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TMI Blog2013 (8) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... 234B of the Act. 2. We have heard and considered the arguments advanced by the parties and have gone through orders of the authorities below, material available on record and the decisions relied upon. The submission of the learned AR, at the outset, remained that the issue raised in the grounds regarding chargeability of income as royalty is fully covered by the decision of Delhi Bench of the Tribunal in the case of the assessee itself for the assessment years 2002-03 to 2008-09. 3. The facts in brief are that Microsoft Regional Sales Corporation ('MRSC' in short), the assessee, is a company incorporated in USA and is a wholly owned subsidiary of M/s Microsoft Corporation, USA (MS Corp). The assessee is engaged in the business of distribution of Microsoft retail products in the Asia Pacific region, including India. The assessee is engaged in selling/licensing of software through independent distributors to the end users under the End User License Agreement (EULA). The consideration received by the assessee from the distributors in India has not been offered to tax in India on the basis that they are business receipts and are not taxable in the absence of a permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that an identical issue has been decided in favour of the assessee under similar set of facts and circumstances. The authorities below have held that the payment made by the Indian distributors is towards the use of copyright and not for the purchase of copyrighted article and, therefore, the same is royalty under Section 9(1)(vi) of the Act. They have also held that the amount received by the assessee fulfilled the conditions of Section 9(1)(vi) of the Act and, hence, taxable as royalty in India. They have held that the consideration received by the assessee was on account of licensing of software and not on sales of software and that the amount received by the assessee is taxable as royalty in India even though the assessee does not have any permanent establishment (PE) in India. They have held further that the consideration received by the assessee is payment for a 'process' and is covered by Section 9(1)(vi) of the Act. They have held that the consideration received for use of software is towards consideration for use of patented article and inventions. As per the authorities below, the payments made for import of software are royalty payments and the only exception ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the draft assessment order that revenue earned by the assessee from sale of Microsoft retail products to distributors in India is royalty under Article 12 of the India US Tax Treaty and that the payments received by the assessee were deemed to arise in India under Article 12(7) of the India US Tax Treaty. While doing so, the learned DRP has disregarded the fact that the revenue earned by the assessee is from the sale of Microsoft software products to the Indian distributors ex-warehouse Singapore. It was contended that the learned DRP has also erred in holding that the Revenue earned and received from sale of Microsoft software products by the assessee to Indian distributors is taxable in India under the provisions of Article 12(2) and Article 12(3)(a) of the India US Tax Treaty. The assessee contended that the authorities below have erred in not appreciating that the definition of royalty is different in the Act and the India US Tax treaty. The benefits available under the India US Tax Treaty would still be available to the assessee as the amendment in the Finance Act, 2012 would not impact the treaty interpretation of the term 'royalty' under Article 12. The authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years 1999-2000, 2000-01 and 2001-02 are as under:- "4. Facts of the case The Appellant is a company incorporated in US and is a wholly owned subsidiary ("WOS") of Microsoft Corporation, USA ("MS Corp") with a branch in Singapore. The operating structure of the distribution model along with the flow of distribution rights from MS Corp to Appellant through Gracemac Corporation, USA ("Gracemac") and Microsoft Operations Pte Limited, Singapore ('MO") was explained by appellant as follows: Gracemac is a company incorporated under the laws of USA on September 23, 1994 having its registered office at 300 South Fourth Street, Suite 1100, Las Vegas, Nevada, USA-89109. Gracemac is a WOS of MS Corp. MS Corp entered into a Parent Subsidiary agreement ("PSA"') with Gracemac on January 1, 1999 wherein MS Corp had granted Gracemac the: a) exclusive license to manufacture Microsoft products b) exclusive license to distribute the products so manufactured directly to retailers or to MS Corp or to subsidiaries of MS Corp; and c) exclusive right to license any third party to directly grant customers the right to reproduce Microsoft software products for internal use. In lieu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the distributor sold the products to a reseller in India who in turn sold it to a consumer/ distributor sells directly to consumers. The resellers/ consumers did not have the right to make copies of the software for "commercial exploitation". The distributor was not liable to pay the assessee only upon sale by the distributor to the reseller/ consumer. It was liable to pay the assessee even if it was not able to sell the products to the reseller/ consumer. 4.3 According to appellant the income earned from the sale of computer software to independent distributor in India was in the nature of business profit in the years under consideration and was not taxable in India as appellant did not have a PE in India under provisions of Double Taxation Avoidance Agreement between India and USA (in short DTAA). It was also contested that royalty income from sale of software could not be taxed in hand of appellant which was only distributor of the software of MS Corp and copyrights of these software were owned by MS Corp not by appellant. For these reasons it was claimed that business income of appellant was not taxable in India for the years under consideration accordingly, appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le holding so are contained in para 128 and 132 and it will be relevant to reproduce the said observations of the Tribunal with regard to taxability or otherwise of the aforementioned amount in the hands of the assessee:- "128. From the above it is evident that MRSC was also authorized to reproduce certain products and distribute the same to end users through the distributors appointed by MRSC. MRSC vide agreement dated 3rd May, 1999 was authorized to copy the marketing programmes in object code form from the master copy provided by Microsoft Operations (MO) on to either diskettes or such approved media and prepare the product documentation and packaging based on the material provided and approved by MO. We would like to mention here that source code and object code have copyright. Therefore, MRSC also got right to use copyright in computer products from sub-licencee (MO). Each product package would include a pre-approved diskettes label attached to the diskettes and MS Corp. standard End User Licence Agreement for the territory. From the above it is evident that MRSC is not simply a distributor appointed by Microsoft Operations, but was authorized to reproduce certain computer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs in India. Therefore, the very appointment of distributors by MRSC in India, had business connection in India and the portion of income earned by MRSC perhaps could have been chargeable to tax as business income under section 9(1)(i) of the Act. But since the assessing officer as well as the ld. CIT (Appeals) has chosen to assess the entire receipts under the head 'royalty' in the hands of MRSC also, in our considered opinion, 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. Therefore, we delete the addition in the hands of MRSC for all the three years." 7. The question involved in the quantum appeals filed by the revenue is whether learned CIT (A) is right in deleting the addition made by the Assessing Officer on account of aforementioned royalty. The learned AR of the assessee has referred to the aforementioned decision of the Tribunal wherein on similar facts, it has been held by the Tribunal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, respectfully following the aforementioned decision of the Tribunal, the relevant observations of which has already been reproduced, we hold in the quantum appeals that the additions have rightly been deleted by learned CIT (A) and we decline to interfere in his order. Similarly, for penalty appeals, as income has not been held to be assessable in the hands of the assessee, we find 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 according to the aforementioned order of the Tribunal, there is no question of levy of penalty. 12. So far as it relates to assessee's appeal, the facts being similar, adopting the similar view which has been adopted by the Tribunal in earlier decision in the case of the assessee, we find no justification in assessability of aforementioned royalty in the hands of the assessee, therefore, the appeal of the assessee is allowed. 13. To sum up, in the result, all the departmental appeals are dismissed and the appeal filed by the assessee is allowed in the manner aforesaid". 7. Respectfully following the or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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