2010 (8) TMI 759 - AT - Income Tax

Summary

Issues Involved:
1. Whether the payment made to Avaya International Sales Ltd., Ireland (AISL) for activation charges is a payment for buying a standard product/software.
2. Whether the payment made to AISL can be classified as 'Royalty' or 'Fees for Technical Services'.
3. Whether the assessee is liable to deduct tax at source on the payment made to AISL as per Indian tax laws and the Double Taxation Avoidance Agreement (DTAA) between India and Ireland.

Issue-wise Detailed Analysis:

1. Payment for Buying a Standard Product/Software:
The assessee, engaged in selling Converged Communication Solutions, entered into an agreement with AISL to purchase hardware (EPABX) and standard software embedded in the hardware. The software features are not fully activated at the time of supply. Customers can choose to activate additional features later, which enhances the hardware's functionality. The assessee argued that the activation charges are not taxable as they do not qualify as 'fees for technical services' or 'royalty'. The CIT(A) concluded that the activation charges should be considered part and parcel of the equipment supplied by AISL and not as 'fees for technical services'. The CIT(A) held that these payments are for buying a standard product/software.

2. Classification as 'Royalty' or 'Fees for Technical Services':
The Assessing Officer (AO) contended that the activation charges are taxable as fees for technical services, arguing that AISL provided technical services for activating enhanced features of the equipment. The AO noted that the assessee had previously withheld tax at source on these payments, considering them as fees for technical services. However, the CIT(A) examined the definitions under section 9(1)(vii) of the Income-tax Act and Article 12 of the DTAA between India and Ireland. The CIT(A) found that the activation of software features embedded in the hardware does not constitute customized software or additional technical services. Therefore, the payments cannot be classified as 'royalty' or 'fees for technical services'.

3. Tax Deduction at Source and DTAA Provisions:
The assessee argued that AISL, being a tax resident of Ireland with no permanent establishment in India, is not liable to tax in India on the remitted amounts as per Article 7 of the DTAA between India and Ireland. The CIT(A) supported this view, stating that the income of AISL from these payments is not taxable in India. The CIT(A) referenced previous judicial pronouncements and the provisions of section 9(1)(vii) to conclude that the assessee is not liable to deduct tax at source on these payments.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeals. It concluded that the activation charges paid to AISL are part of the equipment supplied and not fees for technical services. The Tribunal noted that the nature of the transaction, supported by the invoices, indicates a sale of goods rather than a provision of technical services. Consequently, the assessee is not required to deduct tax at source on these payments, as they are not taxable in India under the DTAA provisions.