TMI Blog2018 (5) TMI 1758X X X X Extracts X X X X X X X X Extracts X X X X ..... or of Income Tax (International Taxation), Range - 4, Mumbai (hereinafter referred to as the Learned AO ) has erred in computing the income of the appellant at ₹ 30,72,21,521 and raising a consequent tax demand of ₹ 6,45,16,519 and interest demand of ₹ 10,01,61,895 for AY 2003-04, while issuing a single assessment order for AY 2003- 04, AY 2004-05, AY 2005-06 and AY 2007-08 dated 19 August 2010 and thereby not accepting the Appellant's claim for refund of ₹ 4,60,83,230/- alongwith interest. Taxability of Income 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 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. 3. On the facts and in the circumstances of the case and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profits of the Appellant are to be computed on the basis of the activities of the PE in India thereby taxing the software receipts on net basis in India. 10. Without prejudice to the above, the DRP authorities have erred and consequentially, the in arbitrarily estimating that 80% of the activities are carried out by the PE in India. Further the DRP authorities have erred in estimating an extremely high net profit rate of 40% on their own surmises and conjectures and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in computing the profits attributable to the PE @ 32%, which is very high as compared to the actual activities carried out in India in relation to the supply of software. 11. Without prejudice to the above, the DRP authorities have erred in not appreciating that all the critical activities in relation to the sale of software were carried on by the Appellant outside of India and all risks resided outside of India and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in higher amount of profits being attributed to the PE in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered that there is a PE in India and so the business profits are attributable to the PE. Along with the above two issues there are issues on non-granting of TDS credited, levy of interest also. 52. The issue of royalty was considered above in detail and consequent to the findings therein, it is considered that amounts paid by Reliance for supply of software under a licence agreement is to be considered as royalty under the provisions of the Act and also under DTAA and liable to tax in India. Accordingly, the grounds raised by Lucent from Ground No.2 to 5 are rejected. 53. The next issue to be considered is attribution of business profit to the PE. Vide para 4.18 of the order of the AO for the impugned year, the AO gave a finding that payment made for software would be treated as royalty payments and necessary tax rates have been mentioned in the table. Further, considering the agreements entered by Reliance with Lucent Group the AO was of the opinion that there existed an Agency PE. Vide para 5.8 of the order the AO also considered that in case it is held that assessee s income is not taxable as royalty, the assessee s business profits have to be worked out in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, it was submitted that the coordinate Bench in the case of Lucent Technologies International Inc. vs. DCIT, Non-resident Circle (28 SOT 98) considered the facts in the case to hold that there is a service PE in that case. It was submitted that mere existence of a PE to a group company does not lead to a finding that the assessee also as a PE in India. It was further submitted that AO s reliance on a document i.e., subsequent restructured agreement for payment by the group companies does not indicate that any one of them is authorized to enter into contract on behalf of the assessee Lucent and further, agreement was dated 06.09.2008 does not pertain to any of the impugned assessment years. Nothing was brought on record by the Revenue that there is a PE except relying on the so called agreement which was entered on a principle to principle basis. 56. The ld. Counsel however relied on the orders that the AO as supported by DRP. It was further submitted that assessee chose not to file return after TDS was made and therefore, since proceedings are initiated under section 148 assessee can not seek any benefit in the proceedings initiated for the benefit of the revenue . He reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken by the Indian Subsidiary, LTIL. For said purpose, LTIL had also taken the assistance of the employees of the affiliates of the assessee. Thus, the parent company, being the assessee had made personnel available to the LTIL, the subsidiary in form of the employees of the affiliates of the assessee at certain remuneration. Further, a perusal of the agreement between Escotel and the assessee clearly showed that the warranty provided by the assessee-company was in relation to the defects in the hardware. That warranty clause in identical form was also found in the agreement entered into between Escotel and LTIL. Normally, the warranty for a particular product to be supplied by one person is the responsibility of that person alone, but in the instant case, that burden was also shifted to the subsidiary, being LTIL. Though LTIL had certified that it did not keep any spares on behalf of the assessee for the equipments supplied by the assessee under the contract with Escotel, yet the fact that LTIL had also assumed the responsibilities of the warranty in regard to the hardware supplied by the assess, as also the responsibility to replace the same within the period specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken any responsibility of the assessee Lucent. On the facts of the case we are of the opinion that there do not exist any PE, more so of agency PE. It is also not the case of the Revenue that the assessee deputed its personnel to India so as to invoke Service PE as per Indo-US DTAA. In view of the above, we hold that there is no PE to the assessee company in India and as there is neither any office in India nor it has any business connection in India nor carried out any business activities in India. Assessee s company is a standalone legal independent entity. Therefore, 109 Reliance and Lucent Group assessee s ground nos. 6 to 12 are upheld, as there is no PE in India, so attribution of profits does not arise. 59. Non granting of TDS credit:- AO did not give credit to the TDS claimed by assessee. At the outset it was submitted that this issue is covered by the decision of co-ordinate Bench of the Tribunal in assessee s own case in 45 SOT 311 Lucent technologies GRL LLC vs. DR. director IT (Intl. taxation) Circle-4(1(, Mumbai wherein it was held:- The assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise. Department could not point out any provisions of law under which such a refund could be made particularly as TDS certificates were already issued by the tax deductor, and no fault was found in the certificates so issued. [ Para 8] The rights were granted to the person, from whose income taxes were so deducted and who is issued the tax deduction certificate in the prescribed manner, by the statute and those rights could not be abridged by an administrative action on the part of the revenue authorities and particularly when the person, whose rights were being sought to be abridged, was not even a party to the administrative exercise or was known of refund being granted to R Ltd. Refund granted to R Ltd. By revenue authorities could not have adverse impact on the rights of the assessee. That was a matter between the tax authorities and R Ltd., one was sure that the revenue authorities, while granting the refund, must have safeguarded their interests effectively, and perhaps by now R Ltd. might have even returned the monies, but assessee could not be expected to get into these aspects of the matter. in the instant appeal, one was confined to the issue tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal on initiation of proceedings and since proceedings are not yet finalized, it is little pre-mature to contest. This ground does not require any adjudication. 62. In the result, four appeals of Lucent are partly allowed. 4. Subsequently, in these appeals miscellaneous application was filed before the ITAT. The Tribunal vide order 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchasers/users on the other hand are the decisive factors. If the Owner retains absolute rights of the IPR.s with itself then the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s one thing is clear that there was no transfer of copyright of the software in any manner. As mentioned earlier, a copyright is different from the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutory provision in such a manner which would create an additional fiscal burden on a person. It would never be done by invoking the provisions of another Act, which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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