TaxTMI 
TaxTMI 
2018 (10) TMI 485
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....re reproduced as under: A.Y. 2007-08 "1. That the CIT(A) has erred in law and on the facts of the case whilst confirming the demands raised by the Income Tax Officer, TDS Ward- 1(1), International Taxation, New Delhi ("AO"). 2.(a) The Ld.CIT(A) has erred in law and on the facts of the case in confirming that the appellant had failed to deduct the tax of Rs. 39,09,666/-. (b) The Ld.CIT(A) has erred in law in ignoring the fact that supply of hardware and software by Network Appliances BV, Netherland ("NABV") was made pursuant to outright sale and no right on such hardware and software was retained by NABV. (C) The Ld. CIT(A) has erred in law and on the facts of the case without appreciating that the sale of hardware and software do not give rise to income chargeable to tax in India and hence no tax was required to be deducted in accordance with section 195 of the Act. (d) The Ld.CIT(A) has erred in law and on the facts of the case in holding that payment of Rs. 3,186,279/- made towards installation and support services and post warranty services are in the nature of "Fees for Technical Services" and "Royalty" as defined under arti....
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....the Assessing Officer in the prescribed information, accordingly, he issued a letter to the assessee explaining the reasons for nondeduction of tax at source on the said transactions. The Assessing Officer called for the invoices and other related documents pertaining to the aforesaid remittances made and observed that following payments were made during the previous year corresponding to Assessment Year 2007-08 and Assessment Year 2008-09:- S.No. Invoice/PO No. Date Amount(USD) Amount (INR) Annexure No. Purpose 1. PO 800525 23.05.2007 32,709 1,333,714.34 1 Purchase of storage shelf. 2. A660017822 22.04.2006 96,542 4,288,849.39 2 Software 3. B660017822 20.04.2006 31,602 1,466,961 3 4hr parts replace, install and SW subs 36 months (installation & support services. 4. A660020466 13.09.2006 34,154 1,542,736 4 Computer hardware 5. B660020466 13.09.2006 7,264 328,122 5 Installation & support services 6. 660023351 06.02.2007 10,200 448,904 6 4hr parts replace-post WTY and SW subs 7. 660023350 06.02.2007 10,200 449,517 7 4h....
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....t had relied on the article 12 of the DTAA between India and the USA and committed an error by not applying the provisions of the tax treaty between India and Neatherland, as the 'Network appliance' claimed to tax resident of Netherland. The Ld. Assessing Officer referred to Examples 8 and 9 of the Memorandum of Understanding (MoU) concerning fee for included services in Article 12 with regard to US India tax treaty, which being pari-materia with the scope of the definition in India Netherland tax treaty. 4. In view of the analysis of the Examples 8 and 9 of the memorandum of understanding, the Ld. Assessing Officer concluded as under: "In view of the analysis of example 8 the services of updating the software/ renewal of license, are not inextricably and essentially linked to the sale of computer hardware/ initial sale of software and, therefore, the payments for such services is of the nature of fees for technical services. Similarly, the payments for the post warranty services are also treated as fees for technical services. The payments for the renewal of license/ further subscription of the license for the software, is also of the nature of royalt....
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....the present facts of the case are also technical services. The appellant, reason best known to itself has not filed application to the AO u/s 195(2). 2.5 Judging from either point of view, there is no escapement of the fact that the appellant has not deducted TDS which is obligatory on its part as per the provisions of the law. There is no such mention the DTAA which empowers the assessee not to deduct tax. It was entirely on its own volition, the appellant chooses not to pay the tax which is otherwise liable to be paid and the AO has rightly treated the appellant as assessee in a default and imposition of tax of Rs. 35,91,041/- and Rs. 3,18,625/- and interest u/s 201(1A) of Rs. 6,22,068/- and Rs. 51,559/- respectively is correct and such order does not require interference of any sort from this office." 7. Aggrieved, the assessee is in the appeal before the Tribunal raising the grounds as reproduced above. In both Assessment Years, common grounds of appeal have been raised. 8. The Ground No. 1 of the appeals is general in nature, and thus covered by the other grounds, which we are not required to adjudicate upon specifically. 9. The Ground No. 2 is in respect of ....
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.... Page no. 330334 8.2 Offshore supply of equipment is not taxable 8.1.1. Payment made by the appellant towards the purchase of hardware is not taxable under the provision of the Act or the DTAA between India and Netherlands/USA since the payment for purchase of hardware is business income in the hands of the recipient seller and in the absence of Permanent Establishment ("PE") of the sellers in India, such income will not be taxable in India as provided in Article 5 of the Indo-Netherlands and Indo-US DTAAs. Case Law Relevant Para and Page of Case Law Compilation Ishikawajima-Harima Heavy Industries Ltd. vs. DIT[2007] 288 ITR 408(SC) The amount received by the assessee, a non-resident company, in respect of offshore supply of equipments and materials in terms of a composite contract executed in India was not liable to tax in India because the transaction was carried out outside India and the assessee's permanent establishment in India was not involved in the Transaction. Page No. 20 Hyundai Heavy Industries co. Ltd. 321 ITD 385 (Del ITAT) The assessing Officer was correct in not taxing the revenue relating to offshore supply of material in vi....
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....case of Ericsson A.B. Page no. 146-148 para 25-30 Relaince infocom Ltd vs DDIT [2013] ITA no. 5468/M/08 & Others (ITAT Mum) The Tribunal upheld the principla laid down by the Delhi ITAT in the case of Motorola as ;affirmed further by Delhi HC in the case of Ericsson that software supplied embedded in hardware in not taxable as royalty. Page no. 212 and 213 para no. 27 8.4 Installation and Support Services are not Fee for Technical Services; Software subscription provided along with installation and support will not lead to payment of "royalties" within the meaning of the India-Netherlands and India-US DTAAs 8.4.1 The Appellant has made lump-sum composite payments under the invoices for installation and support service and subscription/license fee for the software update that is provided during the installation. These payments are not in lieu of use or right to use any copyright in the software. The Appellant has merely been given right to use the software. Mere right to use a software under a license arrangement does not lead to royalty unless the licensee gets a right to commercially exploit the copyright by making copies or other commercially exploit....
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.... the applicability of Article 12(6). 8.4.4 Retrospective amendments have been made to the definition of "royalty" in Section 9(l)(vi) of the Act to include payments made for right to use a software. However, such an amendment does not impact the definition of royalty in the DTAA as held by the Hon'ble Delhi High court in Nokia Networks (supra). Please refer to page 146 of the case law compilation for the relevant extract in this regard. Further, it is submitted that the India- Netherlands DTAA does not include right to use a software as part of the definition of "royalty" and the assessee is entitled to rely on the beneficial provisions of the DTAA under Section 90(2) of the Act." 11. The Ld. Counsel also relied on the decision of the Hon'ble Delhi High Court in the case of DIT Vs Infrasoft Ltd reported in 264 CTR 329. 12. The Ld. DR on the other hand, relied on the order of the lower authorities and submitted that Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd reported in (2011) 16 taxmann.com 141 has held that payment for sale of software constitute transfer of copyright resulting into royality income in the hands of the recipient and t....
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....ded in Article 5 of the Indo Netherland DTAA. The Ld. Counsel has also submitted that payment for acquiring software along with the hardware would not be regarded as royalty/FTS as such hardware cannot be used without the software embedded in it and such software becomes a part and parcel of the hardware and would generate business income only and in the absence of any PE of non-resident sellers in India, business income would not be taxable in India. The Ld. Counsel has relied on the various decisions mentioned in his submission. The Ld. Counsel also relied on the decision of the Hon'ble Delhi High Court in the case of DIT Vs Infrasoft Ltd. (supra), wherein shrink wrap software has been held to a copyrighted article and not copyright and sale from outside India of such software embedded in hardware is not taxable in India. The relevant finding of the Hon'ble High Court is reproduced as under: 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software ....
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.... IT vs. Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software. 19. In the case of Customer Assets India P Ltd. (supra) relied upon by the Ld. DR, the Hon'ble High Court has relied on the decision in the case of Samsung Electronics Co Ltd. (supra). 20. In the instant case also the software has been sold to the assessee as shrink-wrapped software, which is commercially off the shelf software sold in retail, in contract to the specially developed (unique) software written by own or contracted programmers. This fact has not been disputed by the Revenue. Thus, in view of the binding precedence of the jurisdictional High Court in the case of infrasoft Ltd (supra), we hold that sale of the hardware along with the software embedded therein is not taxable in the hands of the non-resident recipient in absence of any permanent Establishment of said non-resident in India. 21. In the case of Transmission Corporation of AP Ltd (supra) the Hon'ble Supreme Court while answering the question of law held that the (i) the assessee who made the payments to the three non-residents was under obligation to deduct tax at source under Section 195 of the Ac....
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....t", which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a nonresident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195 (1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India....
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.... his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of....
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....ght into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage." 24. The Hon'ble Supreme Court in the above case has also considered the decision in the case of Transmission Corporation (supra) and distinguished as decision of composite payment instead of pure taxable income payment in the hands of recipient. 25. On perusal of the various decisions cited by the Ld. Counsel and particularly the decision in the case of infra soft Ltd (supra), which being Jurisdiction High Court, it is settled that in case of software embedded with the hardware of computers, being contract for supply of the goods which is a copyrighted articles and not a copyright itself and therefore not liable for tax in India either as royalty or fee for technical services. When the payment to the non-resident is not subject to tax in India, there was no requirement for the assessee to obtain clearance certificate from the Assessing Officer or to file accountant certificate as held by the apex court in the case of GE India technology Centre (supra). ....
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....s are mentioned. One of the exception mentioned in 12(6)(a) is that the fee for technical services does not include amount paid for services that are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of the property. The contention of the Assessing Officer is that since the services availed by the assessee are not inextricably and essentially linked with the sale therefore, the assessee not being covered by the said exception, the services should be treated as fee for technical services. This finding of the Assessing Officer is not justified. We are agreed with the submission of the Ld. Counsel that the clauses related to "inextricably link with sale of property" in Article 12(6)(a) are as exceptions to Article 12(5). Since the services are not covered under Article 12(5) either under clause (a) or (b), applicability of Article 12(6) is not required to be examined. Accordingly, we reject the finding of the Ld. Assessing Officer on this issue. 30. Further, we are also agreed with the contention of the Ld. Counsel that support services or warranty services has not made available any technology or know-how to the assessee and therefore payment mad....