TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 131
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....sessee is a non-resident corporate entity and a tax resident of USA. As stated, the assessee is engaged, inter alia, in the business of developing and marketing of telecommunication equipments and related software. In the relevant assessment year, the assessee had a branch office in India. For the assessment year under dispute, the assessee filed its return of income on 31.10.2004 declaring income of Rs. 1,19,62,800/-. Subsequently, the assessee filed a revised return of income on 03.01.2006 claiming credit of excess Tax Deducted at Source (TDS). Be that as it may, in course of assessment proceeding, the Assessing Officer noticed that, though, the assessee had receipts of Rs. 7,34,95,361/- from certain Indian companies, however, the assessee had not offered such receipts to tax. When the Assessing Officer called upon the assessee to explain, why such receipts should not be treated as royalty income, as, it was for transfer of right to use the copyright in the software, the assessee submitted that it had sold the software along with hardware (equipments) on outright sale. The assessee submitted that the software sold by the assessee is embedded in the hardware and only for the purpo....
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....upply of software as business profit, learned Commissioner (Appeals) held that the receipts from Bharti Telenet Ltd. and Tata Teleservices Ltd. are taxable as business profit under Article 7 of India - USA DTAA as the assessee had a PE in India and such receipts are integrally connected to the PE. Insofar as deductibility of expenses from the profit attributed to the PE, learned Commissioner (Appeals) directed the Assessing Officer to compute the income of the PE in accordance with judgment of the Tribunal in case of Motorola Inc. Vs. DCIT [2005] 95 ITD 269 (Delhi ITAT) (SB), i.e., on the basis of percentage of net profit on global service applied to Indian sales. Being aggrieved with the order passed by learned first appellate authority, both the assessee and the Revenue are in appeal. 6. We have considered rival submissions and perused the materials on record. Undisputedly, the assessee had entered into agreements with certain India telecommunication companies, such as, Bharti Telenet Ltd., Tata Teleservices Ltd. and Reliance Infocomm Ltd. for supply of basic telecom infrastructure equipment software and assisting them to set up telecommunication network. Basically, these teleco....
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....e involved in the operation, maintenance of management of the Broadband Access Reliance Network. Clause 15.1.6 provides that in case software licenses are cancelled or finally terminated, Reliance shall return all copies of such software to assessee. 7. Thus, from the terms of the agreement, it is very much clear that the embedded software has been provided to Reliance only for the purpose of operating the telecommunication equipments supplied by the assessee for Broadband Access Reliance Network. The software licence agreement puts various restrictions and conditions on Reliance with reference to usage of this software. The terms of the agreement make it clear that Reliance cannot itself make copy or duplicate, or permit anyone else to do so with regard to any part of the software, or create the source programs or any part thereof from the object programs. Reliance cannot make the software accessible to any person other than its employees, contractors etc. only for the purpose of establishing and operating the Broadband Access Network. Reliance cannot directly or indirectly sell, transfer, offer, disclose, rent, lease (as lessor), or license the software to any thirty party, exce....
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.... as number of judicial precedents, the Hon'ble Supreme Court finally concluded as under: "169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment." 10. Thus, applying the aforesaid ratio laid down by the Hon'ble Supreme Court, it has to be held that the receipts from Reliance Infocomm Ltd. are not taxable as royalty income, either under the domestic law or India - USA DTAA. More so, when the agreement between the parties makes it clear that the ownership rights over the software remains with the licensor. Thus, for the aforestated reasons, we ho....
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....milar activities in India. In this context, he drew our attention to Article 7(1) of India - USA DTAA. He submitted in the facts of assessee's case, the conditions of Article 7(1) are not fulfilled as the activities undertaken by the head office in India are completely different to the activities undertaken by the branch office. He submitted, the branch office is merely engaged in providing marketing support services to the head office and development of part of the patches of software for head office. He submitted, the branch office was not, at all, engaged in sale of software in India. Rather, the software developed by the branch office was not saleable to any customers as it is not complete and cannot be used to operate the hardware. Whereas, the head office has sold software to Indian customers, which can operate hardware. Thus, he submitted, the conditions of Article 7(1) are not applicable. He submitted, except development of software patches, all other activities relating to sale of hardware and software have taken place outside India and the sale of hardware and software to the Indian customers is in the nature of offshore supply. 14. He submitted, in such a scenario, when....
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....dian customers. It is also a fact that the telecommunication equipments along with software were supplied from outside India directly to the Indian customers. The payments were also made directly to the assessee by the Indian customers. Though, there is an allegation by the departmental authorities that the branch office has played a role in respect of such supplies, however, in what manner and to what extent the branch office has played such role is not forthcoming from the observations of the departmental authorities. It appears from record that the branch office has developed a patch of the software, which has been sold to the head office. It may be a fact that the patch of the software developed by the branch office was made part of the complete software, which in turn, got embedded in the hardware supplied to the Indian customers by the head office. However, in our view, such sale of patch of software by the branch office to the head office cannot be linked to the supply of telecommunication equipment and software by the assessee to the Indian customers, as, the branch office has a very limited and restricted role of supplying patch of the software. 18. In any case of the mat....
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....ng Officer funds assessee's claim to be correct, the addition should be deleted. 23. In addition to the main grounds, the assessee has raised an additional ground, challenging the levy of interest under section 234B of the Act. Since, the additional ground can be decided without fresh investigation in to the facts, we admit it for adjudication. 24. It is the say of the assessee that since it is a non-resident company, it has no liability to pay advance tax, as, the obligation is on the payer to deduct tax at source. For such proposition, learned counsel relied upon a catena of judicial precedents. 25. Having considered rival submissions in the light of judicial precedents cited before us, we accept assessee's claim and hold that no interest under section 234B of the Act can be charged as the assessee, being a non-resident company was not liable to pay advance tax, since, the payer is under an obligation to withhold tax under section 195 of the Act while making payment to the assessee. Accordingly, the Assessing Officer is directed to delete the interest charged under section 234B of the Act. 26. In the result, the appeal is partly allowed. ITA No. 1858/Del/2009 (Revenue's Appe....