TaxTMI 
TaxTMI 
2016 (3) TMI 213
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....the order of the AO by the CIT(Appeals), holding that the provisions of sec.9(1)(vi) of the Act, is applicable to the payment made to the software license by treating the same as 'royalty' concluding that the assessee is liable for deduction of tax u/s.195 of the Act. 4. The facts of the case are that the Assessing Officer in respect of software purchase has observed that the amount paid for usage of software is taxable as 'royalty' as per section 9(l)(vi) of the Income Tax Act. He observed that the examination of the vouchers for software purchased revealed that remittance Is for the software maintenance fees and not software purchases and concluded that what has been purchased is not the software but. the right to use it. The Assessing Officer on examination of the Agreements with the software providers concluded that the assessee has got a license to use the software for a particular tenure subject to certain terms and conditions. He distinguished the case laws relied upon by the assessee in the following cases : In the case of Tata Consultancy Services. (271 ITR 401) As seen from the contract with DNATA, Dubai, assessee has not purchased any software ready to use as....
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....ware license fee are taxable u/s.9(1)(vi) of the Act and also under DTAA. Hence there is default on the part of the assessee to deduct tax under Section 195 of the Act. Aggrieved by this, the assessee went in appeal before the CIT(Appeals), who confirmed the finding of the Assessing Officer. Against this, the assessee is in appeal before us. 5. We have heard both the parties, perused the material on record and case law relied on by the parties. The main contention of the assessee is that the assessee purchased certain off the shelf software from various software suppliers on a non-exclusive/non-transferable basis for enabling the call recording for certain time as per the contract, for processing the airline coupons and other such services. The assessee was given only a copyrighted article and the ownership of such software rest with the suppliers of the software all the time. All these software are taken on license from owners of software and used for business on a non-exclusive basis. According to him, the payment for purchase of software cannot be considered as payment of 'royalty' as per the Act as well as applicable under DTAA and thereby it cannot be treated as the assesse....
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....ase of the product rather than consideration for use of the patent or copyright. In the present case, what was transferred is copyright and the right to use the copyright give rise to 'royalty' payment. Being so, in our opinion, the finding of the CIT(Appeals) in observing that granting of any license to use the software amounts to 'royalty' and the provisions of sec.9(1)(vi) are applicable. Accordingly, we are of the opinion that the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) of the Act for non-deduction of T.D.S. on the impugned payment. This ground of appeal of the assessee is dismissed. 6. The next ground in these appeals is with regard to nonpayment of TDS on bandwidth charges. 7. The facts of the case are that the AO has stated that there is dedicated undersea cable. Bandwidth charges are charges for getting a dedicated lease line for making international voice based calls. It is stated by the assessee that the services were rendered outside India by the service providers i.e within India the connectivity is provided by BSNL/MTNL etc. and beyond the territory of India these services are provided by the foreign Telecom operato....
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....ng voice and data to India. In respect of dialling out to customers in the US or other countries, the telecom operators separately charge for call charges for the duration of the calls. These are covered under the above 3 categories. Since these are services in {he nature of utility services like electricity, in our opinion, they are not liable for TDS. Question No 45 : From the perusal of the form 15CA and 15CB it is seen that a sum of Rs. 53,17, 15,836/- has been paid to various non- residents towards bandwidth charges during 11-12. Please explain the nature of the payment and why no TDS has been made on the said transaction. Answer No. 45: Connectivity and bandwidth charges refer to the payment for lease line circuits provided by the telecom companies abroad. Those are used for transporting voice and data FOR our BPO operations. These are in the nature of utility services and do not come. under royalty or technical services and hence no TDS has been made. From the details you had shown to me it is seen that there are payments for non-telecom companies. We will look into that and revert back with details by 31 JAN 2013. " 7.3 It Is further stated that these a....
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....;service' to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services". 8.1 According to the CIT(Appeals), there is no denial by the assessee that .the 'Bandwidth charges' were paid to the provider of a dedicated bandwidth - a scientifically developed technological arrangement consisting of 'under the sea cable' together with necessary equipment - for the seamless usage by it. The payments were made by the assessee to the non-resident provider towards bandwidth charges. There is also no denial by the assessee that it enjoyed the uninterrupted right to use the bandwidth. The appellant has always been at ease to have fact to face operational contact with the equipment. The assessee paid the bandwidth charges as consideration for using the bandwidth. The point-to-point communication could be possibly established as per the requirements of the assessee only by the commissioning of the bandwidth communication line. 8.2 The CIT(Appeals) observed that it is immaterial that the right to use the dedicated bandwidth was under the ....
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.... by the Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. v. ITO(International Taxation) [361 ITR 575], wherein it was observed as under : "Under section 9(1)(vi)(b) of the Income-tax Act, 1961,where income by way of royalty is payable by a person who is a resident to a non-resident, it shall be taxable as income under the provisions of the Act. Explanation 2 to sub-clause (vi) gives the definition of "royalty". "Royalty" means the consideration for transfer of intellectual property rights, for imparting any information regarding the working of, or the use of the intellectual property rights, use of any intellectual property, imparting any information concerning technical, industrial, commercial, scientific knowledge, experience or skill ; use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB, transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including considerat....
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....and (c) the service order. To the extent that there was any inconsistency between the terms set out in (a), (b) and (c), the service order would prevail over the schedule and master terms. Each service order issued and accepted pursuant to the terms of the agreement would create an individual contract relationship between the parties to such service order. The relationship would be governed by the master terms and schedules together with relevant service order in addition to the provisions set forth in the agreement; the service would also be subject to all mandatory local law requirements, including but not limited to the regulatory and data protection requirements in the respective countries. The international leg of the telecom services provided outside India was provided by the assessee. Since in India, under the Indian Telecommunications Regulations, only licensed service providers could provide international long distance communication services on the Indian leg, and the assessee was not a licensed service provider under the Indian laws, Videsh Sanchar Nigam Limited (VSNL) a public sector undertaking provided the Indian leg of the international service to the customers. Thus,....
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....the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer was guaranteed the transmission of the data and voice. The fact that the bandwidth was shared with others had to be seen in the light of the technology governing the operation of the process and itself did not take the payment out of the scope of royalty. Thus, the consideration being for the use and the right to use the process, it was "royalty" within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi) of the Act. This was because : (i) The service agreement with the customer, service agreement with VSNL and the one between the customer and VSNL, were part and parcel of one composite agreement split into four for the purposes of convenience and the nature of services to be offered through the different agencies having a bearing on each other. The ultimate aim, however, was to give the customer a point-to-point private line to communicate between offices that were geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. The parties had agreed....
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....n of the data/voice from one end to the other and it was difficult to accept the case of the assessee that the nature of transaction was only that of service. The agreement provided an indefeasible right to the customer to use the facility of communicating the data/voice and had an internet in the matching half circuits for providing the required telecommunication services at the assured speed. Thus the efficacy of transmitting data/voice depended on the originating signal from the customer's end which meant there was the use of the equipment by the customer installed by the assessee. In the circumstances, the assessee could not be considered merely to be providing the service to the customer. (iii) Although the agreement between the assessee and VSNL stated that one was not the agent or the representative of the other, this did not mean that VSNL had provided its server independently without any connection whatsoever with the service order that the customer placed with the assessee. A reading of the service agreement showed that the parties agreed that the provisioning entities in the Indian half circuit shall be VSNL and in getting the seamless end-to-end connectivity, t....
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....see in a way was also for the use of process. The service order form clearly pointed out that the assessee was at liberty to change the equipment, modify the configuration or change the routing of the network in providing the service and the assessee could provide the service either directly or through a provisioning entity. Thus, the assessee provided the Indian customer an integrated communication system called international private leased circuit, part of which outside India was taken care of by the assessee and the part inside India through VSNL, which could not be dissected as two independent contracts having no bearing at all on each other. (v) The definition of "royalty" under article 12 of the DTAA between India and Singapore and the Act are in pari materia. Explanation 6 defines "process" to mean and include transmission by satellite (including uplinking, amplification, conversion for down-linking of any signal) cable, optic fibre, or by any other similar technology, whether or not such process is secret. Thus, apart from the relevance and applicability of clause (iva) that the payment was for the use or right to use of the equipment, the payment for the bandwidth....
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....peals) observed that the payments are not purely reimbursements having no identity or propriety of their own. Every payment of expenditure shall be having certain characters making it liable to be classified under a particular account head. As such 'Reimbursement of expenses' - itself on its own cannot constitute an independent head of account. The CIT(Appeals) further observed that the invoices pertaining to the so called reimbursement of expenses were found by the AO to be speaking about the nature of payments involved in those reimbursements. The payments related to (1) purchase of software (2) bandwidth charges (3) commission payments, etc. Therefore it has become apparent that the reimbursements constitute a mixture of so many kinds of payments which should have been genuinely accounted for under the appropriate heads and account. Further, the CIT(Appeals) observed that whereas the assessee has not done so far the reasons best known to it. Had the payments (called reimbursements) been properly accounted for under the respective head of account, the AO would have assessed without any difficulty. A confounding situation has been created by the assessee, itself by Indulgi....