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TMI Blog2018 (8) TMI 856X X X X Extracts X X X X X X X X Extracts X X X X ..... the order is bad in law. Taxability of Income 3. On the facts and in the circumstances of the case and in law the AO / DRP erred in holding that the amounts received by the Appellant from supply of software to Reliance Communications Limited (previously known as Reliance Infocomm Limited) (hereinafter referred to as 'Reliance') are 'Royalty' in nature under the provisions of the Act and under Article 12 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as 'DTAA") and thus liable to tax in India. 4. On the facts and in the circumstances of the case and in law the AO / DRP erred in holding that Appellant has a permanent establishment ("PE") in India being Lucent Technologies Hindustan Private Limited. 5. On the facts and in the circumstances of the case and in law, the AO / DRP erred in holding that the sale of software is effectively connected to the PE of the Appellant in India, 6. Without prejudice to the grounds 2, 3 and 4 above, on the facts and circumstances of the case and in law, the AO / DRP erred in not holding that the payments received by the Appellant are not "Royalty" in nature and there is no PE of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 14. On the fact and in the circumstances of the case in law, the AO / DRP erred in not referring the matter to the Transfer Pricing Officer for computing the profits attributable to the PE in India. Levy of Interest 15. On the facts and in the circumstances of the case and in law the AO / DRP erred in levying interest under section 234A of the Act. 16. On the facts and in the circumstances of the case and in law the AO / DRP erred in levying interest under section 234B of the Act. Levy of Penalty 17. On the facts and in the circumstances of the case and in law the AO / DRP erred in initiating penalty proceedings against the Appellant under section 271(l)(c) of the Act. 3. For assessment year 2009-10 one more ground is raised which reads as under: Quantum 15. On the facts and in the circumstances of the case and in law the AO / DRP erred in considering the income of the appellant at Rs. 1, 07, 41, 99, 767/- based on the communication from Reliance instead of Rs. 1, 04, 19, 63, 417 as provided by the Appellant. 4. Brief facts of the case are that Lucent Technologies GRL LLC (company of the assessee) is a company incorporated in and is tax resident of USA. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 09.10.2017 has noted that similar miscellaneous application filed by Reliance Communication Ltd. has been allowed by the Tribunal vide order dated 18.11.2016. The Tribunal has stated that it was brought to the notice of the Bench that the assessee was also party in the order passed by the Tribunal dated 06.09.2013 along with M/s. Reliance Communication Ltd. Accordingly the Tribunal had recalled the order. Subsequently a corrigendum was passed and in the corrigendum dated 07.02.2018 the Tribunal had directed as under: - 3. Only request was to consider Ground No. 2 whereas due to typographical error, the entire order has been recalled. Now Para 12 may read as under: - 12. In view of the above discussion, we recall the ground No. 2 passed by the Tribunal and Registry is directed to fix the appeals for hearing afresh by regular bench. 5. Pursuant to the above recall we have heard ground No. 2 raised in this appeals. Ground No. 2 reads as under: - 2. On the facts and in the circumstances of the case and in law the Learned AO and the Dispute Resolution Panel (hereinafter referred to as "the DRP") have erred in holding that the amounts received by the Appellant from supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments made by the user will not be royalty. But, if the Owner transfers the rights of the property against periodical or onetime payment to the user it will be a case of payment of royalty. Thus, it is the degree of transfer of the rights of IPR.s that is very crucial. 7.1. We do not have even slightest doubt in our mind that the answers to questions number four and five, at paragraph 7, are plain and simple NO, if the agreements entered in to by the assessee with the non-resident suppliers of softwares are analysed. Similarly, remaining question will have positive answers. In the earlier paragraphs, we have summarised the main characteristics of the agreements. All the agreements stipulate that the assessee would be using the software for 'operation of its wireless network only'. Thus, it is clear that it was prevented from utilising the software for commercial uses. Had the ultimate authority been with the assessee, it could have used the software in the manner it wanted. It could make copies of Software or the documentation or parts thereof for archival purposes only. Restriction on copying the software clearly establishes that the suppliers of the softwares were the sole a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work in respect of which copyright subsists. The assessee had only got a copy of software without any part of the copyright of the software. All the arguments advanced by the DR about ICA, including the section 30, in our opinion are of no help. At the cost of repletion, we are holding that in the cases under consideration payments made by the assessee was for copyrighted articles. So, we are of the opinion that payments made by it to various suppliers of six countries did not amount to royalty within the definition of Article 12/13(3) of the DTAA.s and it was not obliged to deduct tax at source. 8.1. Submissions of the DR in respect of software being Process Invention/ Equipment were considered in the matter of ZTE Corporation(supra). The Tribunal, in the case of Baan Global BY(71 taxmann.com 213), held that receipts from sale of shrink-wrapped software cannot be considered as royalty within the meaning of DTAA as the same is consideration for the copyrighted product and not for the use of copyright. In the said case, the assessee was engaged in the business of development and sale of software and other services related to software products. While deciding the issue, the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are not attracted. It is also trite that while two interpretations are possible, the court ordinarily would interpret the provisions in favour of a taxpayer and against the Revenue." Considering the above, we would like to follow the judgments of Hon'ble Madras and Delhi High Courts rather than judgment of Hon'ble Karnataka High Court. 10. We would also like to deal with other arguments advanced by the DR and the cases relied upon by him. In the case of M/s. PSI Data System Ltd., we find that the Hon'ble Supreme High Court has held as under: "We make it clear at the outset that when we shall speak of software, we shall be referring to the tangible software of the nature of discs, floppies and CD rom and not to the intellectual property, also called software, that is recorded or stored thereon." Therefore, we hold that the aforesaid case is not applicable to the facts of the present case. In Elkem Technology (supra), the question raised before the Hon'ble Andhra Pradesh High Court was dealing with composite contract involving supply of equipment and providing of engineering service. The High Court held that the consideration for engineering service would be independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profits have to be worked out in view of it having a PE in India. We have already held that payments made by Reliance have to be considered as royalty and accordingly the same are to be taxable as royalty only. Therefore, there is no need to consider the same as business profits. However, the issue of PE has to be decided, as existence of PE makes business profit taxable in India. Therefore, it is necessary to give a finding on the existence of PE to the assessee Lucent. 54. The AO invoking provisions of Article-5 of DTAA, was of the opinion that an agency PE is coming into picture as substantive functions of negotiations, entering into contract, stocking of goods or merchandising is being done by India enterprise i.e., LTHPL. He referred to various terms of agreement entered between the parties particularly the Assignment and Assumption Agreement, including the scope of services for maintenance of software entered by LTHPL. The AO was of the opinion that in this case, not only original agreement has been entered into by the Indian Company but services relating to making software operation or warranties or maintenance were also being done by LTHPL only. In addition to that te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of the revenue . He relied on the judgment of Hon'ble Bombay High Court in the case of K. Sudhakar S. Shanbhag Vs ITO (241 ITR 865) for the proposition of "doctrine of election". 57. We have considered the rival submissions. In the case of Lucent Technologies International Inc. (28 SOT 98) the co-ordinate Bench at Delhi considered the facts and held as under :- The agreement entered into between the assessee-company and the Indian Company, Escotel, as also the agreement entered into between Escotel and the Indian subsidiary, LTIL showed that the agreements were for two different purposes. The agreement between Escotel and the assessee was for the supply of the hardware and software; the agreement between Escotel and LTIL was for commissioning, installation and operations. However, both the agreements provided for the turnkey functioning of the project of the GSM network. Therefore, by entering into the contract with both, the assessee and LTIL, Escotel had made both the assessee and LTIL responsible for the turnkey completion of the GSM project, individually and severely. Thus, if either one would break its terms and conditions of the agreement with Escotes, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period specified in the support contract between Escotel and LTIL clearly showed that the subsidiary, LTIL was also acting on behalf of the assessee. A perusal of article 5(2)(1) of the DTAA between India and the USA clearly shows that it is not only the employees through whom if services are provided, the PE is to said to come into existence, it also includes other personnel. Obviously, the term 'other personnel' has to be read with reference to the earlier words, as provided in the said article 5(2)(1). The other personnel specified would be the persons over whom the enterprise would be having a control. In the instant case, undisputedly, employees of the affiliates of the assessee had been employed through LTIL for providing the services of installation, commissioning, testing and bringing up to operational stage of the hardware and the software sold by the assessee to Escotel through its contract in regard to GSM project which was to be completed on a turnkey basis. Those employees of the affiliates over whom the assessee had a control would fall within the term 'other personnel' and, consequently, it would have to be held that a PE did exist as per the inclusive term as pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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