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TMI Blog2024 (3) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... the laws of UK. The assessee provides research and development, marketing, sales, general and administrative support services primarily to its holding company. During the year 2012, there was global acquisition of NDS Limited, UK by the Cisco Group. Consequent to this, the assessee had become the distributor of NDS products in India. Verification u/s 133A(2A) was carried out at the business premises of the assessee on 6-12-2017. During the course of survey proceedings, it was seen that the assessee had made payments/booked expenses to the tune of Rs. 15,82,38,841/- to NDS Ltd., UK during the FY 2013-14 for services in nature of installation, configuration, operation, maintenance etc. Though the services rendered were in the nature of FTS, the assessee was not deducting taxes, based on the argument that no technical knowledge, skill, know how or process was made available to CVTIPL by NDS Ltd. U.K. Pursuant to the survey u/s 133A(2A), the AO issued a show-cause notice u/s 201/201 (IA) on 20.4.2018, asking the assessee to show cause why it had not deducted taxes on the payment made by it to NDS Ltd. UK. 2.1 NDS Ltd. UK is engaged in the supply of software licenses and hardware compo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n plan or escalate a problem in response to which technical support and technical problem management services are provided. Where practical, resolution of the fault would be demonstrated by simulating the fault and solution on the customer's test system. * The support services include maintenance services whereby time-to- time software updates are provided in the form of software patches with customer installation instruction or software patches may be installed via remote access. The support services also include preventive maintenance wherein regular routine maintenance checks will be performed on the hardware components and systems e.g. Monitoring the size of database files. * The services include planned activity and software support services. Also, when a customer wishes to relocate or reconfigure the systems from time to time to meet charging operational requirement, such changes will be accommodated by way of decommissioning, transport, recommissioning etc. as a part of the support services. 2.2 Apart from one-time payments for installation of hardware and integration of NDS software with hardware, NDS Ltd. UK was being paid every year on account of supply of viewin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloping of technical plan/technical design, did not result in subsequent transfer of the technical plan or design. However, the AO held that the services were highly technical and hence the services rendered squarely fit into the meaning of FTS as per the Act and DTAA. The services were inextricably linked to the license of software, supply of hardware, licensing of copyright etc. The AO also referred to subsection 4 of Section 5 of the Distributor Agreement, wherein it was stated that the manufacturer i.e. NDS Ltd. U.K. may make available to the distributor i.e. the assessee, the manufacturer's expertise, know-how, technical personnel in order to facilitate distribution of products and services. The AO noted that by way of an amendment signed on 20-02-2015 to the Distributor agreement, this section 5.4 had been deleted in its entirety. In the recital of the amendment agreement, it is stated that the manufacturer will not provide technical assistance to the distributor. The AO felt that the Distribution Agreement had been amended to circumvent specific provisions of the 'make available' clause of the DTAA and to escape the taxation of the receipts which were in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty are to be interpreted in harmony with the Section 9 of the Income Tax Act, 1961? 3. Whether the C1T(A) is right in ignoring the observation of the AO in order u/s. 20Hhat subsection 4 of section 5 of Distributorship agreement stated that the assessee may make available to the distributor, the technical know-how, expertise etc.?" 3. After hearing both the parties, we are of the opinion that similar issue came for consideration in assessee's own case in IT(IT)A No.940/Bang/2023, the Tribunal vide order dated 13.12.2023 held as under: "4. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in assessee's own case for the assessment year 2006-07 in ITA No.363/Bang/2017 dated 12.11.2021, wherein held as under: "23. In respect of agreement between the assessee and DEN, the relevant terms of the licence is as follows: 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 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-license rights (see clause 3.02 at Page 59). The clauses are typical clauses in a Software End User License Agreement (EULA) as analysed by Hon'ble Supreme Court in the Engineering Analysis case (see paras 45 - 47 of the SC judgment). The Viewing cards, Set 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance manual, this is akin to provision of a User Manual which describes the functioning of any equipment. For example, every sale of a TV comes with an operations and user manual. With refence to para 4.7, the providing of AMC services like repair, etc is akin 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer 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 "transf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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