Printing Co. (1983) 139 ITR 806(Guj). In the case of secret processes, patents, special inventions, wh....
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....termine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the case of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software. Various countries have given different treatment of royalties despite OECD recommendation. Indian DTAAs already contained provisions for taxing equipment rental as royalties, but domestic law did not have specific provisions till 2002-03. The Finance Act 2001 inserted Clause (iv)(a) in Sections 9(t)(vi), Explanation 2 to bring about a result diametrically opposite to the OCED recommendations. The said Clause is reproduced as below: (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB; 24. Where the domestic law is clear, unambiguous and does not suffer from any void or gap, the spirit or intention of international convention, under no circumstances, can override the express provisions of domestic law. 25....
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....0 telemarketing operator hours per month; Now, Therefore, in consideration of the mutual promises herein contained, the parties hereto agree as follows: 1. License, Subject to the terms and conditions set forth in this Agreement, Licensor hereby grants Licensee a non-exclusive license to use and execute the Software (the "License"). The License granted hereunder is limited to 60 simultaneous network connections (the "Connections") to the Software and may be increased upon the prior written agreement of Licensee and Licensor. 2. End-User Materials. Licensor shall provide Licensee with end-user manuals describing the use and operation of the Software (the "End-User Materials"). The End-User Materials are being provided solely to support Licensee's authorised use of the Software. Licensee may copy of distribute the End-User Materials but only for its internal use with employees and agents who agree to the terms and conditions set forth herein. 3. Term of License. The term ("Term") of the License shall commence as of the License Commencement Date (as hereinafter defined) and shall continue thereafter for so long as Licensee continues to comply wi....