TaxTMI 
TaxTMI 
2009 (2) TMI 23
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....ft products in Asia including India. In pursuance of the said agreement, the applicant had appointed Microsoft Regional Sales Corporation (MRSC) as the distributor of Microsoft products. MRSC, in turn, entered into agreements with the Indian distributors for the sale of the said products in India. 2.1 Gracemac merged with MOL Corporation (MOLC) on 2.10.2006. The applicant then entered into a fresh license agreement with MOLC effective from 1st July, 2006. Under that agreement, MOLC granted the applicant non-exclusive right to (a) the manufacture of Microsoft products in Singapore, (b) the sale of manufactured products for re-sale purpose and (c) create derivative works based on Microsoft products in order to customize the products for the particular needs of the customers. In lieu of the above mentioned rights, the applicant makes payments to MOLC computed on the basis of net sale price of the Microsoft products distributed by MRSC. In turn, the applicant had entered into a non-exclusive 'distribution agreement' with the MRSC whereunder MRSC has been appointed as distributor of Microsoft products (manufactured by the applicant) for the sale of such products in Asia including Ind....
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.... be withheld by the applicant? 4. In regard to the first question, it is the contention of the applicant that Section 9(1)(vi) of the Income-tax Act 1961 is not attracted for the reason that the payment in the nature of sub-license fees made to MOLC is not in respect of a right used by the applicant for the purposes its business in India, that the title to the products passes to MRSC outside India and the sale takes place outside India. Further, the products are manufactured by the applicant in Singapore. Hence, no income generating activity takes place within India. Thus, both the conditions set out in Section 9(1)(vi) are not satisfied. The applicant is therefore not required to withhold tax in respect of payments made to MOLC, according to the applicant. The applicant then refers to the provisions of Art.12 of the Treaty (DTAA between India and USA) and submits that the payment made to MOLC does not fall within the purview of Art.12(3)(a) which speaks of "payment of any kind received as a consideration for the use of any copyright of a scientific work". In this context, it is contended that the consideration paid by the distributor / end-user is for the purchase of copyrighte....
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....entered into a licence agreement with the applicant under which a non-exclusive license to manufacture microsoft products in Singapore and to distribute the products so manufactured was granted to the applicant. A non-exclusive right to license or sub-license the right to reproduce microsoft software products to certain end-users was also granted. 6.2 Subsequent to the merger of Gracemac with MOLC, all the agreements of Gracemac got assigned to MOLC. Assessment orders were passed against Gracemac for the assessment years 1999-2000 to 2005-06. The assessing officer held that the payments received by Gracemac from the applicant were in the nature of royalty, that the payment was for the right to use the copyright in the software, that the payment of royalty was directly related to the source in India and therefore taxable in India. Against this order, the assessee namely Gracemac filed appeals. It is pointed out that in the appeal, similar points as those urged in the present application were raised by Gracemac and they were rejected. The CIT(Appeals) Delhi dismissed the appeals by an order dt.14-2-2008. It is also pointed out that similar agreements between Gracemac and MS ....
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.... relevant agreements to which the applicant is also a party. The obligation of the applicant to withhold the tax at source cannot be decided de hors the issues raised concerning the liability of MOLC. The findings of the appellate authority in Gracemac's appeals and the outcome of further appeal to the Tribunal will have inevitable bearing on the questions raised in the present application. The fact that Gracemac's appeals, but not MOLC's appeals are pending, does not make material difference. Apart from the deletion of words "in the applicant's case" in clause (i) of the proviso to Section 245-R(2), as observed earlier, Gracemac's appeal is, from a legal stand point, MOLC's appeal because Gracemac has no separate identity now. 9. The word 'question' occurring in the proviso to Section 245-R(2) should be understood in a manner which sub-serves the object of the proviso. It should not be construed too narrowly or technically. An intimate and direct connection between the question raised in the application and the question pending is what is contemplated by the proviso. It should arise out of identical if not the same transaction. 10. Coming to the point whether the....
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....eduction at source to steer clear of the uncertainty faced by the applicant on account of the decision taken by the assessing officer quite contrary to the ruling in the applicant's case which had become final. The applicant therein approached the AAR at the earliest opportunity. 11. In reply to the objection of the Revenue, the learned senior counsel for the applicant has contended that a fresh agreement was entered into with MOLC after the merger of Gracemac. Though the terms of the agreement and the rights derived therefrom are substantially similar to the earlier agreements, no proceeding in relation to the applicant in respect of the same transaction can be said to be pending. It is then submitted that the applicant seeks advance ruling on the question whether it is liable to deduct tax at source in respect of the payments made to MOLC in terms of the agreements. The proceedings relating to deduction of tax at source cannot be equated to the proceedings arising out of assessment. In short, it is the applicant's contention that the issue relating to deductibility of tax at source under section 195 of the Income-tax Act is a separate and distinct proceeding which can run para....
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....onounce its advance ruling on the question specified in the application." 12.2. Thus, the eligibility criteria for being an applicant and the scope and parameters of advance ruling are set out in the definition clause. Unless the advance ruling sought conforms to the said provisions in the definition clause, the Authority cannot proceed to consider the application. Then comes sub-section (2) of Section 245R. That provision is couched in a permissive language - "may allow or reject". The language clearly admits of an element of discretion to this statutory body while passing an order under Section 245 R(2). Going by the clear language, discretion is implicit in the provision. The first proviso however qualifies the operation of the main provision in sub-section (2) by placing certain restrictions or limitations on the exercise of power. Each one of the clauses in the Proviso operates as a legal bar to the entertainment of the application and hearing the same on merits. The Authority is precluded from 'allowing' the application if the application is hit by any of the embargoes laid down in the proviso. On the basis of the facts stated in the application and the other documents for....
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....rime facie, these words import a discretion, and they must be construed as discretionary unless there be anything in the subject-matter to which they are applied, or in any other part of the statute, to show that they are meant to be imperative." 13. In the light of the above disquisition on the scope and amplitude of the powers vested in this body under Section 245 R(2), let us take stock of the facts of present case. 13.1 The proceedings against Gracemac were initiated as long back as the year 2003. The applicant must be fully aware of these proceedings. By the date of entering fresh agreement in the year 2006, even the assessments were concluded against Gracemac and the payments received from the applicant were subjected to income tax in the hands of Gracemac. Any reasonable person in the position of the applicant should have been fully aware of the implications relating to withholding of tax. All these years the applicant kept quiet, perhaps watching the outcome of the assessment and appellate proceedings. Now, after the adverse order was passed by the Appellate Commissioner and Gracemac filed the appeal, the present application was filed in 2008. The appeals are now befo....