TaxTMI 
TaxTMI 
2021 (11) TMI 1023
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....- 1(2), Bengaluru, under section 143(3) r.w.s. 144C of the Act, relating to Assessment Year 2006-. IT(IT)A No.504/Bang/2017 is an appeal by the assessee against the order of assessment dated 30.12.2016 passed by the ACIT, International Taxation, Circle - 1(2), Bengaluru, under section 143(3) r.w.s. 144C of the Act, relating to Assessment Year 2013-14. IT(IT)A No.505/Bang/2017 is an appeal by the assessee against the order of assessment dated 30.12.2016 passed by the ACIT, International Taxation, Circle - 1(2), Bengaluru, under section 143(3) r.w.s. 144C of the Act, relating to Assessment Year 2012-13. 2. All these appeals were heard together. Since some the issues in all these appeals are common, we deem it convenient to pass a consolidated order. First, we shall take up the appeal relating to Assessment Year 2010-11. 3. Ground Nos. 2 and 4 raised by the assessee in this appeal and the additional ground raised by the assessee are in relation to the question whether the receipts on sale of hardware with software embedded therein can be taxed as royalty. These grounds of appeal reads as follows: 2. Hardware receipts held to be chargeable to tax in India 2.1 The Ld AO and the ....
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....and software embedded therein, even though the same was offered to tax by the foreign entity, and in holding that the said receipts are taxable under the provisions of the Act and/or DTAA. 4. The facts and circumstances that give rise to the aforesaid grounds of appeal are that the assessee is a non-resident foreign company incorporated in United Kingdom. It is in the business of supply of open digital technology and services to digital pay television (pay-TV) platform operators and content providers. The assessee entered into agreement with its customers for supply of integrated hardware systems along with embedded softwares. The hardware is primarily in the form of viewing cards, Set-top-Box (STB) 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. SL.NO Name Amount of receipts (INR) [A] Amount on which TDS is done and offered to tax, Out of [A] Amount on which TDS is not done, out of [A] 1 Bharti Telemedia Limited 501,567,193 501,567,193 - 2 Hathwa....
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....nctional Specification. e) It is impossible for a subscriber to use the STB and Viewing cards independent of the NDS Software, NDS Hardware and STB. f) It is clear from the agreement that the NDS Hardware, NDS Software, STBS and Viewing cards are supplied to Bharti under license and therefore the receipts on account of the same is to be treated as Royalty. 8. The AO also came to the conclusion that the receipts were in the nature of royalty or fee for technical services (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, includin....
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....available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. 7.2 Para 3(a) and 3(b) of the Article are reproduced below for reference 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 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....
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.... found to be never transferred but rather charged for on a continuous usage or compounded basis. It is not case of the assessee that viewing card did not contain any application software, but its defence rather is that the card is the main item sold and the software etc are only attending facilities embedded therein. As already stated above, we are not in agreement 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 accordi....
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....llate Tribunal ("ITAT") in case of ITO vs Smt. Manini Niranjanbhai [1992] 41 ITD 324 (Ahmedabad ITAT) wherein it has been explained that it is a well-established position that the SC does not declare the law with effect from the date of its order and the law declared by the SC has effect not only from the date of the decision but from the 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....
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....as specifically approved the ruling of the Hon'ble Delhi High Court in the case of Ericsson A.B. (infra) and Nokia Networks (infra). He brought to our notice that the Hon'ble Delhi High Court while dealing with an identical sale of hardware with embedded software has dealt with the same as follows: "110.A 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,....
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....ette 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." 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 commo....
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.... the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated 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 Pr....
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.... c. The AO and the DRP have erred in holding that provisions of DTAA are very similar to provision of the Act without understanding the legal position. d. The lower authorities have 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 ....
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....ry server(s) fails to function properly; (b) to permit Subscriber to use the NDS Software as integrated in a Set-top- Box for 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....
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....se the NDS Software and NDS Hardware authorized by NDS solely for the purpose of developing and transmitting the DTH Service to Subscribers using Set-top- Boxes and to use two back-up 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 sublicenses to Subscribers in the Territory for the Term of this Agreement." 23. In respect of agr....
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....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 software is licensed and not sold, it ....
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....ply 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 clarificatory so as to apply retrospe....
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.... 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 under which software in question was sold by the Assessee to its distributions and the terms of the EULA. The s....
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....e 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 Petition (Civil) 15639/2006 and 7127/2008 dated 03.06.2011 after considering the decision rendered in the case of CIT Vs. Shelly Products 261 ITR 36....
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....ereafter 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 Cisco Video constitutes FTS under the India-UK DTAA, without appreciating the fact that even assuming without admitting that services were rendered, the same did not `make available' technology as contemplated unde....
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....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 respected of the fixed assets (Page 313-382 of the Paper Book). It was submitted that from a perusal of the same, it would be apparent that cost relating to fixed assets amounting to Rs. 5,00,42,174/- represent a pure reimbursement of cost actually incurred by the Appellant in relation to the fixed assets that has been transferred by NDS Pay-TV. With respect to assets delivered to NDS Pay-TV....
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....s 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 was submitted that the AO has wrongly extracted the confidentiality clause of the agreement at page 52 of the Order. The actual relevant clause 6(iv) of the cost sharing agreement which states as under (Page 311 of the paper Book) "iv. Confidentiality Under this agreement, NDS UK and NDS India, would keep all the information or material which are confidential, secret or proprietary in nature, concerning t....
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....onsideration 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 the receipts for services rendered then whether the charge for the services is equivalent to the cost or not becomes immaterial. Therefore, if the receipts fall within the ambit of Sec.9(1)(v) (vi) or (vii) of the Act, then it would constitute income in the hands of the assessee chargeable to tax. Thereafter the AO has in paragraph 2.5 of his order proceeded to hold that on perusal of same copy of invoices furnished along with the submission dated 2.11.2012 and 13.12.2012, the assessee is providing business support services to....
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.... 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 the case of Perfetti Vam Melle Ltd., 342 ITR 200 (AAR) and Mersen India Pvt.Ltd. 249 CTR 345(AAR) held that make available also includes providing expert advice and including one time assistance. The DRP thereafter observed that the Assessee also provided maintenance and support services and finally concluded that the except payment for software which was held to be in the nature of royalty, the remaining payment constituted FTS taxable in India under the provisions of the DTAA. 41. We are of the view that in principle we hold that pure rei....
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....round No.7 with regard to initiation of penalty proceedings under section 271(1) (c ) of the Act, is not appealable and hence the same is dismissed as devoid of any merit. 44. In the result, appeal by the assessee is partly allowed. 45. IT(IT)A No.363/Bang/2017 : The issue raised in this appeal in ground Nos. A1 was not pressed and hence dismissed as not pressed. With regard to ground raised in A2 to 4, the issue is identical to the issue which was decided in the appeal for Assessment Year 2010-11, with regard to receipts by the assessee on sale of hardware with software embedded therein. For the reasons given therein, we are of the view that the claim of the assessee has to be allowed. We may also point out that in this Assessment Year, certain training services have been brought to tax as royalty on the ground that they were incidental to the transaction of right to use software. Since we have already concluded that the receipts in question are not in the nature of royalty, the training services in question can also not be brought to tax as royalty. We hold accordingly. Ground No. A5 raised by the assessee on the rates of tax to be applied on royalty and FTS becomes academic in....