TaxTMI 
TaxTMI 
2016 (6) TMI 329
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....ear, the assessee was engaged in supply of telecom 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 du....
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....o the decision of ITAT Delhi (Special Bench) in 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 ....
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.... the same manner as telecom equipment, - The software is an integral part of the telecom equipment which facilitates running of the said equipment. - The subject software has no 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 Benc....
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.... the customers, the buyer has no title or ownership rights. Buyer can neither license nor sell nor alienate or part with its possession. In view of this the said transaction is not a sale as per Sale of Goods Act but it is a limited right to use the software and hence the payment for the same 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 ....
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....eld that 2.5% of total sales made by foreign company in India was to be attributed as business profits of PE (including the value of software). (iv) Ld. CIT(A) also directed the AO to delete the interest levied u/s 234B. 10. Being aggrieved with the order of ld. CIT(A), both the assessee and department are in appeal before us. 11. 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 equi....
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....circumstances of the case and in law, the order passed by the Ld. AO pursuant to directions of Hon'ble DRP is bad in law and void ab-initio. 2. Appellant alleged to have a business connection in India Based on facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has erred in holding that the Appellant has a business connection in India in terms of section 9(1)(i) of the Act. 3. Appellant 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....
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.... India, we wish to submit: 5.1 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in attributing45 percent of the net profit to the alleged PE of the Appellant in India which is excessive and unreasonable. 5.2 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in not appreciating the decision of Hon'ble Commissioner of Income Tax (Appeals) in appellant's own case for Assessment Years 2004--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 w....
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....f hearing, ld. counsel for the assessee submitted that he has instructions from his clients that the dispute between the assessee and department may be settled and, therefore, on the most contentious issue regarding the existence of PE in India, he has instructions not to press the same. Therefore, the only ground which remains for adjudication is ground no.7 regarding attribution of profits to PE. 14. Ld. counsel for the assessee submitted that the attribution @ 2.5% of sales as done by ld. CIT(A) is highly excessive. He pointed out that the attribution done by AO by applying 20% of the net global 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....
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....y "R" with that of the same PE operating in country "S". Consequently, the ordinary credit given by country "R" for tax paid by its resident to country "S", on the resident's income (as determined under the domestic case law of country "S"), will not be in respect of exactly the same amount of income that country "R" measures for the purposes of calculation of its tax credit. Article 23B of the OECD model DTAA provides that methodology is not an exact ssience but merely an acceptable estimate to give a result that more or less fairly removes the effect of juridical double taxation. This system works so long as 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 m....
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....thod of determination of an income in the case of non-residents where exact profits cannot be calculated for want of sufficient information. The Said rule is reproduced hereunder: "10. In any case in which the Assessing Officer is of the opinion that the actual amount of the income accruing or arising to any non-resident person 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 source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained the amount of such income for the purposes of assessment 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 As....
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....embedded in the telecom equipment or provided to the customers separately has been discussed later in this order. Hence, it is clarified that the attribution of profits to the PE in India is ill respect of the "hardware component" of the telecom equipments arid the mobile handsets . As per Article 7 of the India-China DTAA, "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. 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....
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.... annual accounts are prepared in China. The assessee's submissions are misplaced and without appreciation of the fact matrix which has emerged from the findings of this case as discussed in preceding paras. It is observed that the only the following transactions were referred to the TPO for benchmarking. Description of transaction Amount (In Rs.) Sale of telecom equipment, spares, components & handsets 42,14,73,291.00 Logistic support services 34,94,21,178.00 repairs & maintenance services 6,33,31,168.00 Administrative support services 15,40,63,637.00 Total 98,82,89,274.00 These transactions do not constitute the part of crucial key functions performed by the Fixed PE, Installation PE, Service PE and DAPE. It is reiterated that business connection in respect of entire Revenue 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 transaction....
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....and Mobile Handset as per TP Documentations of ZTE India submitted by the assessee Summary of functions performed by ZTE India as per TP Documentations Trading of Telecom equipment Procuring equipment from ZTE China Sale to the Indian customers Minor incidental activities regarding installation After sales services towards such contracts Sale of Telecom Equipments directly by ZTE China to Indian customers Provision of installation and post installation services This is not the subject matter of TP Study [admitted as per TP Documentation] Trading of Mobile Handsets for only one customer- Drive India Enterprise Solution Ltd. Purchase of mobile handsets from ZTE China for only one customer Resale to the said company Sales Does not take decision in strategic marketing activities. Tendering process ZTE China to actively participate to provide technical, marketing & commercial guidance 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 del....
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....rs/ arranging supply orders for ZTE China - Raising invoices through ZTE India - Getting invoices from the customers in India - Payment negotiations with the customers in India - other administrative functions - Foreign investments - FIPB Clearances - Taxation matters - Marketing Functions - Banking Functions - Visiting customers and vendors - The profit is therefore, attributable to the above functions - Calculation of profit - During the course of assessment proceedings, assessee submitted that it does not maintain any separate books of accounts for Indian operations. In absence of any books of accounts in respect to India operations, Rule 10 of the Income Tax Rules, 1962 is invoked for determining the income of the assessee. - The assessee has submitted copy of the Global Accounts which shows consolidated accounts of - various countries. In China, the financial year is from January to December. As per the Global Accounts, the net operating profit for the calendar year 2008 & 2009 comes to 1.70% and 2.80%. - Since, in India the Fin Year is from Ap....
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.... - The Industries vertical market mix in India is well balanced across several mature and emerging sectors. While the Banking, Financial Services and Insurance Segments remains the biggest sector with over 41% of Total Revenues, verticals like HI-Tech/Telecom Manufacturing and Retail are increasingly gaining share. - The Indian IT-BPO Industry has displayed resilience and tenacity in encountering the unpredictable conditions during these years and reiterating the viability of India's fundamental value proposition. - According to NASSCOM Factsheet-Indian IT-BPO Industry', the Indian IT-BPO" - Industry is estimated to achieve revenues of USD 71.7 Billion in F. Yr. 2009. As " proportion of National GDP, the Sector Revenues have grown from 1;2 percent to an estimated 5.8 percent in F. Yr. 2009. Therefore, in absence of India specific accounts and in view of the reasons cited above, the operating profit estimated at 7.5 %.Considering the scale of functions performed by the PEs (which are not included ill TP Documentations), 45 % of such profits are considered attributable to the PE of the assessee in accordance with the provisions of Art....
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....(A) has confirmed the findings of AO in regard to fixed PE in India and dependent agency in India but has not concurred with the findings of AO in regard to installation PE. The observations of ld. CIT(A) in regard to fixed PE in India are as under:- 5.4 'From above statements, it can be seen that ZTE Corporation China is supplying telecom equipments to customers in India. ZTE India which is wholly owned subsidiary of ZTE Corporation China is responsible for installation / commissioning of equipments su Plied by the appellant. The contracts are negotiated and concluded in India by a team consisting of persons from ZTE India and ZTE China. The expatriates from ZTE China come to India to provide technical support services to ZTE India. All these activities go on to establish that the appellant has business connection in India within the meaning of section 9(1)(i) of the Act. The non- resident appellant is doing business activities in India which are not isolated instances, rather these represent real and intimate relationship between activities of the appellant done outside India and those done inside India. The business operations being done in India by the appellant ar....
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.... Al8, Scetor-I, 2nd floor, A-wing, Mahape, Navi Mumbai These addresses are offices of ZTE India and Chinese expatriates come to India and operate for ZTE China, the appellant, from these places. 28. As regards the dependent agency PE, ld. CIT(A) has observed in paras 7.2.2 and 7.2.3 as under: "7.2.2 Combined reading of these two clauses of Article 5 shows that Indian entity should be other than an agent of independent status and it should habitually exercise authority to sign contract on behalf of non-resident provided its activities are not of ancillary or auxiliary nature. In present case, ZTE India is performing installation activities in respect of telecom equipments supplied by ZTE Corporation to customers in India. It is not the case of the appellant that ZTE India is performing similar services for other such suppliers. Thus, activities of ZTE are devoted wholly or almost wholly on behalf of the appellant and hence it cannot be considered as agent of independent status. Further, even for technical input, ZTE India is wholly dependent upon the appellant. It is undisputed that employees of the appellant are always providing technical support services to ZT....
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....of signing of contract is irrelevant for constitution of agency PE. Only requirement is that business activity of agent should be pursued in the state where agency PE is to be constituted. 29. Before arriving at any conclusion on the basis of aforementioned findings of lower revenue authorities on the level of operations carried out at PE in India, we will first refer to various case laws relied upon by both the sides. 30. The ld. counsel for the assessee relied on the ITAT Delhi Special Bench decision in the case of Motorola Inc. v. DCIT [2005] 95 ITD 269 (Del.)(SB). In this case the Tribunal in para 287 has observed that the only activities which the assessee carried on in India through its PE were (a) Net work planning; (b) Negotiations in connection with the sale of equipment; and (c) The signing of the supply and installation contracts. 31. Tribunal further noticed the decision of Hon'ble Supreme Court in the case of CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC) (para 19), wherein the Hon'ble Supreme Court held that the income attributable to the manufacturing activity should be more than the income attributable to the activ....
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....he contribution of PE towards earning of taxable revenue observed that since PE was merely doing job business of negotiations, profits attributable to PE were to be reduced to 8%. Tribunal upheld the ld. CIT(A)'s contention after considering the decision in the case of Motorola Inc. (supra). Tribunal, inter alia, observed that since PE was merely doing the job business of negotiation, therefore, 8% profits attributable to PE were in line with the requirement of Rule 10(2) of the IT Rules. 35. Ld. CIT(DR) referred to the assessment order passed in the case of Alcatel Lucent, France for AY 2006-07 and referred to para 6.6 at page 78 of the said order, which is reproduced hereunder: 6.6. Assessee has submitted the annual. accounts of the group for the calendar years 200 1 to 2008. However, this basis cannot be adopted because article 7(2) of the treaty provides that profits to be attributed to a permanent establishment are those which that permanent establishment would have made if, instead of dealing with its head office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. The business of the asses....
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.... i.e. after reducing the payment made to Indian company for marketing support; 'an objective & reasonable profit attributed to the PE in India will be 2.50% of the turnover. There are facts which were not disclosed earlier and as per the discussion above, satisfaction is hereby recorded that the assessee had concealed the particulars of its income inter-alia by furnishing inaccurate particulars of its income. Penalty proceedings u/s 271 (1)( c) of the Income-Tax Act 1961 initiated; separately. 36. Ld. CIT(DR) further referred to the appellate order passed in the case of Alcatel Lucent France and referred to para 5.8 of ld. CIT(A)'s order wherein ld. CIT(A) has, inter alia, observed as under: ".... As mentioned in para 3.3 above, in respect of hardware sales, the Ld. AO has estimated net profit chargeable to tax as attributable to PE in India @ 2.5% of the hardware sales made by appellant in India and the appellant has not disputed the findings of the ld. AO on taxability of hardware sales." 37. This remained the basis for assessment years 2004-05 and 2005-06. 38. Ld. CIT(DR) referred to para 9.2.3 of CIT(A)'s order, wherein it is observed as under: ....
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....0 (department's appeal). The Tribunal has observed that M/s Nortel Networks India International Inc., a company incorporated in USA, was a group concern of M/s Nortel group, which is a leading supplier of hardware and software products for GSM Cellular Radio Telephones System. During the year under consideration the assessee had supplied telecommunication hardware to Reliance Infocom. Tribunal, after rejecting the assessee's plea that there was no PE in India, considered the issue of attribution of profits from para 9 onwards of its order. The AO noted from the global accounts of Nortel, the gross profit margin percentage of the assessee was 42.6%. He allowed 5% deduction towards expenses on general and marketing and thus 37.6% of the total value of supplies of hardware made to Indian customer was taxed by AO. Ld. CIT(A) attributed 50% of the profits to the activities of PE in India which was upheld by Tribunal. 40. Ld. CIT(DR) further referred to the decision in the case of Rolls Royce PLC Vs. DIT International taxation 339 ITR 147 (Del), wherein the Hon'ble Delhi High Court approved 35% profits attributable to PE on account of marketing activities in India. The Hon....
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....assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered. Thus, there is no need to remand the case back to the Tribunal for this purpose which was the plea raised by the counsel for the assessee. The view taken by the Tribunal in the impugned order as well as in the Miscellaneous Application is upheld. - Royce PLc v. Dy. Director of IT [2008] 113 IT) (Del) 446 : (2008) 1 DTR (Del) 394 and Rolls Royce PIc v Dy. Director of IT [2009] 122 IT) (Del) 359 : [2009] 20 DTR (Del) 140 affirmed." 41. Ld. CIT(DR), therefore, submitted that there is no thumb rule that only 20% of the profits are to be attributed and it depends on facts of each case as to what is the level of operation which is quite extensive in the present case as is evident from the findings of AO in AY 2009-10 and ld. CIT(A)'s findings. 42. Ld. counsel has filed a detailed rebuttal with reference to the decision in the case of Rolls Royce PLC (supra). Ld. counsel submitted that Tribunal had taken note of Article 7(3) of Indo-UK DTAA as per which where a PE takes an active part in negotiating, concluding or fulfilling contracts, notwithstanding....
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....ng upon the level of operations carried out by PE in India. In the present case we have earlier reproduced paras 6.2.2 and 7.2.3 from ld. CIT(A)'s order and also findings from AO's order for AY 2009-10 which give a clear picture of the level operations carried out by ZTE India, the assessee's PE. Ld. CIT(A) has pointed out that ZTE India is doing preparatory work, negotiating the contract and price and answering specified queries of the customers on behalf of the assessee. These are all vital functions which are revenue generating. The AO in AY 2009-10, as noted earlier, has elaborated in detail the functions carried out by PE in connection with sale in India. At the cost of repetition, we reproduce the same:- "Activities performed by PE, summarized by AO as under, - Supervision and control of projects in India by MD of ZTE India - Meetings at Tendering/ Pre Bid stage in India - Preparation of Bidding Documents in India - Signing and submissions of bids in India - Price and contract negotiations in India - Preparation of draft agreements and MOUs in India - Signing of agreement in India - E....
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....ider the overall operations carried out by PE in India. Mere involvement of expatriates in the activities of PE for assisting the Indian team cannot substantially affect the revenue generating capacity of PE. 49. The decision in the case of M/s Nortel Networks India International Inc. ( ITA nos. 119 to 121/Del/2010 and 1153 to 1155/Del/2010 order dated 13.6.2014), the Tribunal in para 14.4 has noted that in assessee's case hardware supply contract was a part of the trunkey contract which involved supply, installation, testing aand commissioning etc. as is in the present case. Activities of M/s Nortel India and that of LO of Nortel Canada and services of expatriate workers had also been taken as part of the execution of the work by the PE. Thus, the level of operation carried out in India were extensive and under such circumstances Tribunal had attributed 50% of the net profit arising out of Indian transactions as assessee's income. 50. Having discussed the entire case law and after considering the factual aspects, we find that the level of operations carried out by assessee through its PE in India are considerable enough to conclude that almost entire sales functions ....
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....rfaced on account of survey operations, profits have to be attributed. The AO in his findings for AY 2009-10, as reproduced earlier, very rightly pointed out that 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 is applied then nothing further will be left to be taxed in the hands of foreign enterprise in light of the decision in the case of Morgan Stanley (supra), cannot be accepted because in that decision itself Hon'ble Supreme Court has, inter alia, observed that if the TP analysis does not adequately respect the functions performed and risk assumed by the enterprise then in such a case there would be need to attribute profit to the PE for those functions/ risks that have not been considered. 53. In the result assessee's appeals stand partly allowed. Department's appeals: 54. Revised grounds, common in all the appeals, raised by the revenue are as under: "1. On the fads and in the circumstances of th....
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....wherein AO has considered the terms of agreement between assessee and Spice Mob. Pvt. Ltd. Ld. CIT(DR) referred to various covenants of the agreement, which have been reproduced in the assessment order. The same are reproduced hereunder: (Agreement between the assessee and Spice Mobile Pvt. Ltd.) This Memorandum of Agreement is made on this 21st day of November, 2006 BETWEEN Spice Mobile Pvt. Ltd, a company incorporated in India and having its principal/ registered office at Viii. Billanwalla labana, P.O. Baddi, Tehsil Nalagarh, Dist Solan- 173001 (H.P.) (hereinafter referred to as "Purchaser'? or sometimes also referred to as "Customer'? of the one part, AND ZTE Corporation, a company incorporated under the laws of P.R. China having its registered office at ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, P.R. China (hereinafter referred to as "Contracto,Jkor sometimes referred to as "ZTE'?, which expression shall be deemed to mean and include its all successors-in-interest end assigns of the other part. - WHEREAS: B. the purchaser is engaged in the sale and di....
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....ent or third party to) (ii) modify, vary, enhance, copy or duplicate, any part of the software, or (ii) create or attempt to create, or permit others to create or attempt to create, by adapt, dissemble, decompile, reassemble, translate, reverse engineering, or otherwise, the source programs or any part thereof from the object programs or from other information made available under this contract. (Agreement with Shyam Telelink Limited) This contract is made on this 2:fd day of August, 2008 BETWEEN Shyam Telelink Limited, a company incorporetedin India and having its registered office at B-2-D, Shiv Marg, Bani Park, Jaipur, India and its corporate office at A-60, Naraina Industrial Area, Phase-1, New Delhi 110028 (hereinafter referred to as "the buyer") which expression shall deem to mean and include all its successors-in-interest and permitted assigns of the one part. AND ZTE Corporation, China a company incorporated under the China Laws, having its registe.red office at 3/F, A Wing, ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, P.R. China hereinafter called the "supplier' which expres....
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.... well as the cost of freight, insurance and shipment in accordance with the delivery term CIF (lNCOTERMS 2000) as per Article 16 of the contract. Prices for software specified in individual orders for the delivery of software shall include all taxes and fees charged outside India and the cost of warranty services for software under this contract. 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 (IISoftware 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 t....
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....rrections 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." 62. Thereafter ld. DR referred to Article 2 dealing with scope of supply referred to para 2.3 which reads as under "The delivery of System and provision of Software Produce shall be implemented on the oasis of Purchase Orders. A Purchase Order shall be signed by the Authorized Representatives of the Parties and shall be deemed to be placed when both the Parties have signed the Purchase Order in original or by means of - exchanged signed faxed copies. The Supplier shall within 3 (three) business days after receipt of a copy of the Purchase Order signed by the Buyer shall either sign the Purchase Order and send it to the Buyer or inform the Buyer in writing about its non acceptance. In case the Supplier fails to sign the Purchase Order or fails to send any intimation in token of its acceptance within the allowed three (3) days time, in that event, the purchase Order shall deemed to be considered as ac....
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....sly provided otherwise in the Purchase Order. 34.5 The obligations of Buyer under this Article, shall survive the termination or \ expiration of this Contract for any reason. 66. Thus, as per the licensing terms as contained in Article 34, limitations have been prescribed for use of software. The proprietary right remained with assessee as is evident from the restriction imposed while granting license. 67 To further buttress his submission that software was separately ordered and invoices separately raised, ld. CIT(DR) referred to Annexure XI of department's paper book page 109 PB wherein the invoices raised by assessee on M/s Sistema Shyam Teleservices Ltd. is contained in which the item description is as under: 1. EVDO for BTS Jaipur-Software 2. BSC Upgrade for EVDO Jaipur-Software 68. He also referred to page 107 wherein the copy of bill of lading is contained. Ld. CIT(DR) pointed out that the contention of tax payer is that since on software there is no custom duty, separate invoices were raised. He submitted that characterization of a transaction should remain same for all statutes and the assessee cannot change its stand under Income-ta....
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....e Hon'ble Delhi High Court in the cases of Ericsson AS and M/s Nokia Networks has allowed the appeal of the assessee. However, in paragraph 5.8 of the order, the Id.CIT(A) has directed the AD to tax profit worked out @ 2.5% of total sale consideration received by the appellant for supply of hardware and software. 6. The Revenue is aggrieved with the decision of ld.CIT(A) to the extent of not upholding taxation of Income from software as royalty and also not considering the applicability of retrospective clarificatory amendments through insertion of explanations 5 and 6 to Section 9(1)(vi) of the Act by Finance Act 2012. 7. The undisputed facts In present case are that software has been licensed and not sold. Further, title in the software has not been transferred. Only partial rights permitting the use of software have been granted. 8. The Revenue relies on the decision of the Hon'ble High Court in the case of Infrasoft Ltd (Order dated 22.11.2013 in ITA No. 1 034/2009) to the extent that the assessee has not contested the taxability of income from software as royalty under the provisions of the Income Tax 4ct. The Hon'ble, High Court in the c....
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....2 of Non-Resident Income Tax Act (Law 41/1998 of 9 December amended by Law 46/2002 of 8 December, currently Article 13.1) No.3 of Royal Legislative Decree 5/2004), the Administrative Court concluded that payments derived from the use of computer software should not be regarded as literary or scientific work and therefore, such royalties should be taxed as other royalties at a higher rate of 10% and not at 5% as applicable to literary or scientific work. Copy of summary of this decision is submitted. 11. Relevant portion of Article 12 of Spain-USA treaty is also attached. The issue of taxation of income from software as royalty was never in doubt and not disputed under the Spain-USA treaty, the dispute only concerned rate of tax. 12. Kind reference is also invited to paragraphs 114 to 117 and 130 to 134 of the assessment order for A Y 2006- 07 in the matter. Page 116 and 117 shows that even the GECD countries namely Mexico, Spain, Slovak Republic, Greece, Korea, Poland and Portugal taxes the income from software. India along with many non-member countries of the GECD have submitted their position on taxation of software (kindly refer to pages 132 and 133 of the ass....
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....rused the record of the case. We find that in the case of Alcatel Lucent, France Tribunal in para 12,13 & 14 it has been held as under: "12. We have carefully considered the arguments of both the sides and perused relevant material placed before us. We find that learned ( (A) allowed the relief to the assessee following the decision of ITAT in assessee's own case for AY 1997-98 in ITA No.407/Del/200l. The ITAT had delivered the above decision following the decision of Special Bench of ITAT in the case of Motorola Inc. (supra). We find at Hon'ble jurisdictional High Court upheld the decision of ITAT of Special Bench in the case of Motorola Inc. (supra) in the case of DIT v. Ericsson A.B. (supra). In the appeal by the Revenue, question No.3 pre posed before the Hon'ble Jurisdictional High Court and admitted by their Lordships reads as under.- "Whether in law, the learned De/hi Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and, hence, was not assessable both under section 9(l)(vi) of the Double Taxation Avoidance Agreement between the Government of India and Sweden?" 13. That ....
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.... 234B on account of default of the payer in deducting tax at source from the payments made to the assessee. The relevant part of the judgment is quoted below: 8 This clause categorically uses the expression" deductible or collectible at source" and it is this clause which is incorporated by the Uttaranchal High Court in the said judgment (supra) in the manner already pointed above. The scheme of the Act in respect of non-residents is clear. Section 195 of the Act puts an obligation on the payer, i.e., any person responsible for paying to a non-resident, to deduct income-tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head "Salaries". Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the nonresident. Section 201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a nonresident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in ded....
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....t it had a PE in India and by admitting that the income earned in India was chargeable to tax. It was further argued by the-revenue that such a contradictory plea cannot be permitted to be taken by the assessee. It was pointed out that consistent with the stand taken in the return, the assessee would have told the Indian payer that no tax should be deducted from the remittance and it was, therefore, not open to the assessee, merely because at the first appeal stage it chose not to contest the assessment of the income attributable to the Indian PE, to turn around and say that since it has now accepted its liability to pay tax on the Indian income, it was for the Indian payers to have deducted the tax and if they had not done so the assessee cannot be held liable for the interest. This argument of the revenue was rejected by the Tribunal on the ground that there was no material in support of the lea that the assessee represented to the Indian payers not to deduct tax, nor did any such facts or circumstances emerge from the Impugned orders 21. We are unable to uphold this part of the decision of the Tribunal. It must be remembered that in the note appended to the return the a....
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....Section 2348. We find that this aspect has not been considered either by the Assessing Officer or by the learned DRP. In fact, the decision of Hon'ble Jurisdictional High Court in the case of Alcatel Lucent USA, Inc. (supra) is dated 7th November, 2013, therefore, this decision was not available' at the time when either the Assessing Officer or the DRP passed the order. In our opinion, it would meet the ends of justice if this matter is restored to the file of the Assessing Officer with the direction to readjudicate the issue after taking into account the decisions of Hon'ble Jurisdictional High Court in the case of Jacabs Civil Incorporated (supra) and Alcatel Lucent USA, Inc. (supra). We, therefore, set aside the orders of authorities below with reference to levy of interest under Section 2348 of the Act and direct the Assessing Officer to allow adequate opportunity of being heard to the assessee. Thereafter, he will readjudicate the issue in the light of the ratio of the decisions of Hon'ble Jurisdictional High Court in the case of Jacabs Civil Incorporated (supra) and Alcatel Lucent USA, Inc. (supra). With regard to interest charged under Section 234A, no specif....
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....rgone a change after the Finance Act, 2012) was that of the payer. The payer would be an assessee-in-default, on failure to dis-charge the obligation to deduct tax, under section 201 of the Act. No interest was leviable on the assessees under section 234B, even though they filed returns declaring nil income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under section 195(1), and to what extent, by recourse to the mechanism provided in section 195(2) of the Act. The failure of the payers to do so did not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under section 201, and the consequences delineated in that provision would visit the payer. DIT v. JACABS CIVIL INCORPORATED [2011J 330 ITR 578 (Delhi) applied. DIT (INTERNATIONAL TAXATION) v. ALCATEL LUCENT USA. INC. [12014] 2 ITR-OL276 (Delhi) distinguished. 82. We have considered the submissions of both the parties and have perused the record of the case. The decision in the case of GE Packaged Power Inc. (supra), is the latest decision in which both the decisions in the cases of Jacabs Civil Inc. (supra) and Alcatel ....