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2018 (8) TMI 856 - AT - Income TaxTaxability of income of the appellant - permanent establishment ( PE ) in India - Royalty - supply of software - taxability of entire receipts from supply of software under section 44D read with section 115(l)(b)(A) of the Act - attribution of profit - Held that - since it has already been held in the hands of Reliance Communications 2018 (4) TMI 80 - ITAT MUMBAI by the elaborate order referred above that the payment made by it was not royalty in the hands of the assessee, these amounts are not taxable as income in the hands of the assessee. The issue that there is no PE in India has also been decided by the Tribunal in its order 2013 (9) TMI 374 - ITAT MUMBAI Decided in favor of assessee.
Issues Involved:
1. Taxability of Income 2. Attribution of Income 3. Levy of Interest 4. Levy of Penalty 5. Quantum of Income Detailed Analysis: 1. Taxability of Income: Issue: Whether the income of the appellant from the supply of software to Reliance Communications Limited is chargeable to tax in India as 'Royalty' under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the USA. Judgment: The Tribunal referred to previous ITAT decisions in the appellant's own case, where it was held that the payments received from Reliance Communications Limited for the supply of software do not qualify as 'Royalty'. The Tribunal reiterated that the software supplied was an integral part of the wireless equipment and had no independent value. The software was used solely for operating the wireless network, and the appellant did not transfer any copyrights or grant access to source codes. The Tribunal concluded that the payments made were for a copyrighted article and not for the use of copyright, thus not taxable as royalty. 2. Attribution of Income: Issue: Whether the appellant has a Permanent Establishment (PE) in India through Lucent Technologies Hindustan Private Limited, and if so, whether the income from the sale of software is attributable to the PE. Judgment: The Tribunal examined the agreements and the role of Lucent Technologies Hindustan Private Limited. It was determined that the Indian entity acted independently and did not have the authority to conclude contracts on behalf of the appellant. Furthermore, the Tribunal found no evidence of the appellant's personnel being deputed to India to provide services. Consequently, the Tribunal held that there was no PE in India, and therefore, no business profits could be attributed to a PE. 3. Levy of Interest: Issue: Whether the AO/DRP erred in levying interest under sections 234A and 234B of the Income Tax Act. Judgment: The Tribunal deemed the issue of interest levy to be consequential. Since the primary issue of taxability of income as royalty was decided in favor of the appellant, the question of interest levy became moot and required no further adjudication. 4. Levy of Penalty: Issue: Whether the AO/DRP erred in initiating penalty proceedings under section 271(1)(c) of the Income Tax Act. Judgment: The Tribunal did not explicitly address the penalty proceedings in detail, but given the favorable decision on the primary issues, it implied that the grounds for penalty would not hold. 5. Quantum of Income: Issue: For the assessment year 2009-10, whether the AO/DRP erred in considering the income of the appellant at a higher amount based on communication from Reliance Communications Limited. Judgment: The Tribunal noted that the calculation method used by Reliance Communications Limited was unclear to the appellant. Moreover, since the payments were not considered taxable as royalty, the question of assessing the income at a higher amount became irrelevant. Conclusion: The Tribunal allowed the appeals by the appellant, holding that the payments received for the supply of software were not taxable as royalty, and there was no PE in India to attribute business profits. The issues related to the levy of interest and the quantum of income were deemed consequential and did not require further adjudication.
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