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2016 (3) TMI 213 - ITAT CHENNAI

2016 (3) TMI 213 - ITAT CHENNAI - TMI - Assessee in default u/s.201(1) and 201/(1A)- non deduction of tds on software licence - whether the provisions of sec.9(1)(vi) of the Act, is applicable to the payment made to the software license by treating the same as ‘royalty’ concluding that the assessee is liable for deduction of tax u/s.195? - Held that:- It is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases .....

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observing that granting of any license to use the software amounts to ‘royalty’ and the provisions of sec.9(1)(vi) are applicable. Accordingly, we are of the opinion that the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) of the Act for non-deduction of T.D.S. on the impugned payment. - Decided against assessee

Nonpayment of TDS on bandwidth charges - Held that:- As decided in Verizon Communications Singapore Pte. Ltd. v. ITO(International Taxa .....

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hat the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is 'royalty' within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. and thus the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) .....

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s of advice of technical character, the payment on account of reimbursement also attracted the provisions of section 195(2) of the Act. - Decided against assessee - ITA Nos. 917 to 920/Mds/2014 - Dated:- 15-2-2016 - Shri Chandra Poojari, Accountant Member And Shri G. Pavan Kumar, Judicial Member For the Appellant : Shri S. Sridhar, Advocate For the Respondent : Shri M.M.Bhusari, CIT ORDER Per Chandra Poojari, Accountant Member These appeals by the assessee are directed against the common order o .....

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oftware bandwidth and reimbursement of expenses. 3. First, we take up the issue relating to confirming the order of the AO by the CIT(Appeals), holding that the provisions of sec.9(1)(vi) of the Act, is applicable to the payment made to the software license by treating the same as royalty concluding that the assessee is liable for deduction of tax u/s.195 of the Act. 4. The facts of the case are that the Assessing Officer in respect of software purchase has observed that the amount paid for usag .....

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enure subject to certain terms and conditions. He distinguished the case laws relied upon by the assessee in the following cases : In the case of Tata Consultancy Services. (271 ITR 401) As seen from the contract with DNATA, Dubai, assessee has not purchased any software ready to use as contended nor is DNATA a supplier of off the shelf software. DNATA is the owner of a software called RAPID which is used in passenger revenue accounting system. As per the contract entered into with SGS India DNA .....

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el S13] distinguished the copyright of a software and copyrighted software and held that the payment for a copyrighted article cannot be treated as royalty and not taxable in the hands of the non-resident. The above decision was rendered by the AAR, relates to cellular company exploiting the software rights., As, the case the Appellant engaged in BPO with call centre operations, the facts are entirely different. As may be seen from the software licence Agreement with DNATA the Appellant was perm .....

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ty for usage of software and taxable In the hands of the non-resident. 4.2 The AO has also analysed DTAA of UAE and observed that there is no specific clause of royalty and hence domestic law will prevail. In respect of DTAA with US. Article 12(3) will prevail and so concluded that as may be seen from the copy of agreement with DNATA and others, the service providers having absolute copyright have agreed to part with their rights to use the same subject to certain terms and conditions. The right .....

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appeal before us. 5. We have heard both the parties, perused the material on record and case law relied on by the parties. The main contention of the assessee is that the assessee purchased certain off the shelf software from various software suppliers on a non-exclusive/non-transferable basis for enabling the call recording for certain time as per the contract, for processing the airline coupons and other such services. The assessee was given only a copyrighted article and the ownership of such .....

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purchased the IP rights in the software. The assessee is not in the business of software development and resale. The assessee has made payment towards software maintenance fee and licence to use it. As per Explanation under Article 12, royalty defined as under : Typically, Article 12 defines royalties as payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, t .....

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Thus, when the assessee acquires the right to use software, the payment so made would amount to royalty . However, in cases where payments are made for the purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use of it. It is well settled that where software is sold as a product, it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh (271 ITR 401), the Supreme Court examined the transactions re .....

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d cases where payment is made to acquire patented or a copyrighted product/material. In cases, where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. In the present case, what was transferred is copyright and the right to use the copyright give rise to royalty payment. Being so, in our opinion, the finding of the CIT(Appeal .....

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e are that the AO has stated that there is dedicated undersea cable. Bandwidth charges are charges for getting a dedicated lease line for making international voice based calls. It is stated by the assessee that the services were rendered outside India by the service providers i.e within India the connectivity is provided by BSNL/MTNL etc. and beyond the territory of India these services are provided by the foreign Telecom operators. The assessee has admitted that there is a dedicated under the .....

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Further in Explanation 6 to section 9(1) (vi) of the Act, it is stated that 'process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification. conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. 7.1 It is noticed that in the certification given by the CA in Form 15CB, it is stated that since services are rendered outside India, it is not taxa .....

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that the bandwidth charges paid by the assessee are chargeable to tax in the hands of the nonresident as royalty and therefore, assessee is liable to deduct tax on the said payment as per section 195 of the Act. Therefore, the AO called for details and the question Nos.7 & 45 and its reply are as follows : Question No. 7 : Please explain the transactions relating to Bandwidth charges, telecommunication charges, connectivity charges and why TDS has not been deducted on these payments Answer N .....

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. These are covered under the above 3 categories. Since these are services in {he nature of utility services like electricity, in our opinion, they are not liable for TDS. Question No 45 : From the perusal of the form 15CA and 15CB it is seen that a sum of ₹ 53,17, 15,836/- has been paid to various non- residents towards bandwidth charges during 11-12. Please explain the nature of the payment and why no TDS has been made on the said transaction. Answer No. 45: Connectivity and bandwidth ch .....

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in the nature of utility services and there is no technology made available to the assessee and there are several decisions to support this view and hence no tax has been deducted. The AO has also held that as per Article 12(3) of Indo US DTAA, the payments are taxable in India. As per Article 12 (3) Indo USA DTAA, the payment made for bandwidth charges are taxable in India. The relevant para defining the meaning of the term royalties in the said DTAA reads as under: The term royalties as used i .....

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enation of any such right or property which are contingent on the productivity, use, or disposition thereof. Hence the AO observed that TDS should have been made and failure to deduct T.D.S. is resulted treating the assessee in default u/s.201(1)/201(1A) of the Act. Aggrieved by this, the assessee went in appeal before the CIT(Appeals). 8. On appeal, the CIT(Appeals) observed that the crux of the entire gamut of the issue harping around in the present case converges to the following observation .....

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gical development. Every instrument or gadget that is used to make life easier is the result of scientific' invention or development and Involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service. Technical service referred in section 9(1)(vii) contemplates rendering of a 'service' to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided t .....

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der towards bandwidth charges. There is also no denial by the assessee that it enjoyed the uninterrupted right to use the bandwidth. The appellant has always been at ease to have fact to face operational contact with the equipment. The assessee paid the bandwidth charges as consideration for using the bandwidth. The point-to-point communication could be possibly established as per the requirements of the assessee only by the commissioning of the bandwidth communication line. 8.2 The CIT(Appeals) .....

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er DTAA and I.T. Act are in pari materia. As per Explanation 6 u/s 9(1)(vi) of the Act, possession, control, etc. of such right on the dedicated bandwidth line are not matters of concern in deciding the character of payment as 'Royalty'. The assessee "no doubt enjoyed the right to use the transmission by cable or optic fibre or satellite as the case may be. This usage/use by the assessee of the communication facility enabled by satellite links and cable through the bandwidth line is .....

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arges' being consideration, for the use and the right to use of the process, is 'Royalty' within the meaning of clause (iii) of Explanation 2 to sec.9(1)(vi) of the I.T. Act, 1961. The payments made for providing communication bandwidth shall by all means, including the DTAA, Royalty. According to the CIT(Appeals), the payments of 'bandwidth charges' for the use of the circuit of dedicated communication bandwidth paid by the assessee shall be 'Royalty' and taxable inc .....

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Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. v. ITO(International Taxation) [361 ITR 575], wherein it was observed as under : Under section 9(1)(vi)(b) of the Income-tax Act, 1961,where income by way of royalty is payable by a person who is a resident to a non-resident, it shall be taxable as income under the provisions of the Act. Explanation 2 to sub-clause (vi) gives the definition of royalty . Royalty means the consideration for transfer of intellectual propert .....

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rtistic 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 or rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). The amendment relating to royalty , particularly the reference to use or right to use any industrial, commercial or scientific equipm .....

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ion of such right, property or information is in India. Explanation 6 further clarifies that the expression process included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. Thus, after the amendment introduced in the year 2012, with effect from June 1, 1976, irrespective of possession, control with the payer or use by the payer or location in I .....

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given. The data service order form stated that it shall be read in conjunction with the terms of the Asia Pacific master terms and conditions, which the customer agreed prior to executing the service order. The Asia Pacific master terms and conditions, the parent document, which governed the provision of services to the customers by MCI-in the Asia Pacific region, gave the scope of the agreement as concerning (a) master terms and conditions, (b) specific terms which applied to particular categor .....

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with relevant service order in addition to the provisions set forth in the agreement; the service would also be subject to all mandatory local law requirements, including but not limited to the regulatory and data protection requirements in the respective countries. The international leg of the telecom services provided outside India was provided by the assessee. Since in India, under the Indian Telecommunications Regulations, only licensed service providers could provide international long dis .....

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the Indian half of the connectivity. VSNL transmitted the traffic of the customer in India from the customer's office in India to a virtual point outside India and the assessee transmitted it up to the customer location outside India. The assessee used its telecom service equipment situated outside India in providing the international half circuit. The gateway/the landing station in India used in transmitting the traffic within India belonged to VSNL and was used by VSNL for providing India .....

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was not royalty or payment made for providing technical services and that the question of any liability to pay advance tax or interest under section 234B of the Act did not arise. The assessee appealed to the Commissioner (Appeals), who confirmed the order of the Assessing Officer. On further appeal, the Tribunal held that even if the payments were treated as not relating to the use of equipment, they should be considered as payment for the use of process, that the payments were for the use of .....

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xplanation 2(iva) and correspondingly article 12(3) of the DTAA between India and Singapore. Even if the payment was not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer was guaranteed the transmission of the data and voice. The fact that the bandwidth was shared with others had to be seen in the light of the technology governing the operation of the process and itself did not take the payment out .....

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ies having a bearing on each other. The ultimate aim, however, was to give the customer a point-to-point private line to communicate between offices that were geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. The parties had agreed to one stop shopping , which allowed an organisation, namely, the customer to place a single order with a single carrier for two private leased circuits for tw .....

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grated and technically and financially viable having regard to the close functional relationship between the two. Thus, the service agreement assuring the service was possible and workable only when the assessee and VSNL were considered as rendering the service jointly in their respective leg. Thus, the two halfs being mirror images of each other and going by the terms of the agreements, the assessee rendered service in India and the consideration received attracted the incidence of taxation in .....

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customers. Thus, being high speed internet connection, to achieve this, the equipment at the customer's end must have the capacity to send and receive data at the required speed. In order that the contracted bandwidth was provided, the master agreement read with the service order clearly gave the selected bandwidth for each customer which was assumed end-toend and to this end, the equipment at the customer's end was delivered by the assessee itself. The customer's responsibility as .....

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e and had an internet in the matching half circuits for providing the required telecommunication services at the assured speed. Thus the efficacy of transmitting data/voice depended on the originating signal from the customer s end which meant there was the use of the equipment by the customer installed by the assessee. In the circumstances, the assessee could not be considered merely to be providing the service to the customer. (iii) Although the agreement between the assessee and VSNL stated t .....

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SNL had to have no relevance or reference to the customer agreement with the assessee, there was no need at all in the service agreement to refer to VSNL as the provisioning entity or for that matter to go for one-stop shopping. Thus, the end-to-end provisioning in one single circuit was assured by the assessee and if by reason of any regulatory laws of the country the assessee was unable to extend its service by itself but went for such other licensed authority, it did so only as a provisioning .....

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o enter into several agreements or sub-agreements, such agreements could not be looked at in isolation having no relevance to the service agreement. Providing service was not possible without the use of the equipment ensuring the assured bandwidth for transmission of data and voice which provided the internet access to the customer to and fro. (iv) After the insertion of Explanation 5, possession, control of such right, property or information usage directly by the payer, location of the right w .....

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he one stop shopping was a facility which the customer was provided with for availing of the economic interest in the services provided. The bandwidth capacity made available on a dedicated basis for the entire contract period, even if it did not involve a possessory interest, the amount received by the assessee in a way was also for the use of process. The service order form clearly pointed out that the assessee was at liberty to change the equipment, modify the configuration or change the rout .....

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article 12 of the DTAA between India and Singapore and the Act are in pari materia. Explanation 6 defines process to mean and include transmission by satellite (including uplinking, amplification, conversion for down-linking of any signal) cable, optic fibre, or by any other similar technology, whether or not such process is secret. Thus, apart from the relevance and applicability of clause (iva) that the payment was for the use or right to use of the equipment, the payment for the bandwidth am .....

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ities of the assessee, vis-a-vis the customer and the customers' responsibilities clearly show the extent of the virtual presence of the assessee which operates through its equipment placed in the customer's premises through which the customer has access to data on the speed and delivery of the data and voice sent from one end to the other. The Explanations inserted thus clearly point out that the traditional concepts relating to control, possession, location on economic activities and g .....

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following the aforesaid decision of the Madras High Court, we reject this ground of appeal raised by the assessee. 10. The next ground in these appeals is with regard to reimbursement of expenses. 11. The facts of the case are that the AO classified reimbursement of Expenses under the head business development commission and bandwidth charges even though these were shown as reimbursement to the parent company and other group companies for common expenses incurred by them. The A.O. observed that .....

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penditure shall be having certain characters making it liable to be classified under a particular account head. As such 'Reimbursement of expenses' - itself on its own cannot constitute an independent head of account. The CIT(Appeals) further observed that the invoices pertaining to the so called reimbursement of expenses were found by the AO to be speaking about the nature of payments involved in those reimbursements. The payments related to (1) purchase of software (2) bandwidth charge .....

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nfounding situation has been created by the assessee, itself by Indulging In unfair and unapproved accounting procedures. According to the CIT(Appeals), when adequate opportunities were provided to the assessee, during the course of assessment and appeal proceedings, it could not furnish a segregated statement of expenses together with the relevant invoices and vouchers pertaining to such reimbursements. Under these circumstances, it is quite natural for the AO to resort to a permissible assumpt .....

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Tribunal in the case of Ashok Leyland Ltd. v. DCIT [313 ITR (AT) 191], wherein it was held as follows: In order to invoke the provisions of section 195 of the Income-tax Act, 1961, in the context of a nonresident, it is sine qua non that the amount must bear taxable character. Where the person responsible for making the payment is not sure as to which part of the amount of income referred to in section 195(2) of the Act is chargeable to tax, he can apply to the Assessing Officer to determine th .....

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