TMI Blog2019 (10) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... stified. In the result the ground No. 2 of the appeal is allowed. Taxability of income from sale of shrink- wrapped software as Royalty - HELD THAT:- The receipt on account of sale of copyrighted/Shrink Wrapped Software is not taxable as per Article 12(14) of India-US Tax Treaty. Further, the receipt is also not taxable under the provisions of Income-tax Act as the assessee is eligible for beneficial provision of India-US Tax Treaty in term of section 90(2) of Income-tax Act. Moreover, after the amendment introduced in Explanation (4) in definition of Royalty under section 9(1)(6) by Finance Act, 2012, there is no corresponding change made in definition in term of Royalty under India-US Tax Treaty. Therefore, in view of the aforesaid discussion, the ground no.3 of the appeal is allowed in favour of assessee. Taxability of support and maintenance services as FIS - HELD THAT:- We have noted that the assessee provided support and maintenance services linked with the software supplied. Accordingly, the taxability of such services is dependent on the taxability of software supplied. As we have held that the receipt earned on sale of software is not taxable under Article 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pawan Singh, 1. This group of three appeals by assessee are directed against the assessment order passed under section 143(3) rws 144C(13) dated 21.01.2014, passed in pursuance of direction of Disputes Resolution Penal-II (DRP) Mumbai, dated 9.12.2013 for assessment year 2008-09, 2010-11 and 2011-12. In all the appeals the assessee has raised certain common grounds of appeal, therefore, with the consent of parties all appeals were clubbed, heard and are decided by common order to avoid the conflicting decision. With the consent of parties the appeal for assessment year 2009-10 was treated as a lead case. In appeal for assessment year 2009-10, the assessee has raised following grounds of appeal: 1. That in the facts and circumstances of the case in law, the Ld. AO/DRP erred in assessing the income of Appellant at ₹ 8,55,40,120 against the returned income of ₹ 47,94,030. 2. That in the facts and circumstances of the case in law, the Ld. DRP/AO erred in making an addition of ₹ 1,36,31,094 received on account of International Private Leased Circuit (IPLC) charges by stating that link charges constitute as Fee for Technical/Includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Amount Rs. 1 Supply of software 4,05,24,300/- 2 Support and maintenance fees 2,29,63,770/- Total Service fees 36,26,925/- 3. In the return the assessee claimed that the all receipts earned by assessee are not taxable in India in term of India US Double taxation Avoidance Agreement (India USA tax treaty) as the income neither qualified as Royalty nor fees for technical services/ fees for included services (FTS/ FIS). The return of income was selected for scrutiny. The assessing officer after granting opportunity of hearing to the assessee passed the draft assessment order under section 143(3) rws 144C(1) dated 28th March 2013. The assessing officer treated the aforesaid receipts as Royalty / fees for technical services (FTS)/ fee for included services (FIS) under the income tax Act as well as under the India US tax treaty and taxed the said receipts in the hand of assessee as taxable in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable in India as the same is neither constitutes royalty or FIS/FTS under India US tax treaty. The assessing officer while passing the draft assessment order proposed to tax that IPLC charges by taking view that receipts were for the right to use a process and hence, the same was Royalty in terms of Article 12(3) of India USA tax treaty. The assessing officer also took his view that services under consideration were technical in nature and therefore, the receipts constitute FIS/FTS in terms of Explanation 2 to section 9(1)(vii) of the Act as well as Article 12(4) of India USA tax treaty. The assessee filed objections before the learned DRP against the aforesaid action of the assessing officer however, the learned DRP upheld the action of assessing officer, accordingly the assessing officer tax the said receipts in the final assessment order. 6. The learned AR of the assessee submits that assessee is incorporated under the law in USA and is a non-resident company for the purpose of Indian tax laws. The assessee is tax resident of USA as per Article 4 of India US tax treaty and therefore, basis the provision of section 90(2) of the Act and is entitled to invoke t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to not qualify as Royalty in term of Article 12(3) of India US tax treaty. In support of his submission the learned AR of the assessee relied upon the decision of the Tribunal in assessee s group entity case in Convergys Customer Management Group Inc. (ITA No. 1443 /Del/2012 5243 /Del/2011) and would submit that the Tribunal held that provision of IPLC a merely amounts to provision of service and therefore does not constitute Royalty under the provision of article 12(3) of India US tax treaty. 8. For taxability of IPLC charges as FTS/FIS, the learned AR submits that assessing officer also tax the IPLC charges received by assessee from Indian entity for FTS/FIS. The learned AR carried us through the definition of FIS as provided under Article 12(4) of India US tax treaty and would submit that in term of Article 12(4) of tax treaty, the receipt should be of a technical nature and the service should be of make available technical knowledge, experience skilled, know-how or process or consist of the development and transfer of technical plan or technical and design. 9. Whether the IPLC connectivity services are technical in nature, the learned AR of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rfetti Van Melle Holding BV reported vide (340 ITR 200 AAR) and in Raymond s Ltd versus DCIT (89 ITD 791 Mumbai Tribunal). It was submitted that the decision of authority of advance ruling in (AAR) in Perfetti Van Melle Holding BV (supra) has been set aside by Hon ble Delhi High Court reported in (228 Taxman 201 Delhi). The learned AR for the assessee further submits that the decision of Mumbai Tribunal Raymond Ltd (supra) support the case of assessee wherein it was held that mere rendering of technical services cannot be equated with making available technical services. 11. In support of his submission the learned AR of the assessee further relied upon the decision of Geo Connect Ltd Vs DCIT (54 ITR 481 Delhi tribunal) and Cable Wireless network India P Ltd (315 ITR 72 AAR) and Inerroute Communication Ltd versus DCIT (179 TTJ 355 Mumbai tribunal) 12. The learned AR of the assessee further submit that there would be no impact on change in the definition of Royalty under the Income tax Act, by Finance Act, 2012, as there is no corresponding change introducing the definition of Royalty under India-US Tax Treaty, and the assessee, being a tax resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt some sample invoices. The ld. AR submits that in reply to the other submission of assessee he relied upon the order of Assessing Officer and that of DRP. 15. We have considered the submissions of the partied and have gone through the orders of the lower authorities below. We have also deliberated on various case laws relied by the parties and the lower authorities. The Assessing Officer, during the assessment noted that assessee has received an amount of ₹ 1,36,31,094/- from Convergys Information Management (India) Pvt. Ltd. (CIM). The assessee claimed that the receipt is for reimbursement for providing link charges and not subject to tax in India in accordance with the provision of Income Tax Act and India-US Tax Treaty. The assessee was asked to substantiate that such receipt are in the nature of reimbursement and why it should not be treated as FTS. The assessee furnished its reply as recorded by Assessing Officer in para-4 of the Draft Assessment Order. In reply the assessee specifically stated that CIM has used certain communication links which are comely known as IPLC. IPLC provided point to point private line used for organization for communication for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be Royalty only when there is use or Right to use of a process. The assessee claimed that the Indian Entity-CIM do not have any access or control over the communication line involved in such communication and accordingly, no right to use has been granted to assessee or Indian Entity to use such communication line or process involved. The third party i.e. AT T and Sprint are merely using their own equipment. 17. The ld. AR of the assessee vehemently relied upon the decision of Delhi Tribunal in assessee s group entity in Convergys Customer Management Group Inc. (supra) wherein on similar provision of IPLC, the co-ordinate bench of Tribunal held that, the provision of IPLC merely amount to provision of services and therefore, does not constitute Royalty under the provisions of Article 12 of India-US Tax Treaty. The relevant part of decision of co-ordinate bench is extracted below: 13. Adverting to the issue of taxability of link charges as 'Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. This issue is common to both assessment year 2006-07 and 2008-09. In this regard, the ld. AR of the assessee submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice provider was merely using its own equipment itself while rendering the services to its customers including the assessee and CIS and there is no transfer of the right to use, either to the assessee or CIS. The assessee has merely procured services and provided the same to CIS and no part of the equipment was leased out to CIS. The Ld. CIT (A) held that the payment for link charges do not constitute Royalty under the provisions of Article 12 of the DTAA. 13.3 The provisions of Equipment Royalty are also contained in Explanation 2(iva) of section 9(1)(vi) of the Income Tax Act, 1961 ('Act') which is similar to the provisions of Article 12(3)(b) of DTAA. 13.4 Besides, though Asia Satellite Telecommunications Co. Ltd.'s case (supra) is a decision on the domestic law but also makes an observation regarding DTAA. In para 74 of the judgment, it is specifically mentioned that Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the assessee gets a boost . This observation supports the case of assessee. 13.5 In view of the foregoing observations we hold that there is no transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in Geo Connect vs. DCIT (supra) while examining the taxability of IPLC charges paid to AT T also held that agreement was only for the provision of services and not for use or right to use any industrial, commercial or scientific equipment or process between the non-resident and assessee for use of dedicated private bandwidth in underwater sea cable and therefore, consideration paid to AT T would not constitute Royalty . The Tribunal further held that payment to ICLC charge does not constitute FTS either under the Act or the Treaty. The relevant part of decision is extracted below: 10.13 In the case of instant assessee, the control of equipment was with the nonresident parties and they have not leased the equipments, i.e. the undersea cable etc. to the assessee. The equipments were owned and used by the non-resident parties only and therefore it cannot be said that the consideration paid was for use of equipment by the assessee. Similarly the non-resident parties have not provided use of any process to the assessee, which are of patentable nature having exclusive ownership rights. The assessee was not concerned with any of the process involved in transmis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Karnataka High Court in the case of CIT Ors. v. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 0467; the payment cannot be treated as FTS under the DTAA as ITA Nos. 3593 TO 3596/Del/2012 [Bharti Airtel Ltd. v. ITO(TDS)] ITA Nos. 4076 TO 4079/Del/2012 [ITO(TDS) v. Bharti Airtel Ltd.] there is no imparting as contemplated in the Treaties. Similar are the propositions on the issue of make available in the decisions in the case of Mahindra Mahindra Ltd. v. DCIT 313 ITR 263; Raymond Ltd. v. DCIT 86 ITD 791; Cable and Wireless Networks India P. Ltd. [2009] 315 ITR 72.' 20. We find that in the DTAA between India and the USA the make available clause is in existence. The article 12(4) of the treaty is reproduced as under: 'For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f pricing of a service, by segregating the fixed and variable price, is not unusual . That does not, however, alter the character of arrangement. The payment continues to be for service alone. The assessee may charge a fixed amount to cover its costs in employing enhanced capacity so as not to incur losses when this capacity is not used, but what the customer is paying for is a service and not the use of equipment involved in additional capacity, nor, as we have seen above, for any scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. It cannot, therefore, be taxed as royalty under article 13 of the Indo-UK tax treaty. The payment for a service can be brought to tax under article 13 only when it makes available the technology in the sense that recipient of service is enabled to perform the same service without recourse to the service provider. As held by this Tribunal, in the case of C.E.S.C. Ltd. v. Dy. CIT[2003] 87 ITD 653 (Kol.) (TM), ....in order to be covered by the provisions of Art. 13(4)(c) of the India-UK DTAA, not only the services should be of technical in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee sold certain off-the self /shrink wrapped software to TCS for an amount of ₹ 4,05,24,300/-. The main features of contract for sale of shrink wrapped software by assessee to TCS were viz, (i) the assessee granted a personal, non-transferable and non-exclusive license to TCS, (ii) the assessee is the owner of the patents, copyright, trade secret, trademark and any other intellectual property right which subsist in the software, (iii) the title of the software shall remain with the assessee, (iv) the TCS was not allowed to make copy or print out of the software except for reasonable number of copies but only for its own internal back-up, archival, development, training and testing purpose, (v) TCS was not allowed to reverse engineer, decompile or dissemble the software,(vi) TCS was not allowed to sell, assigned, licensing lease, rent, lend, transmit network or otherwise distribute, transfer or make available the software in any manner to the third party, (vi) the Software was to be used for internal purpose only and was not allowed to use the software to provide services through a service bureau or other arrangements,(vii) TCS was expressly prohibited from adapting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of copyrighted article. The assessee has transferred to copyrighted article and there is no transfer of any copyright. A right to use copyright is distinguishable from the sale consideration paid for copyrighted article. The licensing agreement between the assessee and the TCS shows that license is non-exclusive nontransferable and that software is to be used in accordance with the agreement, only one copy of software is supplied by the assessee to TCS. 26. To strengthen his submission the learned AR for the assessee also relied upon the decision of Delhi High Court in DIT Versus Infrasoft Ltd (264 CTR 329), PCIT Vs M. Tech India P. Ltd (2016) 382 ITR 31 (Delhi), Mumbai Tribunal in Tata Communications Ltd. (ITA No. 1473 /Mumbai /2009 and Delhi Tribunal in assessee s group case in Converges Customer Management Group Inc Versus ADIT (ITA No. 1443/Delhi/2012 and 5 to 43/Delhi/2011). 27. On the other hand the learned AR for the revenue supported the order of lower authorities. The ld. DR for the revenue further submits that the software supplied by the assessee is not a copyrighted article. On the point of the issue of amendment in section 9(1)(vi) the ld DR s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be treated as consideration for transfer of any copyright and cannot be treated as Royalty under Article 12 of the IndiaUS Tax Treaty. The Delhi Tribunal in Converges Customer Management Group Inc. (supra) held that the consideration received for sale of Shrink Wrapped Software does not constitute Royalty as the same is for the sale of copyrighted article and not for the use of copyright. Further, Mumbai Tribunal in case Tata Communication Ltd. (supra) also held that payment made for copyrighted article and not copyright per se and hence, the same is not taxable in India. 29. The Hon ble Delhi High Court in DIT vs. Infrasoft Ltd. (supra) also held that when they right transfer is not the right to use the copyright but it is limited to right to use the copyrighted material and the same does not give rise to Royalty Income and would be business income. It was also held that consideration received by assessee on grant of licence for use of software is not Royalty within the meaning of Article 12(13) of India-US Tax Treaty. The decision relied by ld. DR in Samsung Electronics (supra) has been distinguished by Hon ble Delhi High Court in DIT vs. Infrasoft Ltd. (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance services in the form of version updates, bucks fixing, call support etc, in connection with the software supplied to TCS. The support and maintenance services were rendered remotely from outside India. The main feature of the contract consists of viz, (i) to addresses standard software code product defect, bug, issue or technical query,(ii) the problem include but is not limited to new standard software problem, related problem, re- occurrence of all problems, duplicate problems or problems that we are similarities to issue which have been previously raised, and any technical quarries on standard core software, (iii) the problem was to be reported either by way of telephone or by email. The agreement specifically mentioned that assessee shall not be under no obligation to provide support and maintenance service in respect viz,(a) problem resulting from any modification of customisation if the software is not made by the assessee list of any software other than software supplied by assessee, (b) any software other than the software supplied by the assessee, (c) incorrect or unauthorised use of the software supplied by the assessee or operation is not in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The learned AR in alternative submission submit that the receipt on account of support and maintenance service are not taxable under article 12(4)(b) of tax treaty as the service do not make a available technical knowledge, experience, skill for no or process. The learned AR also relied upon the MOU to the India US tax treaty. In support of his submission the learned AR of the assessee also relied upon the decision of Karnataka High Court in case of CIT v/s De Beers India minerals Ltd 2012 346 ITR 467(Karnataka), decision of Pune Tribunal in Sandvik Australia Pty Ltd Vs DDIT (ITA No. 93/Pune/2011), Bharti AXA General Insurance Co. Ltd (2010) 326 ITR 477 (AAR). The assessee has also placed on record the copy of software licence agreement dated 15.11.2007 with TCS (page no. 126 to 137 of PB). 36. On the other hand the learned AR for the revenue supported the order of assessing officer and the direction of the DRP. The ld. DR for the revenue further submits that this ground of appeal is linked to the Ground No.3. 37. We have considered the submission of both the parties produce the orders of authorities below. We have also deliberated on various case laws re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracted by assessee to Indian Entity CIM on Principle to Principle Basis in the return of income, the assessee claimed said receipt are not taxable in India. The Assessing Officer treated the said receipt as subsidiary and ancillary to the right to use of software which is Royalty and proposed to tax as FIS under Article 12(4)(a). The objection of assessee was rejected by DRP. The DRP concluded that payment have been received for providing specialized technical input services rendered by assessee and will be covered by the definition of FIS/FTS. 41. The Fees for included services is defined in Article 12(4) of India-US Tax Treaty, wherein Fees for included services means payment of any kind to any person in consideration for rendering of any technical or consultancy services (including through the provision of services of technical or other personnel if services are ancillary and subsidiary to the application or enjoyment or right, property or information for which payment is received or make available technical knowledge, experience, skill no-how or process or consist of development and transfer of a technical plan or technical design. We have noted that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of IPLC/Link Charges as FTS/FIS and Royalty under the Act and India-USA DTAA. (iii) Taxability of sale of software as Royalty under the Act and in India-USA DTAA. (iv) Taxability of support and maintenance fees as FIS under Article 12(4)(a) of India-USA DTAA. (v) Levy of interest under section 234B and 234C. 46. We have noted that in appeal for A-Y 2010-11, the grounds of appeal No. 2 to 5 are identical as has raised by assessee in appeal for AY 2009 - 10, which we have allowed in favour of assessee. Therefore, following the principle of consistency all the grounds of appeal raised by assessee are allowed with similar direction. ITA No. 1995/Mum/2015 fort AY 2011-12 47. The assessee has raised the following grounds of appeal: (i) General Ground (ii) Taxability of IPLC/Link Charges as FTS/FIS and Royalty under the Act and India-USA DTAA. (iii) Taxability of support and maintenance fees as FIS under Article 12(4)(a) of India-USA DTAA. (iv) Levy of interest under 234B and 234C. 48. Ground No.1 is general in nature, hence needs no adjudication. 49. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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