TMI Blog2008 (7) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... AI'), which has been established under the Airports Authority of India Act, 1994. The applicant is a public sector undertaking, but has filed these applications in the capacity as a 'resident', seeking ruling on the tax liability of a non-resident US company, namely, Raytheon Company (for short 'RC') with which it has entered into two separate contracts. Under these contracts, RC will provide software documentation, software, hardware, installation, testing, training, etc., to the applicant. 2. Application No. AAR/755/2007 involves supply and testing of Surveillance Situation Display Data (S-SDD). The applicant has sought advance ruling of the Authority on the following questions:-. (i) Whether payment received by M/s Raytheon Company under the transaction mentioned in Annexure I is liable to tax in India in the hands of the recipient non-resident US Company? (ii) If the answer to question No. (i) is in affirmative, on what basis and at what rate the income-tax will be chargeable in India? Application No. AAR/756/2007 involves supply of DG Servers and related software. The applicant seeks advance ruling on the following questions:- (i) Whether payment received by M/s R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c and on sale and transfer of ownership of the software. The applicant can use the software only at Delhi and Mumbai for the intended purpose. The applicant says that such end-use restrictions cannot change the basic character of the transaction, which is sale of S-SDD system. The applicant further states that the contract can be divided into two parts. The first part relates to supply of hardware and software and the second part comprises installation, testing and training services. So far as supply of hardware is concerned, the applicant states that the income in the hands of RC will be in the nature of business profits. This income will not be taxable under the Act in view of Article 7.1 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion (for short 'DTAA') between India and USA, as RC does not have a permanent establishment in India. This income will also not be taxable in view of Circular No. 23 dated 23.7.1969 issued by the CBDT. So far as supply of software is concerned, the applicant states that the Supreme Court has held in the case of Tata Consultancy Services vs. Union of India3 that software are goods. Therefore, the taxability in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining. Article 10 of the contract is important for the present purpose, the provisions of which are extracted below:- "Article 10- Reproduction and license 10.1 Raytheon agrees to provide the necessary information to operate, maintain and repair the System delivered under the Contract. In addition, Raytheon shall use its best efforts to obtain similar information from its subcontractors and suppliers. 10.2 Documents furnished by Raytheon to the AAI which were in possession of Raytheon prior to the date of the Contract, or which were developed mainly on the basis of proprietary concepts contained in these documents, shall be the property of Raytheon. The same applies to all copies of such documents. The AAI shall only be entitled to use such documents and copies in connection with the operation, repair and maintenance of the Automation System. 10.3 All other documents and copies thereof developed independently by Raytheon in connection with the Work, shall remain the property of Raytheon, provided that this is not a violation of any third party's rights. The AAI may, however, use such documents and copies for any purpose for use of the Automation System. 10.4 With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic performance of CP; and (iv) right to public display of CP. Another relevant provision as contained in Article 14.1 is given below:- "Article 14 - Patent Rights and Patent Indemnity 14.1 Patent Rights Consideration for patents owned or controlled by Raytheon and covering materials, articles, apparatus, devices, systems or processes used under this Contract shall be deemed to have been included in the Contract price. Furthermore, Raytheon shall be responsible for any claims of patent infringement with respect to work under this Contract in accordance with the indemnification provisions set forth in Section 14.2, Patent Indemnity. It is understood that AAI shall use such system, equipment, subsystem, work, material and other items delivered by Raytheon pursuant to this Contract only for the purposes for which they have been furnished and/or installed by Raytheon and only in the manner specified in the applicable specifications. Article 14.1 and 14.2 (Patent Indemnity) shall not apply if AAI makes any other use of Automation System or uses same in a manner which is not consistent with the applicable specifications. This provision stipulates that AAI shall use the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use the software. He insisted that the present case is covered by the earlier ruling of this Authority in AAR Nos. 624-625 of 2003 (supra ). He also stated that the applicant had conceded in AAR Nos. 753-754 of 2007 (supra ) that the income derived from sale of software fell in the category of royalty income. According to him, even copying of software programme on computer will amount to transfer of copyright under Section 14 of the Copyright Act. He also submitted that Tata Consultancy case (supra ) was not applicable here, as the decision in that case had been given with reference to sales tax law under which 'goods' and 'sale' had definite meanings assigned to them. 9. We have already observed from the provisions of the contract that RC has not transferred ownership in the documents and software supplied to AAI which has only been given the right to use them for the purpose and in the manner provided in the contract. It is significant to note that AAI has been given the non-exclusive right of use and it has no right of sale, public distribution and circulation of the computer programme delivered to it. But the contract does not contain any similar restrictions in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of 2003 and requested the Authority to confine its ruling only to the rate at which such taxes were to be deducted at source. 10. So far as proceeds of sale of hardware is concerned, there is no dispute about the nature of the income as such; it is business income. As may be seen from paragraph (1) of Article 7, the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated there. If the enterprise carries on business in the other State as aforesaid, only so much of the profits shall be taxable in the other State as is attributable to that permanent establishment. The learned counsel for the Revenue relied on his earlier submission on this aspect made in AAR/753/2007, in which he had stated that some of the facts noted in the assessment orders made in respect of RC would lead to the conclusion that RC had permanent establishment in India. We find that in that case this Authority had looked into those assessment orders and did not find any such definite finding supported by reason which could throw light on the existence of permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv)the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; [(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). The expression 'royalty' has been defined in Explanation-2 above to inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xperience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) x x x x x 4 5 x x x x x x 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply. 7 8 x x x x x x " As can be seen from the above, the expression ' royalties' has been defined in clause (3) of Article 12 to include payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work. It is observed from the foregoing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Sales Tax Act, 1957 (for short 'APGST Act'). The Court held that the expression 'goods' as defined in Article 366(12) of the Constitution of India and as also defined under section 2(h) of the APGST Act was very wide and included all types of moveable property - whether tangible or intangible; 'goods' for the purpose of sales tax could not thus be given narrow meaning. The real test whether an article was 'goods' or not was whether it was capable of abstraction, consumption and use and whether it could be transmitted, transferred, delivered, stored or possessed. A software programme might consist of various commands which enable the computers to perform a designated task. But the moment it was put on a disc and copies were made and marketed, it became chattel exigible to sales tax. Intellectual property, once it was put on to media, whether in the form of books, canvas, computer disc or cassettes and marketed, would become goods. The Supreme Court referred to its earlier decision in Associated Cement Companies Ltd. Vs. Commissioner of Customs4 which it felt directly dealt with the question in issue. The question in Associated Cement case was whether customs duty was lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as they are relevant to the facts in issue in a case. The ratio decidendi of a court decision, which has binding authority, must thus be read in the light of the facts of the case and the issue considered. The Supreme Court has pointed out the following in Sun Engineering Works Private Ltd. "It is neither desirable nor permissible to pick out a word or a sentence from the judgement of this court, divorced from the context of question under consideration and treat it to be the complete "law" declared by this court. The judgement must be read as a whole and the observations from the judgement have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this court, to support their reasonings". As we have pointed out above, in Tata Consultancy case (supra) the issue under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention". The learned counsel for the applicant submitted that since the provision of article 12 of OECD Model Tax Convention is similar to the provision of Article 12 of DTAA, OECD commentary with regard to this Article would be relevant for construing the provision of DTAA. He, in particular, drew our attention to paragraphs 14 and 15 of OECD commentary. Paragraph 14 states that the consideration paid in relation to copying of a computer programme on the computer hardware, which is essential to operate the programme by the user, should be regarded as business income. We find that the present case is not limited to copying of a computer programme, but extends to actually operating the automation system with its help. Paragraph 15 of the commentary deals with a situation where consideration is paid for the transfer of the full ownership of the rights in relation to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As we have already held, payments made in respect of supply of software to be royalty income, the technical services rendered in connection with installation, testing and training in relation to the supply of software would be ancillary and subsidiary to the enjoyment of copyright in the software. Thus the payment made in respect of these services would be fees for 'included services' under paragraph (4) (a) of article 12 and would attract tax @ 15 per cent as per paragraph 2(a)(i)(b)(ii) of that Article. In AAR/756/2007 16. Under the relevant contract No. NS/DG-R/01-06 dated 26.4.2006, RC is to supply DG servers and related software in connection with modernization of air traffic services at Delhi and Mumbai. The contract contains provisions similar in all material respects to those of the contract No. AAR/S-SDD/2007/IP dated 20.2.2007 which we have already considered above in AAR/755/2007. In the present case the total cost of contract comes to US$ 17,900,458. The software is the major component in this contract too, costing US$ 16,313,874. The cost of hardware and services of installation, testing and training are US$ 1,486,584 and US$ 100,000 respectively. Like in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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