TaxTMI 
TaxTMI 
2017 (1) TMI 1338
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....iness of supplying telecom equipment. During the financial years, relevant to the subject assessment year, it was engaged in supply of telecom equipment to Indian telecom operators; it also supplied mobile hand-sets to customers in India. It did not file its return of income arguing that it had no Permanent Establishment (PE) in India in terms of the provisions of Article 5 of the Indo-China Double Taxation Avoidance Agreement ("DTAA"). On 6.10.2009 a survey under Section 133A was undertaken at its premises and several documents were seized. Statements of its senior executives were also recorded. On the basis of these documents and statements, the Assessing Officer (AO) formed the opinion that the assessee had a business connection in India and its business had been carried through its PE in India and further income had accrued to it during the relevant year from such business. 3. A notice under Section 148 of the Income Tax Act ("the Act") was issued on 23.10.2009 requiring the assessee to file its return of income; it did so, declaring Nil income. In the notes to the "statement showing computation of income" the assessee stated that since it did not have PE in India, its reven....
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....yment shall not constitute royalty under India- China tax treaty. 7. The AO also referred to the decision of the Authority for Advance Ruling in Worley Parsons Pty. Ltd.(AAR No. 747 of 2007) for the proposition that the payments for software should be taxed on case basis, since the same were not effectively connected to the PE of the assessee in India. The assessee in its reply distinguished this decision on facts and pointed out that AAR held so since no material evidence was placed by the assessee to demonstrate the role played by the PE under the PMS contract and its relationship with the royalty revenue earned under the BE &P contract. It was pointed out that the applicant before the ruling was not able to demonstrate 'effective connection' between the BE &P revenue and PE under the PMS contract. The AO rejected these contentions. 8. Aggrieved by the AO's order, the assessee appealed to the CIT (A). The appellate commissioner accepted the assessee's contentions and found as follows: (i) Assessee had fixed place PE and dependent agency PE in India. However, he did not accept the AO's plea as regards installation PE in India. (ii) On the issue of taxation ....
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....me Tax v Alcatel Lucent Canada [2015] 372 ITR 475 (Del) which had in turn relied on Director of Income Tax v Erricsson AB (2012) 343 ITR 470. On the issue of interest under Section 234B, reliance was placed on Director of Income Tax v GE Packaged Power Inc. 373 ITR 65 and relief was granted to the assessee. 11. Mr. Ruchir Bhatia, learned counsel argues that the ITAT fell into error, in holding that payment for the embedded software, was not royalty. It was submitted that software prices also have separately been mentioned in the contract itself. The following conditions under the contract between the assessee and its vendor were relied on: "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 pu....
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....that as the agreement specifically provided for 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. 14. It was also argued that "royalty" was not effectively connected with the PE in India. The relevant extract of the finding of AO were relied upon. It was also submitted that the ITAT failed to note and appreciate Explanations 5 and 6 inserted to Section 9 (1) (vi) of the Act with retrospective effect by the Finance Act, 2012. In this case, the assessee failed to establish that the rights, property or the contract in respect of which the royalty is payable is effectively connected to the PE of the assessee in India. The further argument is that the AO's finding- that in the present case of the assessee such royalty is not effectively connected with the PE and therefore is not covered under Article 12(5) of the DTAA between India and China is correct. The taxability of the payments characterized as royalty is to be governed under Article 12(2) of the DTAA read with Section 90(2) of the Act. 15. Mr. Bhatia made an alternative submission that even if this court were to up....
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....tate may be taxed in that other Contracting State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, bu....
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.... of the person making the payments and to any individual for independent personal services mentioned in article 15, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base or with business activities referred to under (c) of paragraph 1 of article 7. In such case, the provisions of article 7 or article 15, as the case may be, shall apply." This court held as follows: "....We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore....
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....uld become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes. xxx In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpr....
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....hani under a separate contract for the technical services rendered by a non-resident company, it must be deemed that there was a "business connection", and it attracts the provisions of Section 9(1)(vii) of the Income Tax Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfillment of the main contract entered into principal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the learned counsel for the assessee that this separate specification of the hardware/software supply was necessary because of the differential customs duty payable. 59. Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of E....
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....,- (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) In the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub clauses (i) to (iv); (d) In the case of a cinematograph film- (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regar....
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....is provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods- significantly enough, Section 14 (1) talks of sale or rental of a "copy". The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign it, divesting itself of the title implying that it has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under Section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as "copyright". 22. In the present case, the facts are closely similar to Ericson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was ....