TaxTMI 
TaxTMI 
2021 (11) TMI 1023
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.... by the ACIT, International Taxation, Circle - 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 he....
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....the facts and circumstances of the case and in law, the AO/DRP have erred in taxing Rs. 105,32,33,692/- towards sale of hardware 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 o....
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....chnology, to its subscribers. c) The viewing cards are used in the Set Top Box ("STB") which is located at the subscribers site. d) Bharti cannot provide the service to its customers without the Set top Box ("STB") which is a device that executes functions as per the NDS Functional 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....
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....other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or (c) make 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 k....
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.... nothing but a vehicle to store, carry and facilitate usage of the licensed rights, embedded within the form of a software, which are the actual commodity supplied and charged for in this case. We are in conformity with the AO's analysis of the agreements between the assessee and its customers which clearly reveal that the items being sold were far more than the mere physical hardware. The ownership over the IP and copyrights are 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 suppl....
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....2021] 125 taxmann.com 42 (SC). In light of the recent developments in the legal jurisprudence with respect to taxability of the software as 'royalty', the Assessee now seeks to raise a ground that since this claim is a purely legal claim, the Assessee is entitled to make this claim before the Tribunal in its pending appeal, as an additional ground. The Assessee has also placed reliance on the decision of Ahmedabad Income-tax Appellate 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 N....
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....oftware is affixed on to hardware as an integrated unit/equipment by foreign non-resident supplier to Indian distributors or end users. This is the fourth category of cases which was dealt with by the Hon'ble Supreme Court in the aforesaid decision. The Hon'ble Supreme Court thereafter dealt with category 4 in paragraphs 44 to 52 and paragraph 118 of its judgment. He pointed out that the Hon'ble Supreme Court in paragraph 118 of its judgment has 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....
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....ale 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." 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 manuf....
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....e OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9(1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because 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) ....
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....ng Analysis (supra) and has concluded after remand report of the AO that the assessee's case is covered in favour of the assessee by the decision of the Hon'ble Supreme Court. 18. On question whether the receipts can be taxed as FTS in so far as it relates to receipts from Tata Sky and DEN, it was submitted as follows: a. Mere issue of plastic/fiber cards along with physical set-up box does not constitutes FTS, instead of sale of hardware. b. Supply of products carrying the IP to the customer does not amounts to "FTS". 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 ....
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....usive, perpetual, nontransferable object code only right and licence in the Country of Designation (which includes the right to grant limited end-user sub-licenses to Subscribers): (a) to use the NDS Software, Embedded Software and NDS Hardware on the hardware authorized by NDS solely for the purpose of developing and transmitting the Service to Subscribers using Set-top-Boxes and make two back-up copies of the NDS Software Incorporating the Embedded Software on 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 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....
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.... all right, title and interest in the NDS Software, NDS Hardware and NTP's any modifications thereto expressly authorized by this Contract, and intellectual Property Rights." 22. In respect of the agreement between assessee and Tata Sky is concerned, the relevant terms are as follows: "3 LICENSE 3.1 License Grant. In consideration of the payment (and any continuing payments) by TATA SKY of the license fees referred to in Schedule 1, and subject at all times to the terms and conditions of this Agreement, NDS hereby grants to TATA SKY the non-exclusive, non-transferable object code only right and perpetual license in the Territory: (a) To use 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) T....
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....licence agreement between the various parties have not been set out in the order of assessment though the copies of the same are available in the Paper Book. The terms of the agreement are clearly similar to the terms of the agreement which the Hon'ble Supreme Court analyzed in the case of Engineering Analysis. We shall anlyse the terms of the Agreement between the Assessee and Bharati Telemedia as a sample. Techinical and commercial proposal given by the Assessee alongwith the STB provides technical specifications for the engineering of the relevant systems. That by itself cannot be the basis to conclude that there has been use of any copyright or that technical services have been provided. This is like providing a technical 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 t....
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.... look at the overall agreement and the real nature of the transaction (para 51 of SC judgment). On the AO's reference in para 4.4 of FAO as license being for use of IPR over viewing cards and software is incorrect since as per Article 3.01 and 3.02 (page 58-59 of paper book), license is for simplicitor use of the software, with several restrictions. Also, as per clause 3.04 (No license to accessed materials) and clause 3.05 (Ownership), no license whatsoever is granted over using the IPR in the software. License is to only use software to enable using the accompanying hardware, as part of an integrated system. Aspect of training referred to in para 4.5 of FAO does not advance AO's case since software and hardware are part of an 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 de....
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.... or offering for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any medium electronically; 2. To issue copies of the work to the public, provided they are not copies already in circulation; 3. To perform the work in public, or communicate it to the public; 4. To make any cinematographic film or sound recording in respect of the work; 5. To make any translation of the work; 6. To make any adaptation of the work; and 7. To do, in relation to a translation or an adaptation 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'....
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....position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. 27. The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the 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 se....
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....P have erred in not appreciating the fact that the reimbursements were purely on cost to cost basis, which was initially incurred by NDS Limited purely for administrative purposes and does not contain any profit element to hold the amount taxable as income / revenue. 3.3. The Ld AO and the Honourable DRP have erred in law and on facts in placing reliance on several decisions and wrongly contending that the facts of the Appellant's case to be similar to the cases on which reliance were placed upon against the Appellant. 3.4. The Ld AO and the Honourable DRP have erred on facts in wrongly terming the receipts by the Appellant from Cisco Video as receipts for rendering 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, whi....
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.... was submitted that the details of the reimbursement are as follows: Sl.No Nature of Reimbursement Amount Paper Book Page reference I Fixed Assets along with invoices 5,00,42,174 (sub-total) Page 313 - 382 - Detailed list of assets along with 38 Invoices Page 619 - Disclosure in financials of NDS India Page 620 - 705 - Bill of Entry for proof of assets imported Plant and Machinery 1,55,55,218 Capital assets 2,96,03,311 Fixed assets accruals and miscellaneous 5,51,807 Software 12,80,565 II Other expenses along with invoices 6,53,63,696 (sub-total) 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 &nbs....
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....11 as well in light of the supporting evidence and back-to-back reimbursement invoices provided by the Appellant. 34. With respect to reimbursement of expenses, it was submitted that the expenses are cross charged on cost to cost basis. The detailed list of assets along with sample of 48 invoices raised by third party vendors on Assessee were submitted to the AO (Refer Pages 383 - 599 of the Paper Book). Further, the details of miscellaneous expenses and equipment maintenance along with invoice copies from vendors were furnished at Pages 706 - 732 of Paper Book). Further, it was submitted that the employees of NDS India 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 expen....
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.... [1993] 202 ITR 1014 (Delhi) e. Krupp Udhe GMBH [2013] 40 taxmann.com 38 (Bombay) f. WNS Global Services (UK) Ltd [2013] 32 taxmann.com 54 (Bombay) g. CSC Technology Singapore Pte. Ltd. [2012] 19 taxmann.com 123 (Delhi) h. Global E-Business Operations (P.) Ltd. [2012] 23 taxmann.com 455 (Bang.) i. Bovis Lend Lease (India) (P.) Ltd. [2010] 1 ITR(T) 87 (Bangalore) 36. Without prejudice to the above factual back ground, it was submitted that the assessee does not make available any technical knowledge. Hence, in light of the decision of the jurisdictional High Court in 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 ....
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...., 39. Having made the above observations (which are in our opinion purely on surmises and without first giving a finding that there is no one to one tally between the actual cost and actual sum reimbursed by NDS Pav TV to the assessee and that there is an element of mark up in such payments) he also observed that there is no written agreement between the parties regarding Cost Contribution Agreement (CCA) in relation to AY 2010-11 but such agreement existed from 1.4.2011 (i.e., from AY 2011-12 onwards). He went on to analyze the terms of the said agreement and found that the preamble to the Agreement 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 cos....
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....ay Tv to Assessee), in accordance with law, after affording assessee opportunity of being heard. 42. Ground No.5 raised by the assessee in its appeal is with regard to non-grant of credit for TDS. In our view, it would be just and appropriate to direct the AO to consider the calim of the assessee and allow credit in accordance with law. The issue raised by the assessee in ground No.6 is with regard to levy of interest under section 234B of the Act. In this regard, we find that the issue with regard to levy of interest under section 234B in the case of a non-resident has been settled by the Hon'ble Supreme Court in the case of DIT Vs. Mitsubishi Corporation (2021) 130 taxmann.com 276 (SC) and the Hon'ble Supreme Court took when the assessee is a nonresident foreign company incorporated in Japan and when the entire income that arises to them and the payment them is subject to deduction of tax at source there was no question of advance tax payment by assessee, accordingly, no interest under section 234B could be levied upon assessee. Following the said ration, we direct that there shall be no levy of interest u/s.234B of the Act. 43. Ground No.7 with regard to initiation of pena....