TaxTMI 
TaxTMI 
2018 (10) TMI 485
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..... 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 article 12 of India Netherlands DTAA. (e) The Ld.CIT(A) has erred in law and on the fac....
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....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 4hr parts replace-post WTY and SW subs 8. A660023589 25.03.2007 30,849 1,338,235 8 Disk storage (computer hardware) 9. B660023589 23.02.2007 6,841 292,007 9 4hr parts replace, install and SW subs 24 months. 10. B660025544 ....
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....um 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 royalty covered by the provisions of paragraph 4(a) of the Article 12. The payment is for the use or the right to use an intangible and such right is given by the Network Appliances by way of licensing, the software. In this case, the licensing of software is not the sale of a copyrighted article but the granting of the right to use th....
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....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 tax liability under section 201(1) of the Act for holding the assessee liable in default for not deducting tax at source in respect of computer hardware and software, as well as installation, support services and post-warranty services. 10. Before us, the Ld. Counsel of the assessee argued matter and filed written submissions which are reproduced as under: ....
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....ellers 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 view of the decision of Tribunal and Jurisdictional High Court in assessee's own case and also the decision of Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. Page no. 61, para 118 DIT vs LG Cable Ltd [2011] 197 TAXMAN 100 (HC Del) Offshore suppliers are not taxable in view of the law as upheld by Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. Page no. 72....
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....iption 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 the same. In this case, what has been made available to the user (appellant) is a copyrighted article and not a copyright. Based on this principle, several rulings have been pronounced by the Hon'ble Tribunal and High Courts, most notable being DIT vs, Ericsson A.B., Ericsson Radio System A.B. and Metapath Software Internation Ltd. [2011] 343 ITR 470 (HC Del) ((Please refer to Paras 59 and 60 of the ruling provided at Page 129 of the Case law compilation) . Relying on the same, ....
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....AA 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 therefore, the assessee was liable for deduction of tax at source. The Ld. DR also relied on the decision of the Hon'ble High Court of Karnataka in the case of Customer Assets India P Ltd reported in (2014) 42 taxmann.com 338. 13. Regarding non-deduction of tax on the payment towards other services, the Ld. DR submitted that case of the assessee is of the composite contract and therefore the assessee was liable for deduction of tax at source. In support of the contention, he relied on the decision of the Hon....
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....s 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 and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nat....
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....ot 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 Act in respect of the sums paid to them under the contracts entered into; and (ii) the obligation of the respondent-assessee to deduct tax under Section 195 is limited only to appropriate proportion of income chargeable under the Act, are correct." 22. The Hon'ble Supreme Court has held the liability of deduction of tax at source on appropriate portion of income chargeable to tax in case of composite nature consisting of income chargeable and not chargeable to tax in India. In the instant case, as far as sale of Hardware coupled with software is concerned, we have ....
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....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. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. vs. Eli Lilly and....
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....n 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 payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the nonresidents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, Section 195 uses the word payer' and not the word "assessee". The payer is not....
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....ra), 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). 26. In respect of the 2nd category of payments, the Ld. Counsel has submitted that payments are not in lieu of use or right to use any copyright in the software and the assessee has been given the right to use the software only. According to the Ld. Counsel merely 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 commercially exploit the same. In the case the assessee has purchased a copyrighted article and not a copyright and thus the lump-sum fee provided in service invoice cannot b....