TMI Blog2007 (8) TMI 717X X X X Extracts X X X X X X X X Extracts X X X X ..... dition, we find that IGTL allowed assessee to use or gave right to use MUX and ancillary equipments in USA so that the assessee gets connectivity facility, which facilitates assessee to establish outbound calls to clients/people in USA. Thus, the second condition is also satisfied. We, therefore, find that payment made by the assessee to the IGTL, USA party is royalty within the meaning given in cl. (iva) of Expln. 2 of s. 9(1)(vi) of the Act. We find that impugned payment is 'royalty' in accordance with cl. (iva) to Expln. 2 of s. 9(1)(vi) which is deemed to accrue or arise in India. All income accrues or arises or is deemed to accrue or arise in India is chargeable under the provisions of this Act. Sec. 195 provides that any person responsible for paying to non-resident any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. We find that the impugned transaction under consideration satisfied all the conditions stipulated in sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs dated 27th June 2003 of the Commissioner of Income-tax (Appeals)-V, Hyderabad for the assessment years 2002-03 and 2003-04. 2. Grounds raised in these appeals are common based on identical facts. Therefore, both appeals are decided by this common order for the sake of convenience. To know the exact grounds of appeal, we reproduce the following grounds of appeal raised in I.T.A. No. 1080/HYd/2003 for assessment year 2002-03: 1) On the facts and circumstances of the case, the Commissioner of Income-tax (Appeals) erred in partly dismissing the appeal and confirming the order of the Assessing Officer, passed under Section 201(1) and Section 201(1A) of the Income-tax Act, 1961. 2) The Commissioner of Income-tax (Appeals) on the facts and the circumstances of the case ought to have held that there was no business connection in India, and that IGTL had not earned any income taxable in India, making it mandatory for the appellant to deduct tax on the payment made to IGTL. The finding of the Commissioner of Income-tax (Appeals) that the provisions of Section 9(1)(vi) of the Income-tax Act applies is erroneous and incorrect. 3) The Commissioner of Income-tax (Appeals) ought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of tax at source payments made to True Dial Technologies. 4. The brief facts of the case are that the assesses company is engaged in the business of development of software and running a call centre. A survey Under Section 133A carried out as on 11.12.2002. It was noticed that certain payments in foreign currency were made to two parties in USA viz. IGTL Solutions (USA) and True Dial Technologies Inc. (hereinafter called as IGTL TDT in that order) during the financial years relevant to A.Y. 2002-03 and 2003-04 without deduction of tax at source under sc. 195 read with Section 9(1)(vi) (vii) of the Act. 5. Payments made to IGTL were towards availing the connectivity facility to enable the appellant to generate and to cater to outbound PSTN calls within USA through co-located equipment comprising of multimodal switches (MUX) belonging to IGTL and located in that country with a certain bandwidth. IGTL provided MUX and ancillary equipment in USA which it owned and maintained for specific use of the appellant company. The agreement entered into with IGTL were of two types, one for availing the connectivity facility and the other for availing maintenance services like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DTAA at 10%. vi) The payment made to IGTL was for the use of the equipment and maintenance of the same. From the service level agreement, it is evident that the maintenance service provided were undoubtedly of a highly technical nature. Payments made for availing such services would not fall under the purview of 'business profit' as claimed by the appellant, since Clause 6 of Article 7 of the DTAA specifically excludes all items of income which are dealt with separately in other articles from being taxed as 'business profits'. Hence, the question of considering the claim that the recipient non-resident party had no permanent establishment in India did not arise. vii) The payment made to IGTL we chargeable to tax in India s per the provisions of Section 9(1)(vi) and Section 9(i)(vii) of the Act read with Clause 3(b) and Clause 4(a) of Article 12 of the DTAA. Further Article 7 of the DTAA had no application to the facts of the present case. The rate of 10% prescribed in Article 13 the DTAA being more beneficial to the overseas parties, tax was deductible Under Section 195 @ 10% of the gross payments, keeping in view the provisions of Section 90(2) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty, the C.I.T. (Appeals) observed that once it is held that a process was being made use of by the non-resident for which a consideration was being paid, there can be no dispute that any consideration paid for availing such process would be covered within the meaning of the term 'royalty' if one take into consideration the provisions of Clause (vi) of Explanation 2 to Section 9(1)(Vi). Therefore, irrespective of whether any process is used or any services in connection with such process have been availed, the same falls within the meaning of the term 'royalty' as defined in Explanation 2. The C.I.T. has also distinguished the decision of the ITAT, Bangalore Bench cited by the assessee in the case of Wipro Limited observing as under: In that case, the Hon'ble ITAT held that when an assessee utilizes the services for link up from India through VSNL and down link the same through telecom companies outside India, most of the services are provided through customer based circuits (CBC) which are like hot lines between the assessee and its customers abroad. Though the CBC I one service, it is commercially divided into two portions viz., the Indian portion and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned D.R. submitted that source of income is generated in India, therefore, same is to be taxed in India in accordance with Section 9(1) of the Act and liable to TDS Under Section 195. The learned D.R. in support of his contention relied upon the judgment of the Hon'ble A.P. High Court in the case of EIKEM Technology v. DCIT 250 ITR 164 (AP). The learned D.R. further submitted that after insertion of Clause (iva) to the Explanation 2 to Section 9(1)(vi) w.e.f. 1.4.2002, the Royalty means consideration for use or right to use ay industrial, commercial or scientific equipment. Thus the case of the assessee is directly covered by this clause. The learned D.R. submitted that decisions relied upon by the learned D.R. are distinguishable, as in those decisions the Clause inserted to Explanation 2(iva) to Section 9(1)(vi) has not been considered. The learned D.R. further submitted that for the purpose of Section whether income is taxable in India or USA is immaterial. The assessee is liable to deduct tax at source as per Section 195. If the assessee wants no tax to be deducted at source, he is to make a request to A.O. Under Section 197. The learned D.R. in support of his contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief, the first controversy raised in grounds No. 2 to 5 of the appeal under consideration is whether payment made by the assessee to IGTL (NRI) engaged in business of providing connectivity facility, which facilitate call centers in India (run by assessee) in India to establish outbound calls to clients/people in United States of America (USA) is liable to deduct tax at source. Section 195 says that any person responsible for paying to a no-resident, any other sum chargeable under the provision of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode whichever is earlier, deduct Income-tax thereon at the rate in force The condition laid down in this provision is sum should be chargeable to tax Section 9 of the Act provides certain circumstances where income deemed to accrue or arise in India which is sum chargeable to tax The AO invoked Section 9(1)(vi) (vii) which reads as under: Section 9(1)(vi) Income by way of royalty payable by- (a) the Government, or (b) a person who is a resident, except where the royalty is payable in respect of any right, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2. - For the purpose of this Clause 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'capital gains' for- (i) the transfer of all or any rights (including the granting of a license in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark of similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use of or right to use any industrial, commercial or scientific equipment but not including the amounts referred to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 2 to Section 9(1)(vi) defines 'Royalty' means consideration including lump sum consideration paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property and also the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. Lump sum consideration paid which is in the nature of income chargeable under the head 'capital gains' is excluded from the meaning of royalty. 12. The term 'Royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grant of that right. 13. By the Finance Act 2001, Clause (iva) has been inserted in Explanation 2 in Clause 9(1)(vi) to wide the definition of the expression 'Royalty' w.e.f. 1.4.2002. As per this clause, royalty would include consideration in respect of the use or right to use any industrial, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment available to Customer or Customer's Software Vendor. (b) Customers Obligations: 1. The Customer shall arrange for 'Customer's Circuit' before Ready for Commercial Date. 2. The customer shall, tough out the tenure of this Agreement, ensure that the all the equipment, 'Customer's Circuit' and CRM software loaded on equipments in 'IGTL Node', necessary for using IGTL Connectivity, are in working condition. 3. The Customer shall either itself or through its Campaign Provider, completes the relevant formalities under various US/India Laws which shall enable the Customer to carry out Call Center Business using IGTL Connectivity. 4. The Customer shall comply with all laws, rules, and Licenses (Indian as well as US) as applicable for the IGTL Connectivity. From above, it is clear that IGTL was having exclusive right over equipments and allowing assessee to make use of it. Those equipments are commercial or scientific equipments. The Hon'ble ITAT, Delhi (C-Bench) in the case of Asia Satellite Telecommunications Co. Ltd. (ITA Nos. 166/Del/2001 and 861/Del/2001 dt. 01.11.2001) had occasion to examine the scope and applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Royalty within the meaning given in Clause (iva) of Explanation 2 of Section 9(1)(vi)of the Act. 16. The judgments of Bangalore Bench cited by the learned A.R. are distinguishable on facts. In Wipro Ltd. v. Income Tax Officer (supra) is in respect of technical services as per Section 9(1)(vii) and not a case of 'Royalty' as per Section 9(1)(vi) of the Act. Further the Bangalore Bench had no occasion to consider Clause (iva) inserted to Explanation 2 of Section 9(i)(vi) of the Act as same is inserted w.e.f. 1.4.2002 as the assessment years involved in that case were Asst. Years 1999-2000 to 2001-02. Similar is the position of the decision in the case of Wipro Ltd. v. Income Tax Officer (supra) wherein above inserted Clause has not been considered. In case of Software Technology Parks of India v. Income-tax Officer (supra), the decision of Bangalore Bench in the case of Wipro Ltd. v. Income-tax Officer 80 TTJ (Bang) 191 has been followed. 17. The argument of learned A.R. that entire activity relating to availing facilities took place in USA and at no stage such activities were conducted in India does not help the assessee after insertion of Clause (iva) to Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific equipment is 'Royalties'. 20. From above discussion we find that impugned payment is 'Royalty' in accordance with Clause (iva) to explanation 2 of Section 9(1)(vi) which is deemed to accrue or arise in India. All income accrues or arises or is deemed to accrue or arise in India is chargeable under the provisions of this Act. Section 195 provides that any person responsible for paying to non-resident any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force. We find that the impugned transaction under consideration satisfied all the conditions stipulated in section, therefore, the assessee is liable to deduct tax at source from both types of payments for availing connectivity facility and for availing maintenance services as both payments are in the nature of 'Royalty'. We confirm the order of C.I.T.(A) though on different reasons and grounds. 21. The grounds No. 6 7 pertaining to deduction of tax at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of property as opposed to licence, alienation of all rights in the property is necessary. This distinction has been recognised and given effect to in the following judicial pronouncements. 1) C.I.T. v. Davy Ashmore India Ltd. (1991) 190 ITR 626(Cal). The term 'royalty' has been defined in the Agreement to mean, inter alia, the payment of any kind including rentals received as a consideration for the use of or the right to use any patent, trade mark design or model, plan, secret formula or process. It is important that, in order that a payment may be treated as royalty for the purposes of Article XIII of the agreement for avoidance of Double Taxation between India and the U.K., the person who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In other words, where the transferor retains the property right in the designs, secret formula, etc. and allows the use of such right, the consideration received for such user is in the nature of royalty. Where, however, there is an outright sale or purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the alienation of the entire rights in the copyright in a program to the sale of a product which is subject to restrictions on the use to which it is on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the case of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software. Various countries have given different treatment of royalties despite OECD recommendation. Indian DTAAs already contained provisions for taxing equipment rental as royalties, but domestic law did not have specific provisions till 2002-03. The Finance Act 2001 inserted Clause (iv)(a) in Sections 9(t)(vi), Explanation 2 to bring about a result diametrically opposite to the OCED recommendations. The said Clause is reproduced as below: (iva) the use or right to use any industrial, commercial or scientific equipment but not includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce code; and Whereas, Licensee and Contact Management Solutions, Inc. ( CMS ) have entered into that certain Agreement of even date herewith pursuant to which CMS has agreed to use its commercially reasonable efforts to deliver to Licensee 10,800 telemarketing operator hours per month; Now, Therefore, in consideration of the mutual promises herein contained, the parties hereto agree as follows: 1. License, Subject to the terms and conditions set forth in this Agreement, Licensor hereby grants Licensee a non-exclusive license to use and execute the Software (the License ). The License granted hereunder is limited to 60 simultaneous network connections (the Connections ) to the Software and may be increased upon the prior written agreement of Licensee and Licensor. 2. End-User Materials. Licensor shall provide Licensee with end-user manuals describing the use and operation of the Software (the End-User Materials ). The End-User Materials are being provided solely to support Licensee's authorised use of the Software. Licensee may copy of distribute the End-User Materials but only for its internal use with employees and agents who agree to the terms and conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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