2008 (12) TMI 248 - AT - Income Tax

DTAA between USA and India - Existence of permanent establishment in India (PE) - Income attributable to the operations in India - Whether the payment received by the assessee under the license agreement for allowing use of the software is in the nature of royalty income or it constitutes the business profit of the assessee - CIT(A) held that the assessee did not have a PE in India - Lucent Technologies International Inc. (LTII) is a company incorporated in US. It is a tax resident of USA. It is a leading supplier of hardware and software used for GSM cellular radio telephone system. The assessee had supplied telecommunications hardware and software to its customers in India. HELD THAT - It is noticed from the two agreements being the one between the Escotel and the assessee and the other between Escotel and AT T (India) (P) Ltd. now known as LTIL shows that the contract is for two different purposes. The agreement between Escotel and the assessee herein is for the supply of the hardware and software. The agreement between Escotel and LTIL is for commissioning. installation and operations. However both the agreements provided for the turnkey functioning of the project of the GSM network. A perusal of art. 5(2)(1) clearly shows that it is not only the employees through whom if services are provided the PE is to set to come into existence. It also includes other personnel. Obviously the term other personnel has to be read with reference to the earlier words as provided in the said art. 5(2)(1). The other personnel specified here would be persons over whom the enterprise would be having a control. In the present case undisputedly employees of the affiliates of the assessee had been employed through LTIL; the services of installation commissioning testing and bringing upto operation of the hardware and the software sold by the assessee to Escotel through its contract in regard to GSM project to be completed on a turnkey basis. These employees of the affiliates over whom the assessee has a control would fall within the term other personnel and consequently it would have to be held that a PE did exist as per the inclusive term as provided in art. 5(2)(1) of the DTAA between USA and India. A copy of the returns of the expatriates which have been placed in the paper book also clearly shows that they have been in India for more than 90 days within the 12 months period from April 1996 to March 1997. Consequently the terms of art. 5 (2)(1)(i) of the DTAA between USA and India are fulfilled. Consequently it would have to be held that LTIL in fact was a service PE of the assessee. Consequently the findings of the CIT(A) on this issue stand reversed. Payments under license agreement - royalty - stand of the assessee as taken before the AO was that there was no transfer of copyright in the software to the Indian operator and what was transferred or sold was merely a copyrighted article - It was pointed out in this context that the Indian operator had no right to sub-lease or sub-license the software and the copyright thus remained with the assessee - AO rejected this stand of the assessee - treatment given by the AO as well as by the CIT(A) to the payments for allowing use of computer software as royalty as against the claim of the assessee company that the same constituted its business profits. HELD THAT - After a perusal of the license agreement entered into by the assessee company with the Indian operators reveals that the sum and substance of the material clauses relevant in this context of the said agreement are similar to that of the agreement analyzed and relied upon by the Special Bench in the. case of Motorola Inc. 2005 (6) TMI 226 - ITAT DELHI-A come to the conclusion that the payment made for transfer of right to use the software was not for any copyright in the software but only for the software as such as a copyrighted article and the same therefore could not be considered as royalty either under the domestic law or under the relevant article of the DTAA. In our opinion the decision rendered by the Special Bench of Tribunal in the case of Motorola Inc. on the similar issue thus is directly applicable in the present case and respectfully following the said decision which is binding on us we hold that the amount received by the assessee under the license agreement for allowing use of the software was not royalty either under the IT Act or under the relevant DTAA and the same constituted the business profit of the assessee company as claimed by it. We therefore set aside the impugned orders of the CIT(A) on this issue and allow ground No. 1 of the assessee s appeal for AY1998-99 and 2000-01 and ground No. 2 of its appeal for AY 1997-98. Levy of interest u/s.234B - It is observed that the issue raised therein is squarely covered by the decision of Hon ble Supreme Court in the case of Sedco Forex International Drill Inc. Ors. vs. CIT Anr. 2005 (11) TMI 25 - SUPREME COURT held that the entire amount received by the non-resident assessee in India being liable for deduction of tax at source there was no liability to pay any advance tax and therefore there was no question of levy of interest u/s.234B. Respectfully following the same we uphold the order of CIT(A) cancelling the interest levied by the AO u/s.234B and dismiss ground No. 2 of the Revenue s appeal.

Summary

Issues Involved:
1. Existence of Permanent Establishment (PE) of the assessee company in India.
2. Treatment of payments received under the license agreement for use of computer software as 'royalty' or 'business profits'.
3. Validity of assessment based on the notice issued under Section 142(1).
4. Mistake in quantification of royalty income.
5. Levy of interest under Section 234A and 234B.

Detailed Analysis:

1. Existence of Permanent Establishment (PE):
The primary issue raised by the Revenue was whether the assessee, Lucent Technologies International Inc. (LTII), had a PE in India. The Assessing Officer (AO) concluded that LTII had a fixed place of business in India through its Indian subsidiary, Lucent Technologies India Ltd. (LTIL), and that LTII's employees conducted significant activities in India, such as network surveys, negotiations, and training. The AO held that these activities constituted a PE under Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA, making the profits from hardware and software supplies taxable in India. The CIT(A) disagreed, stating that LTII did not have a PE in India. However, the Tribunal reversed the CIT(A)'s findings, concluding that LTIL was a service PE of LTII under Article 5(2)(1)(i) of the DTAA, as LTII's personnel provided services in India for more than 90 days within a 12-month period.

2. Treatment of Payments for Software Use:
The second issue was whether the payments received by LTII under the license agreement for the use of computer software were 'royalty' or 'business profits'. The AO and CIT(A) considered these payments as royalty under Article 12 of the DTAA, asserting that LTII transferred copyright rights to Indian operators. The Tribunal, however, relied on the Special Bench decision in the case of Motorola Inc., which distinguished between transfer of copyright and transfer of copyrighted articles. The Tribunal held that LTII's payments were for copyrighted articles, not for the transfer of copyright, and thus constituted business profits, not royalty. Consequently, these payments were not taxable in India under the DTAA.

3. Validity of Assessment under Section 142(1):
The assessee challenged the validity of the assessment on the grounds that the notice issued under Section 142(1) was barred by limitation. This ground was not pressed by the assessee during the hearing, leading to its dismissal.

4. Mistake in Quantification of Royalty Income:
The assessee raised an alternative plea regarding a mistake in the quantification of royalty income. This issue became infructuous due to the Tribunal's decision that the software receipts were business profits and not royalty.

5. Levy of Interest under Section 234A and 234B:
The Tribunal addressed the issue of interest levied under Section 234B, referencing the Supreme Court decision in Sedco Forex International Drill Inc. & Ors. vs. CIT & Anr., which held that if the entire amount received by a non-resident assessee in India is subject to tax deduction at source, there is no liability to pay advance tax, and thus no interest under Section 234B. The Tribunal upheld the CIT(A)'s decision to cancel the interest levied by the AO under Section 234B. For Section 234A, the Tribunal directed the AO to allow consequential relief to the assessee.

Conclusion:
The Tribunal concluded by partly allowing the appeals of both the assessee and the Revenue, based on the detailed analysis and findings on each issue. The key determinations were the existence of a PE in India for LTII through its subsidiary LTIL and the classification of software payments as business profits, not royalty, under the DTAA.