TMI Blog2023 (7) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... on equipments along with software to Indian telecommunication companies and telecommunication hardware and software were not supplied by the assessee directly to the Indian customers from outside India - HELD THAT:- It is borne out from record that the head office has directly supplied the hardware and software from outside the territory of India. Neither manufacturing nor any other activities relating to the hardware and software supply has taken place in India. In such a scenario, the profit/income from offshore supply of equipments and software cannot be attributed to the PE, as, only such part of income relating to operation carried out in India can be attributed to the PE and taxed in India. Entire profits from supply of equipments and software cannot be attributed to the PE. The departmental authorities have not demonstrated in any financial terms, what is the exact role of the PE in earning the receipts and to what extent. Only that part of the receipts, which can be linked to the activities of the branch office, can be brought to tax in India by attributing to the PE. Instead of undertaking any such exercises, the departmental authorities have attributed the entire recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come on 31.10.2004 declaring income of Rs. 1,19,62,800/-. Subsequently, the assessee filed a revised return of income on 03.01.2006 claiming credit of excess Tax Deducted at Source (TDS). Be that as it may, in course of assessment proceeding, the Assessing Officer noticed that, though, the assessee had receipts of Rs. 7,34,95,361/- from certain Indian companies, however, the assessee had not offered such receipts to tax. When the Assessing Officer called upon the assessee to explain, why such receipts should not be treated as royalty income, as, it was for transfer of right to use the copyright in the software, the assessee submitted that it had sold the software along with hardware (equipments) on outright sale. The assessee submitted that the software sold by the assessee is embedded in the hardware and only for the purpose of operating hardware. Therefore, it cannot be treated as royalty. The Assessing Officer, however, was not convinced. Referring to agreements entered with various Indian telecommunication companies, such as, Bharti Telenet Ltd., Tata Teleservices Ltd., and Reliance Infocomm Ltd., the Assessing Officer concluded that the receipts from transfer of right to use t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the PE, learned Commissioner (Appeals) directed the Assessing Officer to compute the income of the PE in accordance with judgment of the Tribunal in case of Motorola Inc. Vs. DCIT [2005] 95 ITD 269 (Delhi ITAT) (SB) , i.e., on the basis of percentage of net profit on global service applied to Indian sales. Being aggrieved with the order passed by learned first appellate authority, both the assessee and the Revenue are in appeal. 6. We have considered rival submissions and perused the materials on record. Undisputedly, the assessee had entered into agreements with certain India telecommunication companies, such as, Bharti Telenet Ltd., Tata Teleservices Ltd. and Reliance Infocomm Ltd. for supply of basic telecom infrastructure equipment software and assisting them to set up telecommunication network. Basically, these telecom equipments and software were put to use by Indian telecommunication companies to provide basic telecommunication services, value added services, and broad-band services. In sum and substance, the equipments and software were provided to the Indian telecommunication companies to set up mobile telecommunication networks in India. On a perusal of the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en provided to Reliance only for the purpose of operating the telecommunication equipments supplied by the assessee for Broadband Access Reliance Network. The software licence agreement puts various restrictions and conditions on Reliance with reference to usage of this software. The terms of the agreement make it clear that Reliance cannot itself make copy or duplicate, or permit anyone else to do so with regard to any part of the software, or create the source programs or any part thereof from the object programs. Reliance cannot make the software accessible to any person other than its employees, contractors etc. only for the purpose of establishing and operating the Broadband Access Network. Reliance cannot directly or indirectly sell, transfer, offer, disclose, rent, lease (as lessor), or license the software to any thirty party, except for right to use the software. The agreement further makes it clear that the assessee has not made any independent supply of software to the Indian telecommunication companies. Rather, the assessee has supplied Digital Loop Carrier System (DLC), which is the hardware along with software to operate the hardware. 8. This fact becomes more clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 10. Thus, applying the aforesaid ratio laid down by the Hon ble Supreme Court, it has to be held that the receipts from Reliance Infocomm Ltd. are not taxable as royalty income, either under the domestic law or India USA DTAA. More so, when the agreement between the parties makes it clear that the ownership rights over the software remains with the licensor. Thus, for the aforestated reasons, we hold that the amount received by the assessee from Reliance Infocomm Ltd. is not taxable as royalty income. 11. In ground no. 2, the assessee has challenged the decision of the first appellate authority in holding that certain other receipts, though, not in the nature of royalty, are business profits and are attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the branch office. He submitted, the branch office is merely engaged in providing marketing support services to the head office and development of part of the patches of software for head office. He submitted, the branch office was not, at all, engaged in sale of software in India. Rather, the software developed by the branch office was not saleable to any customers as it is not complete and cannot be used to operate the hardware. Whereas, the head office has sold software to Indian customers, which can operate hardware. Thus, he submitted, the conditions of Article 7(1) are not applicable. He submitted, except development of software patches, all other activities relating to sale of hardware and software have taken place outside India and the sale of hardware and software to the Indian customers is in the nature of offshore supply. 14. He submitted, in such a scenario, when title over the goods has been transferred outside the territory of India, such receipts cannot be taxable in India. In this context, he relied upon a decision of the Hon ble Supreme court in case of Ishikawajma- Harima Heavy Industries Ltd. Vs DIT [2007] 288 ITR 408 (SC). Without prejudice, he submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities that the branch office has played a role in respect of such supplies, however, in what manner and to what extent the branch office has played such role is not forthcoming from the observations of the departmental authorities. It appears from record that the branch office has developed a patch of the software, which has been sold to the head office. It may be a fact that the patch of the software developed by the branch office was made part of the complete software, which in turn, got embedded in the hardware supplied to the Indian customers by the head office. However, in our view, such sale of patch of software by the branch office to the head office cannot be linked to the supply of telecommunication equipment and software by the assessee to the Indian customers, as, the branch office has a very limited and restricted role of supplying patch of the software. 18. In any case of the matter, insofar as such supply is concerned and for that matter all other transactions between the branch office and head office have been accepted to be at arm s length, in such a scenario, no further profit attribution can be made to the PE. It is borne out from record that the head office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh investigation in to the facts, we admit it for adjudication. 24. It is the say of the assessee that since it is a non-resident company, it has no liability to pay advance tax, as, the obligation is on the payer to deduct tax at source. For such proposition, learned counsel relied upon a catena of judicial precedents. 25. Having considered rival submissions in the light of judicial precedents cited before us, we accept assessee s claim and hold that no interest under section 234B of the Act can be charged as the assessee, being a non-resident company was not liable to pay advance tax, since, the payer is under an obligation to withhold tax under section 195 of the Act while making payment to the assessee. Accordingly, the Assessing Officer is directed to delete the interest charged under section 234B of the Act. 26. In the result, the appeal is partly allowed. ITA No. 1858/Del/2009 (Revenue s Appeal) AY: 2004-05 27. The effective grounds raised by the Revenue are as under: 1) On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that payment received from M/s Bharti Telenet Limited and M/s Tata Teleser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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