2013 (9) TMI 374 - AT - Income Tax

TDS deduction u/s 195 - Purchase of software - Scope of term Copy Right - DTAA with Australia - Whether purchases of software or payment of Royalty be liable for deduction of TDS - Held that - It is no doubt true the provisions of the DTAA overrides the provisions of the Income-tax Act. In the DTAA the term 'royalty' means payments of any kind received as a consideration for the use or the right to use any copyright of literary, artistic or scientific work whereas in the Income-tax Act, royalty means consideration for the transfer of all or any rights including the granting of a licence. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. - Decided in favour of Revenue. The definition of royalty in the Income-tax Act, 1961 is, consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, innovation, model, design, secret formula or process or trade mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work. License is not confined to an exclusive license. When a software, over which a copyright is acquired and thus owned, is licensed for use to another or sold to another for his own use, the licensee or the purchaser gets the right to use the software without being held guilty of infringement of the copyright. The words within brackets, including the granting of a license indicate an expansive definition. The word includes is an inclusive definition and expands the meaning. Therefore, license cannot be restricted to transfer of a right dealt with earlier by the provision and should be understood as taking in the grant of a license simpliciter. A copyrighted article is nothing but an article which incorporates the copyright of the owner, the assignee, the exclusive licensee or the licensee. So, when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. It is clear that under various agreements, what is transferred is only a licence to use the copyright belonging to the non-resident, subject to the terms and conditions of the agreement, as referred to above, and the non- resident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software. The same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention that there is no transfer of copyright or any part thereof under the agreements entered into by the Reliance with the non-resident supplier of software cannot be accepted. Under these circumstances, payment made by the Reliance to LTGL/ other suppliers can be said to be payment for the use of or right to use of copyright and does amount to royalty within the meaning of Artilce- 12(3) of the DTAA. It is accordingly held that the AO was justified in directing to deduct the tax at source u/s.195. Since we have come to the conclusion that the amount paid by Reliance is to be treated as Royalty chargeable under the Act of the Income Tax, the order of the AO to that extent are upheld - Following decision of Agagrwal Chamber of Commerce Ltd. vs. Ganapat Rai Hira Lal 1957 (11) TMI 1 - SUPREME Court - Decided in favour of Revenue. Existence of Permanent establishment (PE) - LTHPL entered into an agreement for supply of hardware, software and also installation and that company is an Indian company. After entering into an agreement supply of software was assigned to the assessee Lucent by way of the Tripartite agreement between Reliance and LTHPL and assessee Lucent. Eventhough, installation was on Indian company there is no evidence of either deputing personnel of assessee Lucent to India nor there is any evidence in the record for invoking Service PE as in other case. Moreover for invoking Agency PE , facts do not support AO's contentions. The agreement entered is an independent agreement, entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken any responsibility of the assessee Lucent. On the facts of the case we are of the opinion that there do not exist any PE, more so of agency PE. It is also not the case of the Revenue that the assessee deputed its personnel to India so as to invoke Service PE as per Indo-US DTAA. In view of the above, we hold that there is no PE to the assessee company in India and as there is neither any office in India nor it has any business connection in India nor carried out any business activities in India. Assessee's company is a standalone legal independent entity - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of payments made for acquiring software from non-resident companies.
2. Permanent Establishment (PE) status of Lucent Technologies in India.
3. Tax credit and levy of interest issues in Lucent appeals.
4. Tax treatment of payments for satellite bandwidth capacity.

Issue-wise Detailed Analysis:

1. Taxability of Payments Made for Acquiring Software from Non-Resident Companies:
The primary issue in these appeals revolves around whether payments made by Reliance for acquiring software from non-resident companies constitute 'royalty' under the Income Tax Act, 1961, and the Double Taxation Avoidance Agreement (DTAA) between India and the respective countries. The Assessing Officer (AO) held that the payments were for the use of software, thus constituting royalty under Section 9(1)(vi) of the Income Tax Act. This conclusion was based on the interpretation that the software licenses granted to Reliance were for the use of copyrighted material, which falls under the definition of royalty. The AO's decision was challenged by Reliance, which argued that the payments were for the purchase of copyrighted articles, not for the use of copyright, and thus should not be classified as royalty.

The CIT(A) sided with Reliance, stating that the software was a copyrighted article and not a copyright, leading to the conclusion that the payments did not constitute royalty. However, the ITAT, referencing various judicial precedents including the Special Bench decision in Motorola Inc. and the Karnataka High Court's decision in Samsung Electronics, concluded that the payments indeed amounted to royalty. This was because the software licenses granted to Reliance involved the right to use the copyright embedded in the software, making the payments subject to tax as royalty under both the Income Tax Act and the DTAA.

2. Permanent Establishment (PE) Status of Lucent Technologies in India:
In the case of Lucent Technologies, the AO argued that Lucent had a PE in India through its association with Lucent Technologies Hindustan Pvt. Ltd. (LTHPL), which provided services related to the installation and maintenance of the software. The AO based this conclusion on the Assignment and Assumption Agreement and other related documents, suggesting that LTHPL acted as an agent for Lucent in India, thereby creating an agency PE.

Lucent countered this by asserting that LTHPL acted independently and that Lucent had no business connection or fixed place of business in India. The ITAT, after reviewing the agreements and the nature of services provided, agreed with Lucent, concluding that there was no PE in India. The ITAT noted that the agreements were entered into on a principal-to-principal basis, and there was no evidence of Lucent deputing personnel to India or LTHPL having the authority to conclude contracts on behalf of Lucent.

3. Tax Credit and Levy of Interest Issues in Lucent Appeals:
Lucent also raised issues regarding the non-granting of tax credit for the tax deducted at source (TDS) by Reliance and the levy of interest under Sections 234A, 234B, and 234D of the Income Tax Act. The ITAT referred to its earlier decision in Lucent Technologies GRL LLC vs. Director of Income Tax (International Taxation), which held that Lucent was entitled to credit for the TDS based on the original tax deduction certificates issued by Reliance. The ITAT directed the AO to grant the due credit for the TDS.

Regarding the levy of interest, the ITAT relied on the Bombay High Court's decision in DIT (International Taxation) vs. NGC Networks Asia LLC, which held that when TDS is made, the question of levy of interest under Section 234B does not arise. Consequently, the ITAT directed the AO to adjust the interest levied in accordance with the law.

4. Tax Treatment of Payments for Satellite Bandwidth Capacity:
In the appeals involving payments made to New Skies Satellite N.V. for satellite bandwidth capacity, the issue was whether such payments constituted royalty. The AO held that the payments were for the use of a process and thus amounted to royalty under Section 9(1)(vi) of the Income Tax Act and the respective DTAA. The CIT(A) disagreed, relying on the ITAT's decision in PanAmSat International Systems Inc., which held that payments for transponder capacity did not constitute royalty.

However, the ITAT, referencing the Special Bench decision in New Skies Satellite N.V. vs. ADIT, concluded that the payments for satellite bandwidth capacity constituted royalty. The ITAT held that the use of transponder capacity involved the use of a process, and the payments were for the use of this process, thereby falling within the definition of royalty under the Income Tax Act and the DTAA.

Conclusion:
The ITAT upheld the AO's decision that payments made by Reliance for acquiring software from non-resident companies constituted royalty and were taxable under the Income Tax Act and the DTAA. The ITAT also concluded that Lucent Technologies did not have a PE in India, and thus its business profits were not taxable in India. The ITAT directed the AO to grant tax credit for the TDS and adjust the interest levied accordingly. In the case of payments for satellite bandwidth capacity, the ITAT held that such payments constituted royalty and were taxable in India.