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Income Tax Officer TDS Ward 2 (2) , International Taxation, New Delhi Versus M/s Sistema Shyam Tele Services Ltd., New Delhi

2015 (7) TMI 843 - ITAT DELHI

TDS liability u/s 195 - whether the payment made by the assessee company for purchase of software amounts to royalty and hence the same subject to TDS? - Held that:- The issue is squarely covered in favour of the assessee by the said decision of Hon’ble jurisdictional High Court in the case of DIT Vs. Ericsson AB (2011 (12) TMI 91 - Delhi High Court ) and DIT Vs. Nokia Network Oy (2012 (9) TMI 409 - DELHI HIGH COURT ). We further held that the CIT(A) was quite correct and justified in holding th .....

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d hence we upheld the same. Accordingly, the sole issue/ground raised by the Revenue in both the appeals being devoid of merits is dismissed. - Decided in favour of assessee. - ITA No.2629 & 2630/Del /2013 - Dated:- 22-7-2015 - Shri S.V. Mehrotra and Shri Chandra Mohan Garg, JJ. For the Petitioner : Sri B.R.R. Kumar, Sr. DR For the Respondent : Sri Alok Vasant, AR ORDER PER CHANDRA MOHAN GARG, JUDICIAL MEMBER 1. These appeals have been filed by the Revenue against the order of the CIT(A)-XXIX, N .....

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ed in the business of providing cellular mobile telephone and wireless services and other related services in various telecom circles of India. The assessee company was desirous of procuring a CDMA Mobile Telephone System from Huawei International Pte Limited, Singapore for the purposes of installation in various telecom circles in the country, in respect of which it had obtained telecom licenses. There was a contract between the assessee company and Huawai for supply of system as whole which co .....

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yable under the supply contract for purchase of embedded software does not attract a withholding tax as per the provisions of Act read with DTAA between India and Singapore, made payments without deduction of tax at source. 4. The AO issued show cause notices dated 25.02.2010 wherein the assessee was required to submit various documents and also to explain why the alleged payment for software should not be treated as royalty in terms of provisions of the Act and also in terms of Tax Treaty betwe .....

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ed the submissions of the assessee and held that payments towards the software component of the equipment are characterized as royalty and thereby attracted withholding tax in India. The AO also held that payments attracted tax on grossed up basis. Consequently a composite demand of ₹ 1,84,70,751/- for FY 2008-09 and 2009-10 was computed and a consolidated demand notice was issued and served on the assessee. 5. Being aggrieved by the above action of the AO, the assessee preferred an appeal .....

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made by the assessee clearly constitute payments of royalties and the assessee was duty bound to withhold tax on these payments at the rate of 10%. The Ld. Departmental Representative further submitted that since the agreement with the payee Singapore companies was net of taxes therefore, after grossing up such rates would come to 11.11% and, therefore, the demand of tax and interest was rightly raised by the AO. The Ld. DR further submitted that CIT(A) was not correct in granting relief to the .....

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rt of Delhi in the case of DIT Vs. Ericsson AB (2011-TII-46-HC-DEL-INTL) and view taken by the Hon ble Delhi HighCourt in the case of DIT Vs. M/s Nokia Network Oy(2012-TTI-49-HC-DEL-INTL). 8. The Ld. AR also took us through finding of the CIT(A) from Paras 6.1 to 6.4 of the impugned order and submitted that the Revenue Department has agitated issue without any basis and the appeals may kindly be dismissed and the order of the CIT(A) may kindly be upheld. 9. On careful consideration of above, at .....

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2 and clause 39(iii) of Annexure-l of the contract, it is seen that under the supply contract, the appellant has purchased integrated system comprising of hardware and embedded software. Even software supplied on separate media was meant for re-loading into the system whenever there is malfunctioning etc. The issue of taxability of software has been subject matter of intense litigation in the past. On the issue of taxability of integrated supply of hardware and software i.e. supply of software .....

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ld by the jurisdictional Hon'ble Delhi High Court in a recent judgment in the case of Director of Income-tax Vs. Ericsson AB [2011-TII-46-HC-DEL INTL]. In this ruling, the High Court has held that the contract for the integrated supply of hardware and software was to be treated as contract of supply of goods. The relevant extract from the judgment are reproduced below: "54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above t .....

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hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The softw .....

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TATA Consultancy Services Vs. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and therefore, liable to sales tax. 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. ………….. 58. No doubt, in an anne .....

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tion- II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work. Section 2 (0) of the Copyright Act makes it clear that a computer programme is to be regarded as a "literary work ': Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or .....

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mentary on the GECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA .....

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oftware 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. " Further, the above view has also been upheld by a very recent ruling of jurisdictional Delhi high court in the case of Director ofIncome-tax vis Mls Nokia Networks OY [2012-II- 49-HC-DEL-INTL]. 6.2 There is no other ruling of any other High Court on the issue of taxability of integrated supply of .....

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hich was given which was given in the context of standalone import of software. Similarly, the ruling of Delhi Bench of Tribunal in the matter of Gracemac Corpn was in !he context of shrink wrapped software and, therefore, not applicable in the instant case. On the aspect of the retrospective amendment made to section 9( I )(vi) of the Act, Hon'ble Delhi high court in case of Nokia Networks Oy has held that the integrated software supplies would not be taxable as Royalty even after the amend .....

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