2011 (12) TMI 91 - HC - Income Tax

Foreign company – engaged in supply of hardware and software which is used in the business of rendering telecommunication services – validity of notice issued u/s 142 - viability of charging of interest u/s 234A and 234B on the ground that the revenues were liable for tax deduction at source - Revenue contention, assessee having business connection in India and has a permanent establishment in the form of a dependent agent establishment – income from licensing of software amounted to receipt of royalty – Held that:- Finance Act, 2006, the Legislature has added proviso in Section 142 (i) of the Act. The effect thereof is that an assessment framed pursuant to a notice issued under Section 142 after the end of the assessment year would also be valid. Regarding levy of interest charged u/s 234B it is held that levy of interest was not justified, inasmuch as the assessee had no obligation to pay any advance tax as tax was deductible at source on its income that was chargeable to tax in India.

The place of negotiation, the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the goods were manufactured outside India and even the sale has taken place outside India. Thereby, no part of the income accrued to the assessee in India. The terms of the contract make it clear that the acceptance test is not a material event for the passing of the title and risk in the equipment supplied. It is further held 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.

The assessee together with supply of hardware and software has to over-see installation thereof to ensure that it was carried out to the satisfaction of Indian buyer in accordance with the terms of the contract. It is clear that under the Supply Contract, the assessee has not earned any income in India through or from any business connection. Because the installation contractor is a subsidiary of the assessee holding company would not, by itself, give rise to a business connection. Therefore, assessee did not have any business connection in India. In view of this, it is not necessary to go into the issue whether the assessee had any Permanent Establishment in India or not during the relevant period in India or not.- Decided in favor of assessee.