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TMI Blog2018 (8) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... ute 32% of total receipts from supply of software as taxable business profits is not correct. 3. The appellant prays that the order of the Ld.DRP on the above ground(s) be set aside and that of the Assessing Officer be restored. Assessee's appeal (in ITA No. 1239/Mum/2011): 1. On the facts and in the circumstances of the case and in law, the Assessing Officer ("AO") / Dispute Resolution Panel ("DRP") erred in holding that the income of the Appellant of Rs. 87, 44, 067/- is chargeable to tax in India. 2. On the facts and in the circumstances of the case and in law, the AO / DRP have passed the assessment order in an arbitrary manner and without application of mind and, hence, 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 Income-tax Act ("Act") and also under Article 12 of the Double Taxation Avoidance Agreement between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 12 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as "DTAA") and thus liable to tax in India. 6. We find that in the case or Reliance Communications Ltd., from whom payment has been received by the assessee company, ITAT has passed an order wherein it has been held that the impugned payment would not qualify as royalty. In the said order dated 02.02.2018 in the case of DDIT vs. Reliance Communications Ltd. in ITA No. 837 & Others the Tribunal had adjudicated the issue as under: - "7. After considering the various clauses of the above mentioned agreements, we are of the opinion that below mentioned factors can be very helpful to solve the knotty problem of taxation of royalty payments to the non-residents. In such matters, what has to be seen is that as to whether: i) the software was sold in the same manner as wireless network equipment, ii) the software was an integral part of the wireless-equipment, which facilitated running of the said equipment, iii) the subject software had no independent value of its own, iv) copyrights in the software were transferred to the customers, v) access to the "source codes" in the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling, reverse-engineering, disassembling/decoding the software. None of the agreement talks of transferring of copyright to the assessee by the suppliers - rather it is clearly mentioned in the agreements that copyright would remain with them. Agreements provide returning of the copies of the software to the vendors upon termination or cancellation of the agreements. So, we hold that the consideration paid by the assessee to the suppliers for acquiring copy of software was not for the 'use of copyright or transfer of right to use of copyright' the payment was made for the 'copyrighted article' and that the payments made by the assessee to the vendors of software cannot be taxed as royalty. 8. While deciding the appeals, filed by the 19 recipients, who are not part of the present appeals, the Tribunal or the Hon'ble High Courts have held that sums-received by them from the assessees for supply of software for wirelessnetwork- were not taxable in their hands and that the payments could not be termed as royalty. Those suppliers are Nortel Networks India International Inc. USA, Team Telecom International Ltd., Israel, Motorola Inc USA, Alcatel USA International Marketing Inc USA, ZTE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... National Stock Exchange of India Ltd (supra), First Advantage (P.) Ltd. (163 ITD 165) Datamine International Ltd. (68 taxmann.com97); Black Duck Software Inc. (86 taxmann.com 62); I.T.C. Ltd. (79 taxmann. com 206), the Tribunal has considered the term 'process' while deciding the issue of software is not royalty. We also find that in the case of AVEVA Information Technology India (P.) Ltd. (85taxmann.com 14), the Tribunal had considered the argument that software was Invention/Patent, etc. and had held that payment made for procuring and distributing copy - righted software was not royalty. Judgment of Samsung was considered in the cases of Solid Works Corpn. (supra); Shell Information Technology International BV (80taxmann.com 64); Shinhan Bank (76 taxmann.com 42); Baan Global BV (71 taxmann. com 213); Alcatel Lucent USA Inc. (ITA.s/1131, 7299 & 7300/Mum/ 2010), National Stock Exchange of India Ltd. (supra), Lucent Technologies Hindustan Ltd.(348 ITR 196), Halliburton Export Inc (152 ITD 803), Halliburton Export Inc.(ITA 477 of 2014 of the Hon'ble Delhi High court). 9. We are aware that the Hon'ble Karnataka High Court has held that the payment for supply of software is royalty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the effective grounds of appeals against the AO.s, as, in our opinion, same does not suffer from any factual or legal infirmities. 5. Following the above, the tribunal concluded as under: Accordingly as discussed above, since it has already been held in the hands of Reliance Communications supra by the elaborate order referred above that the payment made by it was not royalty in the hands of the assessee, these amounts are not taxable as income in the hands of the assessee. 6. Accordingly, respectfully following the pleadings, we decide the above issue in favour of the assessee. 7. As regards the issue that there is no PE in India and hence no income can be attributed, the issue is covered in favour of the assessee as decided by the Tribunal in its order dated 06.09.2013 referred as above, wherein it has been held as under: "51. These appeals pertain to Lucent Technologies, GRL LLC. As briefly stated above, the issue in these appeals is with reference to the taxability of the amounts received from supply of software to Reliance. The AO held the same as royalty in nature and in the alternate, also considered that there is a PE in India and so the business profits are attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Ltd. (got merged entity of LTHPL) more particularly with respect to letter of agreement dated 06.09.2008 between group concerns with Reliance Communications regarding restructure of payment mile stone. The AO ultimately concluded that there existed an agency PE and accordingly, since assessee has a PE in India, the business profits are taxable and worked out profits at 32% of the total receipts. 55. It was the submission of the assessee that LTHPL was acting independently and assessee has no agency agreement or no business. connection in India except supply of software. It was also further submitted that no service personnel came to India so as to come under Service PE. The ld. Counsel for the assessee also relied on Article-5 of the DTAA and decision of co-ordinate Bench in the case of Western Union Financial Services Inc. vs. ADIT (104 ITD 34)(Del.) to submit that mere use of software for the purpose of business in India need not lead to an agency PE as assessee was not rendering any service in India nor LTHPL is authorized to deal with outsiders on behalf of assessee Lucent. Further, it was submitted that the co-ordinate Bench in the case of Lucent Technologies Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian subsidiary, LTIL. With that situation, the next question for consideration arose as to whether either the assessee or its subsidiary, LTIL could complete the contract with Escotel on a turnkey basis without the assistance of the other. Obviously, the assessee was to supply the hardware and the software and LTIL was to do the installation, testing, commissioning and bringing up to operational stage the turnkey project. If the assessee did not provide the hardware and the software, it would be the duty of LTIL to provide the requisite hardware and the software for the completion of the turnkey project. Similarly, if LTIL did not comply with its duties of commissioning, installation, testing and bringing up to operational stage the turnkey project, such responsibility would rest on the shoulders of the assess. There was no dispute in that the assessee had completed part of its contract, i.e., the supply of the hardware and the software. The installation, commissioning, testing and bringing up to operational state of the hardware and the software supplied by the assessee had been undertaken by the Indian Subsidiary, LTIL. For said purpose, LTIL had also taken the assistance of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n staying in India for more than 90 days within the 12 month period from April, 1996 to March, 1997. Consequently, the requirements of article 5(2)(1) of the DTAA were fulfilled. In such circumstances, it was to be held that LTIL, in fact, was a service PE of the assessee-company. As a result, the findings of the Commissioner (Appeals) on the aforesaid issues were to be set aside." 58. However, the facts in the present case are different for the above case. Here LTHPL entered into an agreement for supply of hardware, software and also installation and that company is an Indian company. After entering into an agreement supply of software was assigned to the assessee Lucent by way of the Tripartite agreement between Reliance and LTHPL and assessee Lucent. Eventhough, installation was on Indian company there is no evidence of either deputing personnel of assessee Lucent to India nor there is any evidence in the record for invoking Service PE as in other case. Moreover for invoking Agency PE, facts do not support AO's contentions. The agreement entered is an independent agreement, entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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