TMI Blog2022 (2) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee when there is one to one tally. In our view it cannot be said so. As we have already mentioned the AO has proceeded to draw inferences on surmises and conjectures. Firstly there is no evidence to show that services were rendered which can be termed as FTS. Under the DTAA FTS can be taxed only when it makes available technical knowledge to the person making payment. On the application of make available clause of the DTAA, there is no finding whatsoever as to what was the technical service made available to NDS Pay TV. We, therefore, deem it fit to set aside this issue and remand the same for consideration by the AO in the light of the observations made above (in particular with regard to actual tally of expenses incurred and reimbursed by NDS Pay Tv to Assessee), in accordance with law, after affording assessee opportunity of being heard. The facts are identical and the arguments advanced by the Ld.AR as well as the Standing Counsel for revenue are similar with that raised in the preceding assessment years. It is noted that the Ld.AO proceeded on identical basis for the relevant assessment year, we are of the opinion that the entire addition in respect of internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Act and DTAA. 3. The learned AO has erred in law and in fact, in treating the receipts on account of rendering of support services to be in the nature of 'Fees for Technical Services' (`FTS') as defined under the provisions of the Act read with the DTAA. 4. The learned AO has erred in law and in fact by treating the amounts as recovered by the Appellant from Cisco Video Technologies India Private Limited (`CVTIPL') to be in the nature of consideration received for provision of 'Business support services' chargeable to tax as FTS as defined under the provisions of the Act and the DTAA. B. Grounds of appeal relating to other matters 5. The learned AO has erred in law and facts by levying interest of INR 10,95,44,982 under section 234B of the Act, on account of the adjustments proposed to the returned income, by not appreciating the fact that even in a scenario wherein the impugned receipts were to be considered as Royalty/FTS taxable in India, the entire such receipts of the appellant were liable to be subjected to withholding tax provisions of the Act and accordingly, there was no requirement for the Appellant to pay adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on account of supply of software license as royalty amounting to ₹ 48,80,75,507/- ii) Treatment of receipts on account of sale of hardware in the nature of Set-Top-Box ( STB ), viewing cards, Conditional Access Module hardware ( CAM hardware ) etc. as royalty amounting to ₹ 33,83,56,660/-. iii) Treatment of receipts on account of provision of support services to be in the nature of Fees for Technical Services ( FTS ) amounting to ₹ 1,16,08,302/- which were received in respect of rendering of support services in relation to software / hardware supplied to customers. iv) Treatment of amounts recovered from Cisco Video Technologies India Pvt. Ltd. ( CVTIPL ) on account of amount paid to their parties on behalf of CVTIPL amounting to ₹ 5,74,94,598/- as FTS. 3. The Ld.AR submitted that assessee granted exclusive non-transferrable license to customers in India to enable them to use the software for provision of DTH services to Indian subscribers. It is also submitted that the hardware sold is transferred outside in India and it constitutes business income of the foreign company which is not comparable to tax in India unless the PE situate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the definition of the term, Royalty as given under Article 12(3)(a) in DTAA between India and UK. The Ld.AR submitted that in the decision relied by the Ld.AR passed by the Coordinate Bench (supra), Tata Sky and Hathway Cable were also one of the parties who were made payment in those Assessment years. He submitted that the terms of these license agreements and their rights to transfer have been discussed in the order passed by this Tribunal (supra). He submitted that this Tribunal after considering the various clauses of the agreement, remanded the issues for consideration by the Ld.AO/TPO in the light of observations made therein and to decide in accordance with law. He thus prayed that the issues may be remanded with similar directions. 7. The Ld.CIT.DR though vehemently opposed the submissions by the Ld.AR could not controvert the fact that the Ld.AO has proceeded on surmises and conjectures and without application of the DTAA to the facts of the present case. We have perused the submissions advanced by both sides in the light of records placed before us. 8. Admittedly, the facts in the present case are identical with that considered by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es means (a) 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 cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b)payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 6.1 Though the word granting of licence does not figure in the royalty definition of the DTAA, the scope of the definition of royalty is wide enough to include the granting of licence which is nothing but the authorization by the owner i.e. NDS UK. Bharti gets the the right to use the CAS, NDS Hardware, NDS Software and distribute the viewing cards by virtue of the licencse granted by the Agreement. A licensee is the authorized user of and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation of ships or aircraft in international traffic 7.3 Article 12(4)(a) and 12(4)(b) are similar to the clause(vi) of Explanation 2 to Section 9(1)(vi) of the Act. As discussed in the earlier paragraphs if the payments for hardware services not offered to tax also include payments for implementation/installation services or for support services then such payments are covered by Article 12(4)(a) and 12(4)(b) and therefore held to be Fees for Technical services under the DTAA. 9. In short, the conclusion of the AO was that the sum received has to be regarded as Royalty within the meaning of Article 12(3) of the DTAA because the STB will not function without the viewing card and the software and therefore the entire payment has to be regarded as royalty. Alternatively, if part of the payment is to be considered as payment for hardware services, then the payment to the extent it relates to hardware services has to be regarded as Fees for Technical Services within the meaning of Article 12 (4) of the DTAA. 10. The assessee filed objections before the Dispute Resolution Panel (DRP) confirming the order of the AO. The conclusions of the DRP in this regard wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese amounts within the ambit of taxation under the relevant provisions of the IT Act and the Indo- UK DTAA. We do not in these circumstances find reason to interfere with the proposal of the AO and the objection raised by the assessee is accordingly dismissed. 11. Aggrieved by the aforesaid order of the DRP which was incorporated in the final order of assessment, the assessee has raised ground Nos. 2 and 4 before the Tribunal. 12. As far as the additional ground of appeal is concerned, we have already seen from the chart reproduced in paragraph-4 of this order that the assessee has in the return of income filed offered to tax amounts on which tax has been deducted at source by the person making payment to the assessee. In additional ground which is sought to be raised before us, is that the aforesaid sum which was offered to tax is not taxable in the hands of the assessee in India and hence taxes paid on the sums so offered should be refunded. In the application filed for seeking to raise additional ground, the assessee has submitted that the Assessee received certain sum from Indian residents towards sale of hardware and copyrighted software. Out of the above payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of ignorance of the assessee as to his rights. 13. We have considered the prayer for admission of additional ground and are of the view that the additional ground can be adjudicated on facts already available on record and by applying the law declared by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., (supra). Hence, keeping in view the ratio laid down by the Hon ble Supreme Court in the case of NTPC Ltd., 229 ITR 383 (SC), we admit the additional grounds for adjudication. 14. As far as ground Nos. 2 and 3 are concerned, the question that has to be decided is as to whether the receipts by the assessee on sale of hardware with software embedded therein can be regarded as royalty chargeable to tax under the Act or under the DTAA. On this issue, we find that the assessee has produced the copies of agreements (i) between the assessee and Bharti Telemedia Limited, (ii) the assessee and Gujarat Tele Link Private Limited, assessee, (iii) Assessee and Hathway Cable and (iv) Assessee and Datacom Limited, (v) the assessee and Tata Sky Limited, (vi) the assessee and DEN Digital Entertainment Networks Private Limited. The terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a good , but when transferred to a laser readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs maybe tailored for specific purposes need not alter their status as goods because the Code definition includes specially manufactured goods. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. (pages 499-500) Be that as it may, in order to qualify as royalty payment, within the meaning of Section 9(1)(vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime, to the further expanded definition of royalty that is contained in the retrospective amendment that inserted explanation 4 to section 9(1)(vi) of the Income Tax Act. In this case, the High Court was concerned with the Agreement between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,43 [ India-Finland DTAA ]. After setting out the rationale for the clarificatory amendment made vide the Finance Act 2012, the High Court held : DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. v. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a copyrighted article as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o earn income by allowing customers to avail of the benefit of the user of such equipment, does not result in the provision of technical service to the customer for a fee. Reference was also made to the order of the DRP in assessee s own case for AY 2016-17 (page 1725 of case law compilation) wherein the DRP has categorically held that the technical support and rendered by the assessee for ensuring the deployment/maintenance of the hardware and software is a routine after-sales support service and does not make available any technical know-how to the Indian customers. The DRP held that the make available clause as per Article 13 is not being satisfied in the case of the Assessee. It was further submitted that once the principal receipts are not held to be in nature of royalty , but receipts towards simplicitor sale of goods (copyrighted product), then the receipts from subsequent AMC and other services will also not be covered under clause (vi) to Explanation 2 of section 9(1)(vi). Even under the DTAA, these will not be covered by Article 12(4)(a) or 12(4)(b), since these services fees will be seen as towards services for post-sale of goods and not ancillary to royalty transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reverse engineer, decompile or otherwise attempt to create the source code from the NDS Software nor shall it modify, translate or create derivative works based on the NDS Software or NTP's except as expressly provided in this Contract. Bharti shall not sub-licence, rent, lease, sell or otherwise transfer or distribute copies of the NDS Software or NTP's (expressly excluding Viewing Cards) to any third party, whether as a stand-alone or bundled product excepting for the purposes of sub-licensing Subscribers for accessing the Service. Bharti shall not exceed the scope of the licenses granted in this clause. Bharti may not remove any copyright notice and any other notices that appear on the NDS Software or Embedded Software or third party software or NTP's or from any copies thereof. Bharti shall supervise and control the use by its employees, agents and subcontractors of the NDS Software, to ensure that it is used in accordance with the terms of this Contract. The use of the Embedded Software in addition to the above terms is subject to the licence terms set out in Annexure F and Bharti agrees to be subject to these terms. Provided nothing contained herein shall be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Test Systems at the agreed locations solely for the purposes of testing, demonstration and back-up, not for providing a DTH Service to Subscribers except where the broadcast system used by TATA SKY is undergoing maintenance and is not being used at that time to provide a DTH Service to Subscribers, or as backup where the main broadcast system has failed; (e) to grant non-exclusive, non-transferable end user sub-licenses to Subscribers in the Territory for the Term of this Agreement. 23. In respect of agreement between the assessee and DEN, the relevant terms of the licence is as follows: 7. LICENSE License Grant. In consideration of payment by DEN of all license fees due in accordance with Schedule 1, and subject at all times to DEN complying with the terms and conditions of this Agreement, NDS hereby grants to DEN the non-transferable object code only right and license in the Territory. (a) To use the NDS Software, NDS Hardware, Third Party Hardware and Third Party Software in accordance with Schedule 2 but only as is strictly required to provide the services to Subscribers using STBs incorporating the Components; (b) From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Top Boxes and the software to run it are together an integrated system. This is similar to the fourth category examined by the Supreme Court. The Supreme Court approved the judgment of Delhi High Court (para 118 ) in the cases of Ericsson and Nokia which dealt with the sale of integrated telecom equipment with embedded software (para 110). The AO also acknowledges that STB, Viewing Card and embedded software is an integrated system. There were certain inferences drawn by the AO based on the FAO given along with the STB. Even if software is licensed and not sold, it is akin to sale based on real nature of transaction. Bharti is just a distributor of Assessee s products (ie, integrated system). Distributor is buying products for onward sale para 45 of SC judgment. Use of hardware and software to run are key characteristics of an integrated system. Even if it is licensed, the real nature is that of a sale as per para 51 of SC judgment (one has to look at the real nature of the transaction upon reading the agreement as a whole as laid down by the Hon ble Supreme Court and para 52 of SC judgment (licensing is akin to sale reference to SC judgment in TCS case). With reference to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kin to post-sale standard AMC services provided in the case of any sale of equipment. This AMC service does not in any way make the original transaction a royalty transaction. Since the AY is AY 2010-11 (ie, prior to the Finance Act, 2012 amendment by way of inserting Explanation 4 to Section 9(1)(vi) of the Act, as per the SC in its judgment, the Finance Act, 2012 amendment has to be read as expanding the scope of royalty with prospective effect from the Assessment Year 2013-14 (After FA, 2012 was enacted) and cannot be upheld as clarificatory so as to apply retrospectively for previous assessment years (para 73 - 74, 78 and 79). Therefore, the payments made under the customer contracts are not be treated as royalty under section 9(1)(vi) of the Act itself for the subject AY 2010-11, even without reference to the DTAA. Under the DTAA, clearly these are not royalty payments under Article 12 of the India UK DTAA as held by the SC (UK DTAA has also been examined by the SC para 40. 25. As already observed in the earlier paragraph, the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puter program. Therefore, it was a case of sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon ble Karnataka High Cour in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon ble Supreme Court. We have already set out the terms of the Agreement under which software in question was sold by the Assessee to its distributions and the terms of the EULA. The same are identical to the case decided by the Hon ble Supreme Court and hence the ratio laid down therein would squarely apply to the present case also. 26.On the question whether the provisions of the Act can override the provisions of the DTAA, the Hon ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the transfer of all or any rights in respect of any right, property, or information included and had always included the transfer of all or any right for use or right to use a computer software . The cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and which by virtue of our conclusions as aforesaid cannot be regarded as royalty or FTS and hence cannot be taxable, the Revenue should be directed to not to tax the aforesaid sum also. The first aspect that may require consideration is as to whether the assessee can seek to lay a claim that the amount offered tax in the return of income is not taxable. On this issue, the law is well settled and the Hon ble Delhi High Court in the case of Indglonal Investments and Finance Limited Vs. ITO, Writ Petition (Civil) 15639/2006 and 7127/2008 dated 03.06.2011 after considering the decision rendered in the case of CIT Vs. Shelly Products 261 ITR 361 (SC) came to the conclusion that if by mistake or inadvertently or on account of ignorance included in his return of income in income which is not income within contemplation of law, bring the same to the notice of tax authorities and the tax authorities can grant him relief and repay of tax in excess. The Hon ble Court referred to article 265 of the Constitution of India which provides that there shall be no tax levied or collected except by authority of law. We therefore are of the view that in the light of the discussion in the earlier p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that prevailing for the AY 2011-12. 3.7.The Ld AO and the Honourable DRP have erred in law and facts in concluding that the reimbursements received by NDS Limited were taxable in India merely due to the presence of a confidentiality clause in the cost sharing agreement entered into between NDS Limited and Cisco Video (which was effective April 1, 2011). 3.8.The Ld AO and the Honourable DRP have erred in law and on facts in holding that the receipts by the Appellant from Cisco Video constitutes FTS under the India-UK DTAA, without appreciating the fact that even assuming without admitting that services were rendered, the same did not `make available' technology as contemplated under the India-UK DTAA and consequently not chargeable to tax in India. 31.The facts in relation to ground No.3 raised by the assessee are according to the Assessee, during the FY 2009-10, the Assessee had procured assets and incurred other expenses on behalf of NDS Services Pay-TV Technology Private Limited ( also referred to as NDS Pay- TV or NDS India in the orders of the revenue authorities and submissions of the Assessee. NDS Pay TV reimbursed the Assessee on a cost to cost bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with invoice copies Pages 757-765 Purpose of overseas travel made by employees of NDS India Communication 3,89,340 Equipment maintenance 16,70,095 Medical insurance 3,07,895 Miscellaneous 1,12,89,209 Travel 50,11,525 Accommodation Overseas 3,25,69,355 Travel Advance 90,274 Software 1,40,05,934 Exchange realized gain/loss 30,069 TOTAL 11,54,05,870 33.With respect to reimbursement of cost of fixed assets, the learned counsel for the Assessee submitted that the detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets along with sample of 48 invoices raised by third party vendors on Assessee were submitted to the AO ( Refer Pages 383 599 of the Paper Book ). Further, the details of miscellaneous expenses and equipment maintenance along with invoice copies from vendors were furnished at Pages 706 732 of Paper Book ). Further, it was submitted that the employees of NDS India have travelled to NDS UK for sole purpose of business of NDS India and not for the purpose of rendering any services. The purpose of the travel of the employee are clearly coming out from the communications shared in pages 757-765 of the Paper Book . The communication provided at pages 761-762 of the Paper Book clearly shows the all the expenses will be borne by NDS India. Further, as per the terms of the agreement, it is apparent that no service is being rendered by NDS UK. Hence, it wwas submitted that the expenses incurred are towards administrative expenses which cannot be considered as FTS under the provisions of the Act. 35. Without prejudice to the above factual background, it was submitted that the assessee does not make available any technical knowledge, skill, experience, know-how or processes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness Operations (P.) Ltd. [2012] 23 taxmann.com 455(Bang.) i. Bovis Lend Lease (India) (P.) Ltd. [2010] 1 ITR(T) 87 (Bangalore) 36. Without prejudice to the above factual back ground, it was submitted that the assessee does not make available any technical knowledge. Hence, in light of the decision of the jurisdictional High Court in the case of De Beers India Minerals Private Limited (supra), it was submitted that the said reimbursement of expenses does not fall the definition of the FTS as per the India-UK DTAA. 37. The learned DR relied on the orders of the revenue authorities. Without prejudice to the above submission, he submitted that since the details of one-to-one reimbursement have not been given or examined by the Revenue authorities, the issue should be remanded for consideration afresh by the AO. 38.We have given a careful consideration to the rival submissions. It is the case of the Assessee that the receipts in question are pure reimbursement of expenses incurred by the Assessee for and on behalf of NDS Pay TV. It is the case of the revenue that (Para 2.1 of AO s order) that reimbursement of expenses may be made by the service provider at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mark up in such payments) he also observed that there is no written agreement between the parties regarding Cost Contribution Agreement (CCA) in relation to AY 2010-11 but such agreement existed from 1.4.2011 (i.e., from AY 2011-12 onwards). He went on to analyze the terms of the said agreement and found that the preamble to the Agreement provided that the agreement is being entered into to obtain benefits of corporate purchasing contracts and for administrative simplicity. The AO has thereafter referred to cases where the factual finding (in the case of Van Oord Acz Marine Contractors (52 SOT 423 (Chennai ITAT) was that the assessee could not show that the price reflected in the invoices were comparable to similar services provided by international parties. He also referred to decisions rendered in the context of TDS provisions and cases where there were agreements for secondment of employees and where employees costs were reimbursed. He thereafter proceeded to hold that reimbursements are in the nature of FTS. 40. The DRP made a reference to the preamble to the agreement dated 1.4.2011 and held that the same did not exist for AY 2010-11 and is not relevant. The DRP how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing assessment years. It is noted that the Ld.AO proceeded on identical basis for the relevant assessment year, we are of the opinion that the entire addition in respect of international transaction needs to be looked into afresh having regards the principles laid down by various decisions cited and referred to by coordinate bench of this Tribunal hereinabove as well as the articles under the DTAA between India and UK. Needless to say that appropriate opportunity of being heard should be granted to assessee in accordance with law. Accordingly, these grounds raised by assessee stands allowed for statistical purposes. 10. Ground no. 5 has been raised by assessee in respect of levy of interest u/s. 234B on the proposed addition under international taxation. This issue also stands covered by coordinate bench of this Tribunal in assessee s own case (supra) as under. 42. Ground No.5 raised by the assessee in its appeal is with regard to non-grant of credit for TDS. In our view, it would be just and appropriate to direct the AO to consider the calim of the assessee and allow credit in accordance with law. The issue raised by the assessee in ground No.6 is wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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