TMI Blog2013 (8) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... very appointment of distributors by MRSC in India, had business connection in India. But, MRSC cannot be taxed again on the same income by way of royalty for exploitation of same rights which had been assessed in the hands of Gracemac, otherwise it would result in double taxation -Decision in the case of Gracemac Corpn. and Microsoft Corpn. Versus ADIT [2010 (10) TMI 583 - ITAT, DELHI] followed. – Decided in favor of Assessee. Penalty for concealment u/s 271(1)(c) of the Income Tax Act – Held that:- As income has not been held to be assessable in the hands of the assessee, no justification in levy of penalty, therefore, the order of the CIT (A) deleting the penalty is upheld on the ground that as the income itself is not assessable in the hands of the assessee, there is no question of levy of penalty. - ITA No.6092/Del/2012 - - - Dated:- 5-7-2013 - Shri I. C. Sudhir And Shri Tarvinder Singh Kapoor,JJ. For the Appellant : Shri Nageshwar Rao, Advocate and Shri Rahul Garg Shri Shailesh Kumar, CAs. For the Respondent : Shri D. K. Gupta, CIT-DR. ORDER Per I. C. Sudhir, JM :- The assessee has impugned action of learned Dispute Resolution Panel ('DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a distributor of Microsoft products in India by MO Singapore. 5. The sale proceeds received by the assessee were treated as royalty income and assessed accordingly in earlier assessment years since AY 1999-2000. The same was confirmed by the learned CIT(A) in his consolidated order dated 14.01.2005 for AY 1999-2000 to 2001-02. The Tribunal in its decision dated 26.10.2010 has deleted the addition of the receipts as royalty in the case of MRSC and confirmed the same addition in the hands of M/s Gracemac. The department has preferred an appeal before the Hon'ble Delhi High Court. In this year also, the facts of the case are same as in earlier years, therefore, relying on the stand taken by the department in the earlier years, the Assessing Officer has treated the entire receipts from licensing of Microsoft products to Indian distributors as royalty income in the hands of the assessee and has taxed accordingly. The learned DRP has approved this action of the Assessing Officer. The assessee has questioned this action of the learned DRP. 6. The learned DR has not disputed the above submission of the learned AR that the issue regarding the treatment of receipts from licensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d legal action against the violation of a copyright can be undertaken only by the owner of copyright. Without prejudice to this contention, it was submitted further that the right of the owner of the copyright to take legal action, would not alter the nature of the transaction from the sale of a copyrighted article to transfer of a copyright. The assessee contended further that the learned DRP has erred in observing that the provisions of Section 115A of the Act characterizes the income from sale of software as 'royalty' under the Act in case of non-resident without appreciating that Section 115 does not enlarge the scope of the term 'royalty' as defined in Section 9(1)(vi) of the Act. Against the observation of the learned DRP that the assessee possesses the intellectual property rights (IPR) in the software which it had further licensed to distributors disregarding the fact that the assessee was engaged in only distribution of Microsoft software products to distributors/resellers outside India and no rights have been passed by the assessee to the distributors in the entire transaction, it was further contended by the assessee that the learned DRP has erred in maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Copyright Act, Income-tax Act and Indian Tax Treaties. 8. There is no dispute that the facts relating to the issue are similar with the facts of the case of the assessee in the AY 2002-03 to 2008-09. During the AY 2007-08 2008-09, the Tribunal in the case of the assessee has decided an identical issue in favour of the assessee following the earlier order of the Tribunal on the issue in the AY 2002- 03 to 2006-07. After discussing the issue in detail as well as its finding for the AY 2002-03 to 2006-07, the Tribunal has decided the issue with this finding that such royalty cannot be assessed in the hands of the assessee as it will tantamount to assess the same income which has been assessed in the hands of M/s Gracemac. Though it has been held by the Tribunal that the amount was in the nature of royalty, but, it was held that the said amount cannot be assessed in the hands of the present assessee as it has been held to be taxable in the hands of M/s Gracemac Corporation. The decision of the Tribunal in the case of M/s Gracemac Corporation decided along with the assessee in the AY 1999- 2000 is reported in 132 TTJ 257 (Del). Quoting the finding of the Tribunal in the case of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the right to reproduce Microsoft software products to certain end users (large account customers) for their internal use. In lieu of the abovementioned rights, Gracemac earns royalty from MO. The royalty was computed on the basis of the net selling price of Microsoft products manufactured by MO and distributed to retailers, MS Corp or subsidiaries of MS Corp. 4.1 In turn, MO has entered into a non-exclusive distribution and inter-company services agreement ( distribution agreement ) with the Appellant, wherein Appellant was appointed as a distributor of Microsoft products manufactured by MO. Appellant was given the right to distribute Microsoft products in Asia (with restrictions in China, Korea and Taiwan), Japan, South East Asia and the South Pacific. The assessee did not have any right to copy, adapt etc. the software. The distribution agreement specifies that MO would ship the products to such addresses (of the assessee or its approved distributors) as specified by the appellant. Further, except for Australia and Japan, the title of the products has been agreed to be transferred to Appellant in Singapore which evidences the fact that delivery takes place outside India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars under consideration at US$ 1,01,75,235, US$ 5,87,64,099 and US$ 8,35,51,260 under the head 'Royalty' against the Nil income disclosed by the appellant in the returns of income filed for the years under consideration for following grounds: a) The software falls under the category 'secret formula or process' and the software when installed on a computer respond to every instruction in a specific way. Accordingly, the total revenue received by the appellant from sale of software in India was royalty. b) The appellant was taxable in India under provisions of Act and the DTAA as income from sale of software was in the nature of royalty u/s 9(1)(vi) and article 12 of DTAA. 5. Accordingly, aforementioned income was assessed in the hands of the assessee as royalty upon which the penalty has been levied by the Assessing Officer as follows:- Assessment Year 1999-2000 ₹ 6,45,31,340/- Assessment Year 2000-2001 ₹ 38,30,83,161/- Assessment Year 2001-2001 ₹ 58,18,92,771 6. The aforementioned additions were also upheld by le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Corporation has granted the right to reproduce and distribute Microsoft Products in lieu of Shares to Gracemac and no further royalty is payable by Gracemac and also the End User Licence Agreement is to be in the standard format of Microsoft Corporation, the Microsoft Corp. is under obligation to sign EULA on behalf of Gracemac. Thus it has to be logically concluded that Microsoft Corporation has signed the EULA on behalf of Gracemac to whom exclusive rights to manufacture and distribute Microsoft products have been granted otherwise the products would have been rendered useless and no revenue could have been earned by anyone in the supply chain. Microsoft Corporation has devised a scheme under which EULA has to be signed by Microsoft Corp. and not by Gracemac Corporation. Hence assessee cannot be permitted to take a plea that since EULA has been signed between end users and Microsoft Corp. no licence was granted by Gracemac and consequently the royalty payments will not be chargeable to tax in the hands of Gracemac. The agreements entered into between group companies have drafted in such a way which give an impression that Gracemac Corporation has no connection with the granting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the CIT (A) for deletion of the aforementioned amount should be upheld. As against that it is the case of the learned DR that royalty has rightly been assessed in the hands of the assessee and learned CIT (A) has wrongly deleted the same. 8. In the penalty proceedings, it is the case of the learned AR that it has been held by the Tribunal that income is not assessable in the hands of the assessee. Therefore, he pleaded that there is no question of levy of concealment penalty on the assessee. He submitted that learned CIT (A) though has deleted the penalty on merits and, therefore, it is the case of the learned AR that penalty has rightly been deleted by the CIT (A) and his order should be upheld. 9. In respect of appeal filed by the assessee, it is the case of the learned AR that the facts for Assessment Year 2006-07 are same and on the basis of similar facts, ld. DRP has held that the assessee is assessable in respect of royalty. He submitted that the order of DRP is not in conformity with the decision of the Tribunal in assessee's own case and the aforementioned decision of the Tribunal will be equally applicable for that year also and, therefore, the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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