TaxTMI 
TaxTMI 
2022 (2) TMI 514
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....ereinafter referred to as the 'learned AO'), dated December 16, 2016 under Section 143(3) read with section 147 and 144C of the Act (The Impugned order') inter-alia on the following grounds: That on the facts and circumstances of the case and in law: A. Grounds of appeal relating to corporate tax matters 1. The learned AO has erred in law and in fact, in treating the receipts pertaining to licensing of software by the Appellant to be in the nature of 'royalty' as defined under the provisions of the Act read with the Double Taxation Avoidance Agreement entered into between India and United Kingdom (`DTAA'). 2. The learned AO has erred in fact, in treating the receipts pertaining to sale of hardware in the nature of Set Top Box, Viewing cards, CAM hardware etc. by the Appellant to be in the nature of a licensing arrangement and treating the same as 'royalty' as defined under the provisions of the Act and DTAA. 3. The learned AO has erred in law and in fact, in treating the receipts on account of rendering of support services to be in the nature of 'Fees for Technical Services' (`FTS') as defined ....
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....) and other connected components, usually used in viewing television through satellite. The embedded software is required to run the hardware components. The assessee received the following sums in respect of supply of integrated hardware systems along with embedded software. 2.1 During the AY 2007-08, Assessee filed a NIL return of income. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (`the Act') and the case was not picked for scrutiny under section 143(3) of the Act. Subsequently, the AO re-opened the assessment by issuing a notice under section 148 of the Act citing that certain third party receipts were not offered to tax in the return of income for AY 2007-08. Various Submissions were filed before the Ld.AO in relation to notices issued. 2.2 In the draft assessment order served on the Assessee, the Assessing Officer has proposed to make the following additions: i) Treatment of receipts on account of supply of software license as royalty amounting to Rs. 48,80,75,507/- ii) Treatment of receipts on account of sale of hardware in the nature of Set-Top-Box ('STB'), viewing cards, Conditional Access Module hardware ....
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....d that for year under consideration, the present assessee has received incomes from following parties. Nature of receipt Payer Hathway Cable & Datacom P Ltd Payer Tata sky Ltd Total Supply of software 9159134 478916373 488075507 Supply of hardware 14881760 323474900 338356660 Provision of Services 741115 10867187 11608302 Total 24782009 813258460 838040469 6. The Ld.AR submitted that the above receipts were not offered to tax as they cannot be regarded as royalty in the hands of the assessee in the light of the definition of the term, "Royalty" as given under Article 12(3)(a) in DTAA between India and UK. The Ld.AR submitted that in the decision relied by the Ld.AR passed by the Coordinate Bench (supra), Tata Sky and Hathway Cable were also one of the parties who were made payment in those Assessment years. He submitted that the terms of these license agreements and their rights to transfer have been discussed in the order passed by this Tribunal (supra). He submitted that this Tribunal after considering the various clauses of the agreement, remanded the issues for consideration by the Ld.AO/TPO in the light of observat....
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....FTS) as envisaged under the DTAA and the observations of the AO in this regard were as follows: "Taxation under the DTAA: 6 As stated earlier, the NDS UK is based in United Kingdom ("UK") and the payment is made by Bharti a company based in India. The Double Taxation Avoidance Agreement ("DTAA" / "Treaty") between India and UK is applicable in this case. Article 12 of the Treaty deals with royalties. Sub-clause (a) of Clause 3 of Article 12 of the DTA defines royalties as under: 3. For the purposes of this Article, the term "royalties" means (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b)payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income....
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.... use, any copyright of a literary, artistic or scientific work, including cinematography films.or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret* formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic 7.3 Article 12(4)(a) and 12(4)(b) are similar to the clause(vi) of Explanation 2 to Section 9(1)(vi) of the Act. As discussed in the earlier paragraphs if the payments for hardware services not offered to tax also include payments for implementation/installation services or for support services then such payments are covered by Article 12(4)(a) and 12(4)(b) and therefore held to be Fees for Technical services under the DTAA." 9. In short, the conclusion of the AO was that the sum received has to be regarded as "Royalty" within t....
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....greement with this interpretation. Hence, we are of the view that the AO has correctly categorized the transaction as one of the transfer of license and copyright and the fees charged for the sane are very much in the nature of "royalty" as defined in Sec. 9 of the IT Act. With regard to the other services rendered (implementation, technical, AMC etc ) these are essential support services of the supply of the products carrying the IP to the customer and receipts on their account are found to be very much it the nature of "FTS". Hence, we are of the view that the AO has correctly brought these amounts within the ambit of taxation under the relevant provisions of the IT Act and the Indo- UK DTAA. We do not in these circumstances find reason to interfere with the proposal of the AO and the objection raised by the assessee is accordingly dismissed." 11. Aggrieved by the aforesaid order of the DRP which was incorporated in the final order of assessment, the assessee has raised ground Nos. 2 and 4 before the Tribunal. 12. As far as the additional ground of appeal is concerned, we have already seen from the chart reproduced in paragraph-4 of this order that the assessee ....
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....he inception of the statutory provision. It has also been submitted that under Article 265 of the Constitution of India no tax shall be levied except by authority of law. Hence only legitimate tax can be recovered and even a concession by a tax-payer does not give authority to the tax collector to recover more than what is due from him under the law. In this regard, reliance has also been placed on the CBDT Circular No 14 (XL-35) which has dealt with the aspect of the role of the AO to be adjudicator of the correct tax liability of the assessee. As per this Circular, the AO cannot take advantage of ignorance of the assessee as to his rights. 13. We have considered the prayer for admission of additional ground and are of the view that the additional ground can be adjudicated on facts already available on record and by applying the law declared by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., (supra). Hence, keeping in view the ratio laid down by the Hon'ble Supreme Court in the case of NTPC Ltd., 229 ITR 383 (SC), we admit the additional grounds for adjudication. 14. As far as ground Nos. 2 and 3 are concerned, the qu....
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.... series of judgments by the High Court of Delhi have dealt with the same question that now lies before us. In Director of Income Tax v. Ericsson A.B., (2012) 343 ITR 470 ["Ericsson A.B."], which happens to be impugned in C.A. Nos. 6386-6387/2016 before us, the assessee was a company incorporated in Sweden which entered into an agreement with Indian cellular operators, pursuant to which the assessee supplied various equipment (hardware) embedded with software to the said cellular operators. The High Court in this case, found: "Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by....
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...., consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good", but when transferred to a laser readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the pr....
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....d is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. (pages 501-502) 111.This judgment was followed in Director of Income Tax v. Nokia Networks OY, (2013) 358 ITR 259 ["Nokia Networks OY"],42 with the High Court of Delhi, adverting, this time, to the further expanded definition of "royalty" that is contained in the retrospective amendment that inserted explanation 4 to section 9(1)(vi) of the Income Tax Act. In this case, the High Court was concerned with the Agreement between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,43 ["India-Finland DTAA"]. After setting out the rationale for the clarificatory amendment made vide the Finance Act 2012, the High Court held : "DTAA and in the Income....
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....ve failed to appreciate that the "make available clause" required under the India-UK DTAA are not satisfied in the instant case e. The AO and the DRP have erred in not considering the settled position of law on make available clauses including the decision of the Jurisdictional High Court in the case of De Beers India Minerals Private Limited (Page 1172-1223 of case-law compilation). 19.Reference was made to decision of Hon'ble Madras High Court in the case of Skycell Communications Ltd [2001] 119 Taxman 496 (Madras) wherein it has been held that Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment, does not result in the provision of technical service to the customer for a fee. Reference was also made to the order of the DRP in assessee's own case for AY 2016-17 (page 1725 of case law compilation) wherein the DRP has categorically held that the technical support and rendered by the assessee for ensuring the deployment/maintenance of the hardware and software is a routine after-sales support service and does not make available any technical know-how to the Indi....
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.... the purposes of accessing the Service. (c) to use the NTP's in connection with the operation of the NDS Systems; and (d) to distribute the Viewing Cards to Subscribers for use in Set-top-boxes in the Country of Destination and also the geographical areas where the satellite beam is present for viewing the Service. ............ ............ 3.02 License Restrictions. Except for the permitted back-up copies for testing and disaster recovery, Bharti shall make no more copies of the NDS Software, Embedded Software or third party software than for which it has paid the applicable licence fees. Bharti shall not reverse engineer, decompile or otherwise attempt to create the source code from the NDS Software nor shall it modify, translate or create derivative works based on the NDS Software or NTP's except as expressly provided in this Contract. Bharti shall not sub-licence, rent, lease, sell or otherwise transfer or distribute copies of the NDS Software or NTP's (expressly excluding Viewing Cards) to any third party, whether as a stand-alone or bundled product excepting for the purposes of sub-licensing Subscribers for accessing th....
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....S solely for the purpose of developing and transmitting the DTH Service to Subscribers using Set-top-Boxes and to use two backup server(s) for the limited purpose of ensuring the provision of uninterrupted service in the event that the primary server(s) fails to function properly. (b) To use the Components as integrated in a Set-top-Boxes and/or CAM that shall be manufactured by a third party or as manufactured by NDS as the case may be; (c) To use the Documentation in connection with the operation of the NDS Systems which shall include the right to make copies of the Documentation for internal purposes; (d) to use the Test Systems at the agreed locations solely for the purposes of testing, demonstration and back-up, not for providing a DTH Service to Subscribers except where the broadcast system used by TATA SKY is undergoing maintenance and is not being used at that time to provide a DTH Service to Subscribers, or as backup where the main broadcast system has failed; (e) to grant non-exclusive, non-transferable end user sub-licenses to Subscribers in the Territory for the Term of this Agreement." 23. In respect of agreement between the....
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....and user manual describing the system and does not imply granting of any copyright rights or transferring technical knowledge. The software is only licensed for use without granting any license over the copyrights [see Article 3 - 3.01 - clause (a) at Page 58]. There are further restrictions on such license like (a) no copies to be made (b) no reverse engineering decompiling or otherwise (c) no sub-license rights (see clause 3.02 at Page 59). The clauses are typical clauses in a Software End User License Agreement (EULA) as analysed by Honble Supreme Court in the Engineering Analysis case (see paras 45 - 47 of the SC judgment). The Viewing cards, Set Top Boxes and the software to run it are together an integrated system. This is similar to the fourth category examined by the Supreme Court. The Supreme Court approved the judgment of Delhi High Court (para 118 ) in the cases of Ericsson and Nokia which dealt with the sale of integrated telecom equipment with embedded software (para 110). The AO also acknowledges that STB, Viewing Card and embedded software is an integrated system. There were certain inferences drawn by the AO based on the FAO given along with the STB. Even if softwar....
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....n integrated system akin to supply of goods. When training is provided to use it, it is similar to initial training provided by a vendor of any high end electronic or integrated equipment (for example, telecom equipment as examined by Delhi HC in Ericsson case). This doesn't amount to training in furtherance of license of copyright. With reference to para 4.6 on provision of operations and maintenance manual, this is akin to provision of a User Manual which describes the functioning of any equipment. For example, every sale of a TV comes with an operations and user manual. With refence to para 4.7, the providing of AMC services like repair, etc is akin to post-sale standard AMC services provided in the case of any sale of equipment. This AMC service does not in any way make the original transaction a royalty transaction. Since the AY is AY 2010-11 (ie, prior to the Finance Act, 2012 amendment by way of inserting Explanation 4 to Section 9(1)(vi) of the Act, as per the SC in its judgment, the Finance Act, 2012 amendment has to be read as expanding the scope of royalty with prospective effect from the Assessment Year 2013-14 (After FA, 2012 was enacted) and cannot be upheld as clarif....
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....daptation of the work, any of the acts specified in relation to the work in sub-clauses (1) to (6). The court held that a licence from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a licence issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is 'licensed' by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon'ble Karnataka High Cour in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon'ble Supreme Court. We have already set out the terms of the Agreement....
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.... licencee.It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty. 28. On the question whether the sums in question can be taxed as FTS, we agree with the submissions made by the learned counsel for the Assessee set out in paragraph-18 & 19 of this order and hold that the sums in question cannot be brought to tax as FTS. 29. As far as the question whether the sum which was offered to tax by the assessee and which by virtue of our conclusions as aforesaid cannot be regarded as royalty or FTS and hence cannot be taxable, the Revenue should be directed to not to tax the aforesaid sum also. The first aspect that may require consideration is as to whether the assessee can seek to lay a claim that the amount offered tax in the return of income is not taxable. On this issue, the law is well settled and the Hon'ble Delhi High Court in the case of Indglonal Investments and Finance Limited Vs. ITO, Writ Petitio....
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....dering of 'business support services'. 3.5.The Ld AO and the Honourable DRP have erred in law and on facts by presuming facts contrary to what was submitted by the Appellant and thereafter making several wrong inferences/ observations based on such incorrect facts assumed by him. 3.6.The Ld AO and the Honourable DRP have erred in law and on facts in not appreciating the contents of the agreement entered into between NDS Limited and Cisco Video for the subsequent AY 2011-12, which clearly mentioned that there was no services rendered by NDS Limited to Cisco Video even after explanations were furnished to him that the facts of the case for the AY 2010-11 were the same as that prevailing for the AY 2011-12. 3.7.The Ld AO and the Honourable DRP have erred in law and facts in concluding that the reimbursements received by NDS Limited were taxable in India merely due to the presence of a confidentiality clause in the cost sharing agreement entered into between NDS Limited and Cisco Video (which was effective April 1, 2011). 3.8.The Ld AO and the Honourable DRP have erred in law and on facts in holding that the receipts by the Appellant from Cis....
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.... Page 383 - 599 - Detailed list of assets along with 48 invoices raised by third party vendors on Appellant Page 706 - 732 - Details of miscellaneous expenses and equipment maintenance along with invoice copies Pages 757-765 - Purpose of overseas travel made by employees of NDS India Communication 3,89,340 Equipment maintenance 16,70,095 Medical insurance 3,07,895 Miscellaneous 1,12,89,209 Travel 50,11,525 Accommodation Overseas 3,25,69,355 Travel Advance 90,274 Software 1,40,05,934 Exchange realized gain/loss 30,069 TOTAL 11,54,05,870 33.With respect to reimbursement of cost of fixed assets, the learned counsel for the Assessee submitted that the detailed listing of the fixed assets along with invoices raised by NDS Pay TV and other documentary evidence have been duly submitted by the Assessee vide submission dated 2nd November 2012 (Page 310 of the Paper Book). Further, it was submitted that Assessee has also provided sample copies of the 38 third party invoices raised on the Assessee in respecte....
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....dia have travelled to NDS UK for sole purpose of business of NDS India and not for the purpose of rendering any services. The purpose of the travel of the employee are clearly coming out from the communications shared in pages 757-765 of the Paper Book. The communication provided at pages 761-762 of the Paper Book clearly shows the all the expenses will be borne by NDS India. Further, as per the terms of the agreement, it is apparent that no service is being rendered by NDS UK. Hence, it wwas submitted that the expenses incurred are towards administrative expenses which cannot be considered as FTS under the provisions of the Act. 35. Without prejudice to the above factual background, it was submitted that the assessee does not make available any technical knowledge, skill, experience, know-how or processes to NDS India as required under clause 13(4) of the India-UK DTAA. With respect to confidentiality clause referred by the AO, it was submitted that the DRP has held that the agreement is not applicable to the instant AY 2010-11 but have upheld the order of the AO which refers to the clauses of the said agreement thereby blowing hot and cold at the same time. Further, it w....
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....n the case of De Beers India Minerals Private Limited (supra), it was submitted that the said reimbursement of expenses does not fall the definition of the FTS as per the India-UK DTAA. 37. The learned DR relied on the orders of the revenue authorities. Without prejudice to the above submission, he submitted that since the details of one-to-one reimbursement have not been given or examined by the Revenue authorities, the issue should be remanded for consideration afresh by the AO. 38.We have given a careful consideration to the rival submissions. It is the case of the Assessee that the receipts in question are pure reimbursement of expenses incurred by the Assessee for and on behalf of NDS Pay TV. It is the case of the revenue that (Para 2.1 of AO's order) that reimbursement of expenses may be made by the service provider at actual or alternatively, the agreement may provide a fixed amount towards reimbursement and that the issue that generally arises in such cases is to see whether such reimbursements of expenses is purely reimbursement or for rendering services. Therefore according to the revenue the nature of reimbursement of expenses has to be examined and if ....
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....t provided that the agreement is being entered into to obtain benefits of corporate purchasing contracts and for administrative simplicity. The AO has thereafter referred to cases where the factual finding (in the case of Van Oord Acz Marine Contractors (52 SOT 423 (Chennai ITAT) was that the assessee could not show that the price reflected in the invoices were comparable to similar services provided by international parties. He also referred to decisions rendered in the context of TDS provisions and cases where there were agreements for secondment of employees and where employees costs were reimbursed. He thereafter proceeded to hold that reimbursements are in the nature of FTS. 40. The DRP made a reference to the preamble to the agreement dated 1.4.2011 and held that the same did not exist for AY 2010-11 and is not relevant. The DRP however concluded that the AO has given valid reasons for treating the receipts by the Assessee as FTS. With regard to the argument that under the DTAA, taxability of FTS is subject to the condition that the FTS should make available technical knowledge to the person to whom services were rendered, the DRP by merely observing that the AAR in ....