TMI Blog2009 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... is a company incorporated in Singapore and it is a wholly owned subsidiary of Microsoft Corporation (MS Co) having its headquarters in USA. It entered into a license agreement with Gracemac Corporation ("Gracemac") which is also a wholly owned subsidiary of MS Co on 1.1.1999 under which the applicant was granted non-exclusive license to manufacture, reproduce and distribute Microsoft products in Asia including India. In pursuance of the said agreement, the applicant had appointed Microsoft Regional Sales Corporation (MRSC) as the distributor of Microsoft products. MRSC, in turn, entered into agreements with the Indian distributors for the sale of the said products in India. 2.1 Gracemac merged with MOL Corporation (MOLC) on 2.10.2006. The applicant then entered into a fresh license agreement with MOLC effective from 1st July, 2006. Under that agreement, MOLC granted the applicant non-exclusive right to (a) the manufacture of Microsoft products in Singapore, (b) the sale of manufactured products for re-sale purpose and (c) create derivative works based on Microsoft products in order to customize the products for the particular needs of the customers. In lieu of the above mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the arrangement (details outlined in Annexure III,) the payments made by independent Indian distributors to Microsoft Regional Sales Corporation ("MRSC") should be regarded as licensing revenues accruing to MOLC which are taxable as 'royalty income' under the provisions of section 9(1)(vi) of the Act and/or the provisions of DTAA between India and USA, from which tax is required to be withheld by the applicant? 4. In regard to the first question, it is the contention of the applicant that Section 9(1)(vi) of the Income-tax Act 1961 is not attracted for the reason that the payment in the nature of sub-license fees made to MOLC is not in respect of a right used by the applicant for the purposes its business in India, that the title to the products passes to MRSC outside India and the sale takes place outside India. Further, the products are manufactured by the applicant in Singapore. Hence, no income generating activity takes place within India. Thus, both the conditions set out in Section 9(1)(vi) are not satisfied. The applicant is therefore not required to withhold tax in respect of payments made to MOLC, according to the applicant. The applicant then refers to the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USA and a wholly owned subsidiary of MSCo. got merged with MOLC on 2-10-2006. Following this merger, the exclusive license granted to Gracemac by Microsoft was assigned in favour of the applicant. It is a matter of record that w.e.f. 1-1-1999 Gracemac acquired the proprietary and ownership rights in copyright and in IPR of MS Software from MS Co. Thereafter, Gracemac entered into a licence agreement with the applicant under which a non-exclusive license to manufacture microsoft products in Singapore and to distribute the products so manufactured was granted to the applicant. A non-exclusive right to license or sub-license the right to reproduce microsoft software products to certain end-users was also granted. 6.2 Subsequent to the merger of Gracemac with MOLC, all the agreements of Gracemac got assigned to MOLC. Assessment orders were passed against Gracemac for the assessment years 1999-2000 to 2005-06. The assessing officer held that the payments received by Gracemac from the applicant were in the nature of royalty, that the payment was for the right to use the copyright in the software, that the payment of royalty was directly related to the source in India and therefore ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference is that the applicant being concerned with tax deduction at source in respect of the payments made to MOLC (earlier Gracemac), has filed the present application. It is not in dispute that the tax withholding issue can only be determined by recording a finding on the liability of MOLC to pay income tax in India in respect of income derived by it under the relevant agreements to which the applicant is also a party. The obligation of the applicant to withhold the tax at source cannot be decided de hors the issues raised concerning the liability of MOLC. The findings of the appellate authority in Gracemac's appeals and the outcome of further appeal to the Tribunal will have inevitable bearing on the questions raised in the present application. The fact that Gracemac's appeals, but not MOLC's appeals are pending, does not make material difference. Apart from the deletion of words "in the applicant's case" in clause (i) of the proviso to Section 245-R(2), as observed earlier, Gracemac's appeal is, from a legal stand point, MOLC's appeal because Gracemac has no separate identity now. 9. The word 'question' occurring in the proviso to Section 245-R(2) should be understood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of the applicant but not Raytheon. This gave room to the assessing officer to take its own independent view contrary to the ruling of AAR, presumably taking shelter under clauses (a) and (b) of section 245 S. In view of those facts, we considered it just and proper to allow the applicant (Airport Authority) to raise the question of tax deduction at source to steer clear of the uncertainty faced by the applicant on account of the decision taken by the assessing officer quite contrary to the ruling in the applicant's case which had become final. The applicant therein approached the AAR at the earliest opportunity. 11. In reply to the objection of the Revenue, the learned senior counsel for the applicant has contended that a fresh agreement was entered into with MOLC after the merger of Gracemac. Though the terms of the agreement and the rights derived therefrom are substantially similar to the earlier agreements, no proceeding in relation to the applicant in respect of the same transaction can be said to be pending. It is then submitted that the applicant seeks advance ruling on the question whether it is liable to deduct tax at source in respect of the payments made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing heard: Provided also that where the application is rejected, reasons for such rejection shall be given in the order. Sub-section (4) says : "(4) Where an application is allowed under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the question specified in the application." 12.2. Thus, the eligibility criteria for being an applicant and the scope and parameters of advance ruling are set out in the definition clause. Unless the advance ruling sought conforms to the said provisions in the definition clause, the Authority cannot proceed to consider the application. Then comes sub-section (2) of Section 245R. That provision is couched in a permissive language - "may allow or reject". The language clearly admits of an element of discretion to this statutory body while passing an order under Section 245 R(2). Going by the clear language, discretion is implicit in the provision. The first proviso however qualifies the operation of the main provision in sub-section (2) by placing certain restrictions or limitations on the exercise of power. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out factual foundation. 12.3 It is apt to quote the following passage from Craies on Statute Law (7th Edn.) at page 284. "Statutes passed for the purpose of enabling something to be done are usually expressed in permissive language, that is to say, it is enacted that "it shall be lawful," etc., or that "such-and-such a thing may be done." "Prime facie, these words import a discretion, and they must be construed as discretionary unless there be anything in the subject-matter to which they are applied, or in any other part of the statute, to show that they are meant to be imperative." 13. In the light of the above disquisition on the scope and amplitude of the powers vested in this body under Section 245 R(2), let us take stock of the facts of present case. 13.1 The proceedings against Gracemac were initiated as long back as the year 2003. The applicant must be fully aware of these proceedings. By the date of entering fresh agreement in the year 2006, even the assessments were concluded against Gracemac and the payments received from the applicant were subjected to income tax in the hands of Gracemac. Any reasonable person in the position of the applicant should have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ighted by the Revenue on this aspect are: MSCo. was receiving the royalty directly from Indian customers for grant of licenses to use the software till 1st January, 1999. With effect from that date, Gracemac acquired all the rights from MSCo. and in its turn granted license to the end-users located in India to use the software for a consideration. In the arrangements that followed 1st January, 1999, the basic function of granting user license to the end-users in India had remained unchanged but the receipt of the license fee from India was made complex by "pre-ordained agreements and transactions" with other group companies like MO (applicant) and MRSC. The structures were changed for the main purpose of avoidance of tax, there being no commercial purpose behind the new arrangement. If one looks at the realities of these transactions and agreements, it would be evident that the arrangement was only meant to achieve adventitious tax benefit by artificially reducing the quantum of taxable royalty income in India. 14.1 In reply thereto the applicant has submitted that there were genuine commercial reasons for the changes that were effected after 1.1.1999. The applicant has been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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