TaxTMI 
TaxTMI 
2016 (6) TMI 329
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....elecom equipments to Indian Telecom operators. The assessee was also engaged in supply of mobile hand set to various customers in India. The assessee did not file its return of income as per the provisions of section 139 of the I.T. Act on the ground that it had no PE in India under the provisions of Article 5 of the Indo-China DTAA. On 6.10.2009 a survey u/s 133A was undertaken at the office premises of ZTE Telecom India Pvt. Ltd. at 6th Floor, Tower B, Building No. 10, Phase II, Gurgaon and New Mumbai, Thane. AO has observed that during the course of survey proceedings several incriminating documents were found, copies of which were made and inventorized. Statement of various senior executives including Mr. Huang Dabin, CEO of ZTE India, Dr. Dalip Kumar Ghosh, CMD ZTE India, Shri Hemant Kamboj Dy. Director Sales & Marketing and Mr. Rocky (Chinese name - Mr. Gan Yong) In-charge of Marketing, were also recorded. On the basis of these documents and statements, the AO was of the opinion that assessee had a business connection in India and its business had been carried through its PE in India and further income had accrued to the assessee during the relevant year from such business. A....
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....n the case of Motrolla Vs. DCIT 95 ITD 269 (in respect of Nokia Corporation, which was also involved in supply of telecom India Work equipment to Indian customers) and pointed out that ITAT Delhi Special Bench had affirmed that Nokia had PE in India and had attributed 20% of the net profit to the PE of Nokia in India . The AO attributed the profits to PE as under: 9.3 In China, the financial year is from January to December whereas in India it is from April to March. In view of this, weighted average net operating profit has been applied to the sales revenues to arrive at the profits made by the assessee from telecorn equipment and mobile phone handsets to Indian customers. 20% of such profits are considered attributable to the PE of the assessee in accordance with the provisions of v Article 7 read with Article 5 of the India-China DTAA. 10. In view of the same, computation of income in the present case in respect of the hardware and mobile handsets is as follows: As per the details submitted by the assessee, it has made the following sales in India: (i) Sale of handsets USD 112,000 (Rs.49,24,640 @ Rs. 43.97) (ii) Sale of telecom equipments USD 302,843.31 (....
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....independent value of its own. - No copyrights in the software are transferred to the customers. - No access to the "source cosies" in the software is granted to the customer. - The payment for software is not related to the productivity, use or number of subscribers. - The customers do not have the right to commercially exploit the software. - The supply of software is in the nature of transfer of copyrighted article" and not transfer of "a copyrighted right". (B) Legal Submissions Revenue from sale of computer software is in the nature of payment for the use of copyrighted article as against payment for use of a copyright in the software and hence such payment shall not constitute royalty under India-China tax treaty. In this regard, the assessee has relied on, the definition of the term "copyright" as given u/s 14 of the Indian Copyright Act, 1957. The assessee has further relied on the decision of Delhi Special Bench in the case of Motorola India vs DCIT (95 ITD 269). The assessee has further gone on to rely on a host of judicial pronouncement and also on the relevant part of the OECD commentary and commentary of Phillip Baker. 5. The AO also referred to th....
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.... is in the form of royalty . - Since the agreement specifically provides for the licensing of the software, such licensing amounted to transfer of copyright and not merely transfer of copyrighted article as is the contention of the assessee." 6. From the above AO concluded that the payments made for the right to use the software was royalty as per clause (i), (iii) and (v) to Explanation to section 9(1)(vi). He pointed out that the software is a secret formula or process for the purpose of clause (i) and (iii) of Explanation 2 and was also a copy right as per clause (v) of Explanation 2. Further, such payments were also royalty under Article 12(3) of the DTAA between India and China. 7. As regards the assessee's plea, relying on the decision of ITAT Delhi Special Bench in the case of Motrolla Inc. that the payments for supply of software along with hardware are in the nature of business profits and not royalty, the AO observed that the department was in appeal before Hon'ble Delhi High court against this decision. He pointed out that the department was in appeal before various High Court and Hon'ble Supreme Court against similar decision passed by different Tribunal....
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.... First we take up the assessee's appeals: 12. Common grounds raised by the assessee for AY 2004-05 to 2008-09 are as under: "1. That on facts and in law, the Learned CIT(A) has erred in upholding the order passed by the Learned AO which were bad in law and void ab-initio as they suffered from material illegality and irregularity to the extent of additions confirmed by the Learned CIT(A). 2. That on the facts and circumstances of the case and in law, the Learned CIT(A) has erred in upholding the validity of re-assessment proceedings initiated by the Learned AO by ignoring the fact that the same is without jurisdiction and bad in law. 3. Based on facts and circumstances of the case and in law, the Learned CIT (A) has erred in holding that the income earned by the Appellant from supply of telecommunication equipment (comprising of hardware and software) to Indian telecom operators/ customers is taxable in India on the basis that the Appellant has a Permanent Establishment ('PE') in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement between India and China ("India-China DTAA"). 4. Based on facts and circumstances of the case and in l....
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....alleged to have a Permanent Establishment ('PE) in India 3.1 Based on facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has erred in holding that the income earned by the Appellant from supply of telecommunication equipment (comprising of hardware) to Indian telecom operators/ customers is taxable in India on the basis that the Appellant has a PE in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement between India and China ("India-China DT AA"). 3.2.1 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in holding that ZTE Telecom India Private Limited ('ZTE India') is a 'Fixed place PE of the Appellant in term of Article 5(2)(c) read with Article 5(1) of the India-China DTAA. 3.2.2 Based on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in holding that Liaison Office of the Appellant is a 'Fixed Place PE' of the Appellant in terms of Article 5(1) of the India-China DTAA. 3.3 Based on the facts and circumstances of the case and 111 law, the Ld. AO/Hon'ble DRP has grossly erred in holding that ZTE India co....
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....4--2005 to 2008-2009 wherein 2.5 percent of entire sale revenue (including hardware and software) is attributable to alleged PE a net profit to be taxed as business income 5.3 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in not taking into consideration the activities performed by the Appellant in India and that ZTE India has been remunerated at arm's length price for the services provided to the Appellant. 6. Arbitrary profit margin of 7.5 percent considered Without prejudice to our contention that the Appellant does not have a business connection/PE in India and ground 5 above, we wish to submit: 6.1 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in not applying Rule 10 of the Income-tax Rules, 1962 for determining the profits attributable to the alleged PE of the Appellant. 6.2 Based on the facts and circumstances of the case and in law, the Ld. AO/ Hon'ble DRP has erred on facts and in law in considering the arbitrary profit margin of 7.5 percent whereas the Appellant has earned a weighted average global net profit of 2.53 percent according to ....
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....l profit is reasonable. He pointed out that in AYs 2006-07 to 2008-09 assessee has paid market support separate fee to Indian AE which is at arm's length and, therefore, the profits earned by PE got subsumed in the same and, hence, no further attribution of profits is required. 15. Ld. CIT(DR) Shri Sanjeev Sharma submitted that considering the level of operations carried out by PE in regard to sale activities of assessee in India, ld. CIT(A)'s findings, as regards attribution of profits @ 2.5% of sale price, is quite reasonable and, therefore, may be upheld. 16. Ld. CIT(DR) submitted that as far as assessee's plea regarding marketing support services being paid at arm's length is concerned, the same is a separate activity and, therefore, the same is not to be considered for attribution of profits. He pointed out that market support service is presale service and, therefore, not part of attribution. 17. Ld. CIT(DR) submitted that in the case of Rolls Royce 35% profits have been attributed and in the case of M/s Nortel Networks India International Inc. 50% of the profits had been attributed. 18. We have considered the submissions of both the parties and have perus....
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.... the income tax systems of both countries are almost similar. All these basic principles are embodied in Article 7 of the DTAA between India-China which reads as under: "ARTICLE 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. The provisions of this paragraph shall, however, not apply if the enterprise proves that the above activities could not have been undertaken by the permanent establishment or have no relation with the permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to m....
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....ent to income-tax may be calculated:- (i) At such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable; or (ii) On any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business; or (iii) In such other manner as the Assessing Officer may deem suitable. 23. In the present case, as noted earlier, since assessee did not maintain separate books of account, therefore, AO had invoked Rule 10(ii) and attributed 20% of net global profits arising out of revenues realized from India. However, ld. CIT(A) attributed 2.5% of entire sales revenue as per Rule 10(i) primarily relying on the decision in the case of Alkatel Lucent, France, inter alia, observing that Alkatel Lucent France, which was in the same line of business as assessee had accepted the same and did not contest in appeal. 24. The issue of attribution of profits depends on the facts in particular case and is fully dependent on the level of operations of the activitie....
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....ributable to that permanent establishment. In this context the assessee vide order sheet notings dated. 22.03.2013 was asked to explain that based upon the facts and circumstances of the case why the appropriate profit is not attributed to the PE in India. The assessees vide its letter dated. 25.03.2013 has submitted that; Assessee does not have a business connection or permanent establishment in India. Article 7 of the India- China tax treaty provides for allocation of taxation rights between Contracting States relating to business profits. without prejudice to the plea! contention that no PE is constituted for the assessee in India, even if it is assumed (without accepting) that assessee has a.PE in India, ~ly such profits as are directly or indirectly attributable to the PE of assessee in India shall be taxable in India. The PE being has no role to play in the off-shore supply of material& hence no profits from off-shore supply are attributable to the PE. Hence, in determining the profits attributable to a PE, it is necessary to determine the allocation of functions, risks and assets to the PE and the attribution of income to the PE under arm's length conditions,....
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....e of Rs. 1,101.6 crore on account of Supply of Networking & Terminal Equipments has been established in India. It is also a .proven fact that the said transactions [excluding transactions on account of software] have taken place through the PEs in India/ effectively connected to the PEs. The functions performed in respect of transactions on account of supply of equipments and handsets with customers in India were not the subject matter of TP analysis before the TPO. Since, all the functions were not the part of TP Study, the assessee's contention, that if a correct arm's length price is applied then nothing further would be left to be taxed in the hands of the foreign enterprise in light of the decision of Hon'ble Apex Court of India in the case of Morgan Stanley & Co. Inc. v. DIT, is misplaced. The Hon'ble Supreme Court in this case has ruled that: "As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all th....
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....nce and support in tendering process. ZTE China to review and approve the final contracts entered into by ZTE India Procurement Only upon securing orders from BSNL and TAT A Telecom Products are sold from ZTE China to ZTE India on CIF Basis ZTE India to deliver goods to customers site Cost borne on logistics in India Minor incidental local procurements Packaging and Labeling Ready to sale products by ZTE China Invoicing and Collections ZTE India to issue invoices as sales contracts are entered by ZTE India with Indian customers Administration (Routine Functions] ZTE India's responsibility Logistic Support Logistic Support Services The functions mentioned above are as per the TP Documentation of Indian subsidiary submitted by the assessee before the TPO. However, during survey various facts contrary to the submissions of the assessee have been found. The survey findings give actual state of affairs. Therefore, all other functions which have been proved (supra) are not the part of TP Documentation or undertaken by ZTE India in contrary to the above mentioned functions. Hence, it can be easily concluded that that most of the functions attributable to the PE....
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....e weighted average of net operating profit comes to 2.)3% [(.2.80% x 9 months) + (1.70% x 3 months)/ i2 months]. Vide order sheet notings dated.22.03.2013, the AR of the assessee was asked to explain the justification for taking profit margin attributable to India operations on the basis of Global Accounts. - The AR of the assessee submitted that it cannot be said that the assessee earns higher profit margin from the sale of - Telecom equipments to Indian customers due to following factors, - The assessee faces long delay in collection of receivables which affects cash liquidity and profitability - The sale price in India is lower - Indian customers typically offer contracts on the basis of tenders/ lowest bidders. Hence, the companies have to compensate with the lowest price which leads to low profitability. - Reasons cited by the AR of the assessee are generalized without any supporting facts and figures from the accounts. The reasons cited by him hardly affect the profitability because at no where the people want to pay more for less utility. Sale price largely depends upon the demand and supply. Delays in payments or cash liquidity are not the issues in the companie....
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....are) to arrive at the profits taxable on account of sale of telecom equipment and mobile phone handsets to Indian customers: The assessee' has not submitted the breakdown of the revenue earned on account of sale of equipments/ handsets and software. However, they have submitted that the percentage of software revenue forming part of the telecom equipment is at 40% of the Revenue earned on account of Equipments. In other words the percentage of revenue on hardware component of telecom equipment/ handsets is 60%. On the basis of the submission of the assessee, the profit attributable to the PE is calculated as under S. No. Particulars Amount in USD Amount in INR @ of 50.53) as per IT Act 1961) 1 Sales of Telecom equipment 11,14,96,981.77 563,39,42,488.83 2 Sales of Terminal equipment 10,77,05,271.94 544,23,47,391.12 3 Total 21,92,02,253.71 1107,62,89,879.95 4 60% of 3 above being estimated portion attributed to supply of Hardware 664,57,73,928.00 5 7.5% of 4 above, being profit on account of supply of Hardware 49,84,33,044.59 6 45% of 5 above, being profit attributable to the PE 22,42,94,870.06 Ther....
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....supra are satisfied. Even the appellant has not taken any contention before AO during assessment stage that it does not have business connection in India. This fact has been mentioned in the assessment order itself by the AO. 5.2.5 In view of discussion supra, I hold that the appellant has business connection in India within the meaning of section 9(1)(i) of the Act The ground of appeal is therefore dismissed." ** ** ** 6.2.2 To decide the issue involved, it is pertinent to go through contents of various statements reproduced supra which were recorded during the course of survey proceedings. The business model of the appellant is that it is supplying telecom equipments to customers in India and ZTE India which is a subsidiary of the appellant in India, is carrying out installation /commissioning of the telecom equipments supplied by the appellant. Analysis of various statements reproduced supra reveals that employees of the appellant come to India. These employees along with per....
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....s statements recorded during the course of survey proceedings, it is evident that negotiation of contract and is signing is done jointly by the team comprising persons from ZTE Corporation China and ZTE India. Reply to Q. 3 in statement of Sh. Hemant Kamboj reproduced supra is particularly relevant in this regard. Reply to Q. 7 in statement of Mr. Rocky clearly points out that even price negotiation is done -oy the employees of ZTE India on behalf of the appellant. Reply (c) to Q. 47 in statement of Mr. Huang Dabin shows that even bid documents in respect of equipment supply are prepared by ZTE India and the appellant provides support only. Therefore, it can safely be inferred that ZTE India is doing preparatory work, negotiating the contract and price and satisfying queries of the customers on behalf of the appellant. These activities being done by ZTE India are not in nature of ancillary or auxiliary activities as these are vital functions which are revenue generating. In such a situation, it becomes clear that ZTE India is habitually using its authority to negotiate and conclude contract on behalf of the appellant. Now, even if the contract is formally signed by the appellant af....
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....ribunal referred to the decision of Hon'ble Calcutta High Court in the case of CIT v. Bertams Scott Ltd. [1987] 31 Taxman 144 (Cal.) (para 197) "We have kept the principles laid down in these judgments in mind. In the present case, as already noted, in addition to the signing of the contracts in India, the preliminary negotiations for the contracts and the network planning were carried out through the PE. We may clarify here that the network planning activity is different from the activities which are of a preparatory or auxiliary character. In respect of signing of contracts, alone, the income attributed is 10%, in the decisions cited above. Two more activities have been carried out by the PE in India and, therefore, we have to attribute a higher income than what was attributed in the decided cases. The negotiations which ultimately lead to the signing of the contracts may involve more effort on the part of the PE and the signing of the contracts is only the fructification of those efforts. Obviously, therefore, the income attributable to the negotiations part should be more and in addition to the income attributable to the signing of the contracts. Some income has to be att....
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....ributing profits to the PE, some comparable entities were identified for benchmarking how much a full risk distributor is likely to earn. Based on same, a trading margin of 3.87% is found out, in this regard reference is made to point 2.6(a) of the show cause notice dated 8.3.10. Assessee has not objected to the same except has claimed that on the group basis a payment of 0.88% of sales in India has been made to ALIL on account of marketing support services; which is arrived by taking into account the payments made to Indian entity, divided by total turnover by all the entities from FY. 2001- 02 to FY . After that 2.99% remains. It has also been contended that the agent in India is performing minimal functions and taking minimal risks i.e is a limited risk distributor and therefore a deduction is to be allowed relating to the risks not undertaken by ALIL on account of marketing, etc. After considering the reduction on these two accounts above; net income chargeable to tax, as attributable to the PE, is worked out @ 2.50% of the sale price. Similar reasoning has been followed by this office in calculating income of the assessee for the A Y -2007-08 in the draft assessment order-pass....
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....tributable to Indian PE. It has been found that in another case namely M/s Alcatel Lucent France, facts were similar. That entity is also engaged in same line of business as that of the appellant and is supplying telecom equipments to customers in India. The equipments so supplied were installed by its Indian subsidiary. A survey operation U/S 133A was also carried out in that case. MIs Alcatel Lucent France has accepted and not contested in appeal that 2.5% of total sale revenue is attributable to PE in India as net profit subject to tax as business income. In my view, it shall be fair to adopt the same method in case under consideration. I have held in subsequent paras that revenue from sale of software is also to be taxed as business income in same manner as revenue from sale of hardware. Therefore, I hold that 2.5% of entire sale revenue (including hardware and software) is attributable to Indian PE as net profit to be taxed as business income. The AO has given different treatment to revenue from sale of hardware and software a;:d total tax effect in that case is more than what will be after giving effect to this appeal order. Therefore, this methodology does not amount to enha....
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....ies in India on which global - profits was apportioned and there was no question of setting off the R&D expenses again in respect of marketing activities. For sufficient and adequate reasons, the authorities below have held that RRIL to be the PE of the assessee in India and in the process, the objections of the assessee are duly met with and answered. The Tribunal first considered the question of business connection. After taking note of the relevant provisions which existed at that time as well as the case law, the Tribunal took note of the fact that an agreement was entered into by the assessee with RRIL whereby RRIL was to render certain services to the assessee. From the extent and scope of these services, the Tribunal held that the assessee had a business connection in India within the meaning of s. 9(1)(i). It would be relevant to point out at this stage that the aforesaid conclusion of the Tribunal was not rested solely on the agreement with RRIL. It also took into consideration and analysed various papers which were found during the course of the survey and which were not there earlier when the Tribunal had decided the appeal of the assessee for the asst. yr. 2001-02. It....
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....o tax. Tribunal further took note of the fact that for the purpose of that case it was immaterial as to whether in negotiating the contracts, representatives of the assessee (i.e. Rolls Royce PLC) were also present. 43. It was in these peculiar circumstances and provisions that the Tribunal attributed 35% of the profits to the PE in India for negotiating contract and marketing activities by the PE in India. He pointed out that there is no such Article in Double tax Treaty between India and China. Therefore, where the employees of both China and India were present and carried out the activity of negotiation of contract, the entire profit on such account could not be attributable to the PE in India. 44. Ld. counsel further clarified that before Hon'ble Delhi High Court assessee did not challenge the attribution of 35% of the gross profits to the activities carried out in India. Ld. counsel pointed out that decision in the case of Rolls Royce Singapoe v. ADIT, wherein Tribunal had the occasion to examine whether the foreign company had a PE in India and in the event PE coming into existence what was the profit which was required to be attributed in the facts of the case. He poin....
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....ance Guarantee of the . company- ZTE - Coordination with Government Departments - negotiation at Government level - Decisions regarding partnership with other concerns/ marketing. - Foreign Investments in India - Taxation matters of ZTE China - Marketing Functions - Banking Functions - Visiting customers and vendors 47. In the case of Motorola (supra), Tribunal has referred to the decision in the case of Ahmadbhai Umarbhai (supra), wherein it has been held that income attributable to the manufacturing activity should be more than the income attributable to the activity of sale. Therefore, out of the total global income of assessee relatable to the supplies made to India more income is to be attributed to the assessee as accruing in China and from sale activity, it is not to that extent. We find that ld. CIT(A) has adopted the reasoning in the case of Alcatel Lucent. In this decision ld. CIT(A) himself noted that assessee had accepted and not contested in appeal attribution @ 2.5% of total sales revenue. Therefore, this decision, considered by ld. CIT(A), cannot be the basis for arriving at the conclusion that 2.5% of entire sales revenue should be attributable to I....
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....eal in subsequent part of this order, we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. We are not inclined to accept this mode of computation resorted by AO, particularly in view of Rule 10 of the IT Rules, which mandates the AO to go by the published accounts of assessee. In the result assessee's ground no. 6 in AY 2009-10 stands allowed. We may further clarify that our decision does not amount to enhancement of income because overall tax effect will be less as compared to tax computed by AO/CIT(A). 51. Now we proceed to decide the assessee's submission that since for AY 2006-07 (Rs. 20,56,87,472/-), 2007-08 )Rs. 17,10,23,750/-)and for AY 2008-09 (Rs. 2,38,84,545), the assessee had paid marketing support services, therefore, no attribution should be made. The submission is that TPO in the case of WebT India has accepted that the payment for market support service is at arm's length and, therefore, in view of the decision of Hon....
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....DIT Vs Ericsson AB decided by the Hon'ble Delhi High Court in ITA no 504/2007 dated 23-12-2011 and in the case of Nokia Network dated 07-09-2012. 3. On the facts and in the circumstance of the case, the Ld CIT(A) has erred in not considering the applicability of retrospective clarificatory amendments through insertion of explanation 5 & 6 to Section 9(1) (vi) of the Act vide Finance Act, 2012, which helps in defining the term royalty income more clearly. 4. The Ld CIT(A) erred in directing the AO to withdraw interest u/s 234B by relying upon the decision of Hon'ble Delhi High Court dated 30-08-2010 in the case of DIT Vs Jacobs Civil Incorporated, without appreciating that the levy of interest u/s 234B is mandatory as held in the case of CIT v. Anjum M. Ghaswala & others 252 ITR 1 (SC). 55. In the revised grounds of appeal raised by department there are primarily 2 issues. Firstly, the department is aggrieved by the findings of ld. CIT(A) that the income from supply of software was to be treated as business income instead of royalty considered by the AO. The second issue on which department is aggrieved is in regard to finding of ld. CIT(A) in directing the AO to withdr....
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....er the contract as required for the satisfactory implementation of the works or as specifically provided for in the contract. 1.24 IISqftware" me~ns the software bundle'! with, embedded, or supplied by the contractor. along with the Equipment(s) which is described in the specifications, or any improvements and/ or enhancements thereof, including: (i) man-machine executable object code version of the user loadable programs, (ii) the microcode embedded in the equipment, (Hi) any updated or revision of these programs or the microcode delivered to the purchaser and (iv) any further programs and microcodes necessary for integration of the equipments with the equipments of other vendors/ suppliers of the purchaser. ARTICLE 16: SOFTWARE LICENSE 16.1 Subject to the terms and conditions of this contract, the contractor grants to the purchaser and end-user the nonexclusive and transferable right to use the software delivered with the equipment. Except as provided herein, the purchaser shall not directly or indirectly, sell, transfer, offer, disclose, lease, or sublicense the software to any third party without prior authorization from the contractor. The contractor warrants that th....
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....specified in this contract. "Soitwer« Updates" shall mean latest release of software version applicable to the system or part thereof with all available features and functionalities as per scope of this contract with respect to software and corrections of the software faults that may or may not be reported by the buyer to the supplier, which are issued as software updates by the supplier to the buyer. The software update shall contain the appropriate load file, implementation instructions and user documentation. ARTICLE: 5: CONTRACT PRICE 5.1 The total tentative Contract Price (CIF DELHI) is USD 556,000,000 (US Dollars Five Hundred and Fifty-six Million only) which shall be subject to change as per the mutual agreement between the parties based on the final configuration of the bill of material of all the three phases and the purchase value for the first PO is USD 46,756,935 (US Dollars Forty Six Million Seven hundred and Fifty Six thousand Nine hundred Thirty Five only). The contract price shall be established for the full term of the contract and it represents a sum in the limits of which the buyer shall place orders for the delivery of equipment and the delivery of s....
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....to annexure XII of department's paper book and referred to page 75 wherein the addendum to the supply contract for the telecom equipment dated 5.9.2008 is contained. He referred to page 72 of PB wherein the original supply agreement dated 5.9.2008 between assessee and Shyam Telelink Ltd. is contained. He pointed out that this agreement was found during survey operation. 60. ld. CIT(DR) referred to Article 1 of the aforementioned agreement dealing with definition and interpretation of various words and phrases of agreement and pointed out that BSS Software means software related to BSS equipment. He further pointed out that equipment has been defined to mean the hardware, software, material, components and documentation to be delivered under this contract. Thus, he pointed out that software has separate independent identity. He further referred to the definition of 'software' as per which software means computer application program, software application module or package or any part thereof in binary code from licensed to buyer under this contract and listed in Annexure 8 of this contract which are required for the purpose specified in this contract. 61. The definition....
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....rged outside India and the cost of warranty services for Software under this Contract. 65. Thus, he submitted that software prices also have separately been mentioned in the contract itself. ARTICLE 34 LICENSE 34.1 Subject to this Article, Buyer is hereby granted a limited, non- transferable , perpetual, non-exclusive license to use the Software and Documentation provided pursuant to the Contract ("Software License"). Buyer agrees that the copyright in the Software and Documentation licensed to it by Supplier including any renewals, extensions, or expansions thereof, shall be treated as proprietary of Supplier or its sub-suppliers. 34.2 Buyer shall not make any copies of Software or Documentation, except for archival back up purposes. Buyer shall not translate, reverse engineer, modify, decompile, disassemble or create derivative works from the Software. 34.3 Buyer may assign the right to use the Software License to a third party in India for the purpose of operations and maintenance of the Buyer's Network , provided that any such third party agrees in writing to abide by all of the terms and conditions of this Software License. 34.4 The Software licensed under a Pur....
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....ction 148 of the Act were issued to all Alcatel Group entities which had carried out business in India. Alcatel Group is has supplied telecommunication equipments and software to various Indian customers. 3. In the assessment orders it was held that various Alcatel Group entities have business connection as well as a permanent establishment in the form of fixed place PE, dependent agent PE and installation PE. A profit based on the sales of equipments made in India was attributed to these permanent establishments. Indian permanent establishment was also involved in making sales in some South Asian countries. A profit on account of these sales was also attributed to Indian permanent establishment. The assessee has not disputed the issue of the permanent establishment as well as attribution of profit to the same and has paid the due taxes. Taxation of income from licensing of software 4. Income from software has been taxed as royalty. The paragraph 8 of the assessment order for A Y 2006-07 deals with the taxation of income from licensing of software as royalties. The assessee has taken this of taxation in appeal. 5. The 1d.C/T(A) has discussed the issue of taxation of income ....
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....ght Act or any other Act like Sales Tax Act can be taken in this regard. 10. The Revenue strongly relies on the decision of Central Economic-Administrative Court of Spain in case number 3604/2006 wherein the issue of taxation of income from software under the tax treaty between Spain and the USA has been adjudicated. In this case the taxpayers had claimed that the computer software had to be regarded as literary work under the tax treaty between Spain and the USA. The Spanish Court gave decision in the favour of the Spanish tax authorities and against the taxpayer. The Court observed that computer software is not expressly included in the definition of royalty in Article 12(3) of the treaty due to rapid development of computer technology in recent years. The court then observed that paragraph 13.1 of the OECD Model commentary 2000 on Article 12 recognizes that there may be difficulties in applying the copyright provisions of Art. 12 to software payments since paragraph 2 requires that Software be classified as a literary, artistic or scientific work, but none of these categories seems entirely apt Considering the interpretation required by Article 3(2) of the treaty and the amend....
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....etworks OY 58 ITR 259 and 358 ITR 259. He submitted that receipts on account of supply of software were integrally connected to the supply of hardware and, therefore, AO was not right in taxing such receipts as royalty. He submitted that ld. CIT(A) has rightly held that receipts from supply of software could not be taxed as royalty, relying on various decisions. He further pointed out that ld. CIT(A) also held that in view of the decision of Hon'ble Delhi High Court in the case of DIT v. Nokia India (supra), software supplies could not be taxed even under the amended law. Further, as per the provisions of Article 12(5) of the DTAA the supply of software being integral to the supply of hardware and the finding of existence of a PE of assessee in India, Article 12(5) of the DTAA would cease to apply and the provision of Article 7 would be applicable and, therefore, the income from software is to be taxed as business income. 72. Ld. counsel relied upon following decisions: - DIT v. Ericsson AB [2012] 343 ITR 470 (Del.); - DIT v. Infrasoft Ltd. [2013] 39 Taxmann.com 88 (Del.) - Aspect Software Inc. v. ADIT [2015] 61 Taxmann.com 36 (Del.) 73. We have considered the submissio....
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...." 74. Respectfully following the decision of Hon'ble Jurisdictional High Court, as noted by Tribunal, ground nos. 2 & 3 are rejected. 75. Apropos ground no. 4, relating to levy of interest u/s 234B, ld. CIT(DR) submitted that ld. CIT(A) was not correct in withdrawing interest u/s 234B by relying on the decision of Hon'ble Delhi High Court in the case of DIT v. Jacobs Civil Incorporation 330 ITR 578. He submitted that levy of interest u/s 234B is mandatory in view of the decision of Hon'ble Supreme Court of in the case of CIT v. Anjum M. Ghaswala & others 252 ITR 1(SC). 76. Ld. DR pointed out that Hon'ble Delhi High court in the case of Jacobs (supra) has held that section 195 puts an obligation on the payer i.e. any person responsible for paying any sum from which tax is to be deducted, to deduct tax at source at the rate in force, from such payment and if payer has defaulted in deducting tax at source, the department can take action against the payer under the provisions of section 201. In such a case the non-resident is liable to pay tax but there is no question of payment of advance tax and, therefore, it cannot be held liable to pay interest u/s 234B on accou....
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....to the assessee to change its stand at the first appellate stage and submit to the assessment of the income. When it does so all consequences under the Act follow including its liability to pay interest u/s 234B, since it would not have paid any advance tax. In this regard he referred to para 20 & 21 of the Alcatel order which are reproduced hereunder: "20. The other argument on behalf of the assessee that the liability of the payer under Section 20 I is absolutely different from the liability of the non-resident assessee under Section 234B need not be examined and for the purpose of the present case it would not make any difference, on account of the peculiar facts of the present case. It may be recalled that the argument put forth by the revenue before the Income Tax Appellate Tribunal was that a~ the time of the receipt of monies from India, the assessee took the plea that it did not have any PE in India and, therefore, the payment was not chargeable to tax in India, with the consequence that Section 195(1) was not applicable, whereas in the appeals before the CI A peals), a contradictor stand was adopted by the assessee, by accepting the fact that it had a PE in India and by ....
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....telecom dealers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed. The Tribunal ought to have accorded due weightage to the strong possibility or probability of such a request having been made by the assessee to the Indian payers since otherwise the denial of its tax liability on its Indian income would have served little purpose for the assessee." 78. Ld. CIT(DR), therefore, submitted that the decision in the case of Jacabs (supra), has been clarified by Hon'ble Delhi High Court in the case of Alcatel Lucent (supra). He submitted that facts in the present case are similar to that of the Alcatel Lucent (supra). 79. Ld. CIT(DR) referred to the decision of ITAT Delhi Bench in the case of Huawei Technologies Co. Ltd. v. ADIT ( International Taxation) in ITA nos. 5253 & others dated 21.3.2014, wherein the matter has been restored to AO by observing in para 27 as under: "27. From the above, it is evident that what was the stand of the assessee in the return of income filed by it would be relevant for deciding the liability to interest under Section 2348. We find that this aspect has not b....
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....ttance to be paid to the assessee, towards tax. This determination would depend directly on the income of the assessee that is taxable in India on account of being attributable to its permanent establishment in India. That this determination is the responsibility of the payer is provided for, in the statute, in section 195(2). Thus the assessee's liability to tax does not depend on its own view of its permanent establishment status, or its admission or denial of tax liability. I[an assessee files nil returns at the stage of assessment, and maintains that it is not liable to tax In India, the payer is obliged to apply to the Assessing Officer to determine what portion, if any, of its remittance to the assessee, is liable to be deducted at source towards tax. The anomaly of an assessee denying tax liability (whether under a bona fide mistake or by deceit), thereby not suffering a tax deduction at source, and still being permitted a tax credit for the tax deductible was remedied after the Finance Act, 2012. Held, that the primary liability of deducting tax (for the period concerned, since the law had undergone a change after the Finance Act, 2012) was that of the payer. The pa....