TMI Blog2014 (10) TMI 463X X X X Extracts X X X X X X X X Extracts X X X X ..... company is installed on a server with identifying location and machine No. of the customer - the orders are placed by customers and banks in India with the assessee company on a need based arrangement - The supply of the products are made by the non-resident companies only after approving the technicality of the software module and other necessary particulars - The software products are delivered to the assessee on a CD/any other media specified in the invoices - the assessee does not have ownership in the copyright supplied by the non-resident companies - the assessee does not have any right to make copies of software or use the software anywhere else - The software is carefully marked for that particular customer to whom the assessee has sold the software product - the relationship subsisted between the assessee company and the non-resident companies was on a principal-to-principal basis - The risk of the failure of the software product is borne by the assessee company - The assessee company does not have any right to make changes in the software supplied by ACI Singapore and IRPL Australia - The assessee company is permitted to make only nominal/cosmetic modifications for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the assessee – the AO is directed to give the appropriate withholding tax credit to the assessee company on the basis of withholding tax certificate produced by the assessee – Decided in favour of assessee. Computation of relief u/s 10A/10B – Held that:- Following the decision in ITO v. Sak Soft Ltd. [2009 (3) TMI 243 - ITAT MADRAS-D] - such deductions made from the export turnover should be correspondingly made from the total turnover so as to maintain the parity of the turnover segments - the AO is directed to reduce the expenses also from the total turnover of the respective AYs – the AO is directed has excluded the unrealized foreign exchange from the export turnover without making corresponding deduction in the total turnover of the assessee company - when the foreign exchange is not realized and corresponding export turnover is already reduced, it is a corollary that the total turnover is reduced to that extent for the reason that the total turnover includes export turnover as well – Decided partly in favour of assessee. - IT APPEAL NOS. 2190 TO 2196 & 2199 (MDS.) OF 2013 - - - Dated:- 5-6-2014 - Dr. O.K. Narayanan, VICE-PRESIDENT AND Vikas Awasthy, JJ. Ni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies towards procumbent of software products under the above stated distribution model do not generate taxable income for the non-resident companies in India and therefore, there was no necessity to deduct tax at source while making the payments. But this proposition was not acceptable to the assessing authority. The Assessing Officer was of the view that the payments made by the assessee company to the non-resident companies were in the nature of Royalty. Royalty generates taxable income in the hands of the non-resident companies, in India. Therefore, he held that the assessee was under an obligation to deduct tax at source, while making the payments, and as no such TDS has been made, the assessee is liable for the consequence of provisions of sec.40(a)(i). Accordingly, the Assessing Officer disallowed those payments incurred for procurement of software claimed by the assessee company as expenditure, while computing its taxable income. 4. As already stated, the assessments for the assessment years 2003-04 to 2006-07 were completed under sec.143(3), read with sec.147. The original assessments for these years were completed either under sec.143(1) or under sec.143(3). The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and allowed depreciation at 10%. The Assessing Officer also did not accept the contentions of the assessee company regarding the credit against TDS available to the assessee. 9. All the above additions and adjustments made by the Assessing Officer were taken in first appeals. As already stated, the Commissioner of Income-tax(Appeals) considered all the issues, but rejected the contentions of the assessee company and dismissed the appeals through his common order dated 30.8.2013. 10. The assessee is aggrieved and, therefore in second appeals before us. 11. In these bunch of eight appeals, by and large, common issues are raised. Certain common issues relate to all the eight assessment years under appeal and certain common issues arise only in respect of certain assessment years. The assessee company has also raised individual issues for particular assessment years. The issues and the grounds being in the above nature, we proceed to dispose the appeals issue-wise rather than assessment year-wise. We will consider the issues raised by the assessee in its ground of appeals one after the other and also mention the relevant assessment/assessment years to which the issues relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee company for the assessment years 2003-04 and 2005-06 were processed under sec.143(1). Obviously, in such cases, there is no question of change of opinion. The question of deducting tax at source while making the payments to the non-resident companies was first considered and determined for the assessment year 2007-08. When the Assessing Officer has arrived at a finding that the assessee company is in fact paying Royalty to the non-resident companies, he has to apply the same ratio for pending assessments as well as assessments concluded recently; especially, the assessments concluded under sec.143(1). Wherever the time permits, the Assessing Officer had to reopen the earlier assessments. It is only a necessity in law to bring consistency in decisions relating to important issues. Therefore, it is evident that as far as the assessing authority is concerned, there is reason to believe that income has escaped assessments for the earlier assessment years 2003-04, 2004-05, 2005-06 and 2006-07. 17. In the facts and circumstances of the case, we find that the reassessments completed by the assessing authority for the four assessment years 2003-04, 2004-05, 2005-06 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... talized, the customers place the purchase orders(POs) with the assessee company based on which the assessee places back to back purchase orders with ACI Singapore to get the required software for onward delivery to the customers. 22. The software provided by ACI Singapore consists of two parts, namely, the network layer (nucleus) and an application layer. The network layer is an object code and cannot be altered either by the assessee company or by its customers. It is customer specific and machine specific. The application layer is in vanilla format. The application layer cannot function without the network layer which is the soul of the software. The outcome of the above model of operation with the software licensed by ACI Singapore is that the software tuned for one customer cannot be used for another customer. The software is supplied in modular basis, where the customers have the choice to change the modules according to their convenience and specific business requirements. The customers approach the assessee company and consequently the assessee company places orders with ACI Singapore. No software module is developed by the assessee company internally. 23. The software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software products supplied by the non-resident companies. Orders are procured by the assessee company from Indian customers on its own account Once customers place orders with the assessee company, it approaches non-resident companies and if the orders are approved by the non-resident companies, they raise invoices on the assessee company, in turn, the assessee company raises invoices on its customers in India. Software products are delivered to the assessee company on a CD/any other media specified in the invoices issued by the non-resident companies. The assessee company has no right of ownership in the copy right and also no right to make copies or use the software. The relationship between the assessee company and the non-resident companies is on a principal-to-principal basis. The assessee company shoulders the risk of failure of a contract. The assessee company does not make any functional or fundamental changes in the software products delivered by the foreign companies, but make only nominal and cosmetic changes confined to the installation and start-up of the software in the business environment of the customers. Software under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia are not chargeable to tax in India and therefore, there is no requirement to withhold tax on those payments under sec.195 and accordingly, there is no justification in making disallowance under sec.40(a)(i). 31. The learned counsel has raised another alternative argument regarding the nature of payment that if at all amendment brought in by Finance Act, 2012 is with retrospective effect, such amendment could not have been foreseen by the assessee company and it had no occasion during the previous years relevant to the assessment years under appeal to change its stand and deduct tax at source under sec.195. The learned counsel submitted that no disallowance in the hands of the assessee can be made under sec.40(a)(i), on the ground that the nature of payment did constitute Royalty by virtue of retrospective amendment made in sec.9(1)(vi) by Finance Act, 2012. He further submitted that the amended law was not brought into the statute book at the time the payments were made by the assessee company to the foreign entities. 32. In support of the detailed arguments made by the learned counsel appearing for the assessee company, the following decisions were cited for reliance : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of copyright and not a lump sum payment made for acquisition of a copyrighted article. The court observed that when payment received by assessee was towards title and system of which software was an inseparable part incapable of independent use and where it was a contract for supply of goods, no part of payment could be classified as payments towards Royalty. (iv) DIT vs. Solid Works Corpn., 17 ITR(AT) 510(Mumbai) In this case, Mumbai Tribunal held that when shrink wrap software is sold, consideration is paid for right to use software and such consideration is not Royalty. (v) Dy. CIT v. Abaqus Engg. (P.) Ltd. [IT Appeal Nos.1698 to 1702 (Mds) of 2010 and Dassault Systems Simulia (P.) Ltd. (CO Nos.145 to 149/Mds/2010). 33. In these two cases, ITAT, Chennai Bench 'B' has held that the procurement of copyrighted article for limited use without any acquisition of right or copyright in making payments cannot be treated as Royalty. In the light of the ratio laid down in the above judgments, the learned counsel submitted that the present case is very similar to the above cases and especially that of Dassault Systems K.K. (supra), considered by the Authority for Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Infrasoft Ltd. (supra) decided by the Hon'ble Delhi High Court on 22nd November, 2013, after the amendment brought in by Finance Act, 2012, the court has held that amount received by a non-resident company for granting license to use its copyrighted article for licensee's own business purposes could not be brought to tax as Royalty under Article 12(3) of Indo-US DTAA. In the said case, the court has observed that in terms of license agreement, licensee was allowed to make only one copy of software and associated support information for backup purposes with a condition that such copyright would include 'Infrasoft' copyright and all copies of software would be exclusive properties of 'Infrasoft', which was also apparent that software was to be used only for licensee's own business and without consent of the assessee, software could not be loaned, rented, sold, sub-licensed or transferred to any third party. The court has further held that it was a case of mere transfer of right to use copyrighted material i.e. software and, therefore, amount received by the assessee from its Indian customer did not give rise to any Royalty income in terms of Article 12(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the purview of Royalty . 39. Shri Shaji P. Jacob, the learned Commissioner appearing for the Revenue, on the other hand, argued that the payments made by the assessee company were in the nature of Royalty. He pointed out that the assessee has entered into contract with two NRI companies; on the one side with the developer of software, a non-resident company and on the other side, an end user, which is a bank, a resident in India. The assessee has purchased license to use the copy of software with the recorded key, which is sublicensed to the end user. One copy of the software to be delivered to the assessee by the non-resident developer and the assessee is authorized to make copies as per the license in the agreement. Therefore, he argued that the payments made by the assessee company were nothing but fees for the license to use the copy of the software or right to use the copy of software for a specified period. 40. The learned Commissioner explained that in the above circumstances, the transaction entered into by the assessee is not a trading transaction involving purchase and sale of software. The learned Commissioner further explained that if Royalty received from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this order of the Tribunal has been rendered after the amendment brought in by Finance Act, 2012 and the Tribunal had the occasion to consider the law prevailing before the amendment and the law that followed the amendment. 43. The learned Commissioner relied on the said order of the Tribunal in the case of Reliance Infocom Ltd. (supra) to counter the argument of the learned counsel appearing for the assessee, that as no amendment has been made in DTAAs in consequence of retrospective amendment brought in sec.9(1)(vi) by Finance Act, 2012, the amendment will not have any effect, as the terms of DTAA override the provisions of law stated in the Act. The learned Commissioner explained that as held by the Tribunal in the said case, there is no need to bring any change in the expression of Royalty in DTAAs, because the amended law in sec.9(1)(vi) and the expression Royalty provided in the DTAAs do not have any conflict, even after the amendment. 44. The learned Commissioner also opposed the argument of the learned counsel that as the amendment was brought only in 2012 and as all the assessment years involved in these appeals are prior to the amendment, it was impossible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thereafter places orders with non-resident companies. When the products are delivered to the assessee, it sells the products to the customers in India. The non-resident companies raise invoices on the assessee company and in turn, the assessee company raises separate invoices on the end users. It is to be seen that the orders are placed by customers and banks in India with the assessee company on a need based arrangement. The supply of the products are made by the non-resident companies only after approving the technicality of the software module and other necessary particulars. The software products are delivered to the assessee on a CD/any other media specified in the invoices. It is seen that the assessee does not have ownership in the copyright supplied by the non-resident companies. It is also to be seen that the assessee does not have any right to make copies of software or use the software anywhere else. The software is carefully marked for that particular customer to whom the assessee has sold the software product. From the above features, it is clear that the relationship subsisted between the assessee company and the non-resident companies was on a principal-to-princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal to non-resident companies are only purchase consideration for procuring copyrighted software products. They were not in the nature of Royalty. 52. The learned Commissioner, in the course of his arguments, has stated that all the above judgments relied on by the assessee were rendered before the retrospective amendment brought in sec.9(1)(vi) by Finance Act, 2012. Before the amendment brought in by Finance Act, 2012, Royalty has been defined as consideration for the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. The amendment brought in sec. 9(1)(vi) is an explanation for the purpose of removing doubts. It is clarified that consideration for the transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred, constitutes Royalty. 53. On a comparative readin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. 195. In the said case, what has been acquired by the Indian company is a computer software i.e. software proper . It is not a case, where Indian company had acquired a software product in the nature of copyrighted article . Therefore, there is a fundamental difference in the subject matter of transaction considered in the cases cited by the learned counsel appearing for the assessee and the Tribunal decision relied on by the learned Commissioner. We, therefore, find that the decision of ITAT, Mumbai Bench, in the case of Reliance Infocom Ltd. (supra) stands on a different footing and does not apply to the present case. 56. As we have already reached a conclusion that the assessee has procured copyrighted articles from the non-resident companies, ACI Singapore and IRPL Australia and payments made by the assessee company to those companies were not in the nature of Royalty, within the provisions of Indian Income-tax Act itself, we do not find it necessary to dwell upon the detailed arguments made by the learned counsel appearing for the assessee, to examine the issue in the light of the provisions of the Act vis- -vis terms of Indo-Singapore DTAA and Indo-Australia DTAA. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce as provided under sec.195 of the Act. Accordingly, we have to hold that the assessing authority is not justified to invoke sec.40(a)(i) and make disallowance in respect of the amounts paid by the assessee company to ACI Singapore and IRPL Australia. The disallowances are therefore, deleted. 61. This second issue raised by the assessee for all the assessment years regarding the disallowance under sec.40(a)(i) is decided in favour of the assessee. 62. The third issue raised by the assessee company, common to all the assessment years, except the assessment year 2006-07, is that the lower authorities erred in concluding that ACI Singapore and IRPL Australia have Permanent Establishment(PE) in the India and despite the controversy regarding the payment as Royalty or not, those non-resident companies are liable to tax in India and as such, the assessee company was liable for deducting tax at source. 63. The business model followed by the assessee company has already been explained in earlier paragraphs while considering the issue relating to the nature of payments made by the assessee company to non-resident companies. The assessee company, first obtains purchase orders from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, the learned counsel stated before us that the said ground is not pressed any more. Accordingly, this issue is decided against the assessee. 67. The fifth issue raised by the assessee for the assessment years 2004-05, 2009-10 and 2010-11 is that there is a short fall in the credits granted to the assessee company against tax deducted at source. In the assessment year 2004-05, the relevant income was accounted on accrual basis. The assessee had accounted for ₹ 24 lakhs and ₹ 2 lakhs as part of receivable from UTI Bank on accrual basis for the assessment years 2002-03 and 2003-04 but did not pass any entry for TDS, nor any claim was made through TDS at the time of accrual because UTI Bank deducts tax at source only at the time of payment. In the assessment year 2004-05 out of the above stated amount, the assessee company has written off ₹ 25 lakhs and offered only ₹ 1,00,000/- as income. TDS credit of ₹ 30,750/- was claimed on ₹ 1,00,000/-. But in the assessment, the Assessing Officer has withdrawn the TDS credit of ₹ 1,28,125/- on the written off amount of ₹ 25 lakhs without appreciating the fact that the assessee never claimed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of that, we direct the Assessing Officer to reduce the expenses also from the total turnover of the respective assessment years. This issue of travel and communication expenses are raised for the assessment years 2007-08, 2008-09, 2009-10 and 2010-11. This issue is decided in favour of the assessee company. 72. The other issue raised by the assessee with reference to sec.10A/10B is the disallowance of deduction of foreign exchange loss from the export turnover. This contention of the assessee is rejected in view of various decisions against the assessee. 73. The next item with reference to disallowance of deduction under sec.10A/10B is the unrealized foreign exchange. This issue arises for the assessment years 2007-08, 2008-09, 2009-10 and 2010-11. The Assessing Officer has excluded the unrealized foreign exchange from the export turnover without making corresponding deduction in the total turnover of the assessee company. When the foreign exchange is not realized and corresponding export turnover is already reduced, it is a corollary that the total turnover is reduced to that extent for the reason that the total turnover includes export turnover as well. In view of var ..... X X X X Extracts X X X X X X X X Extracts X X X X
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