2018 (6) TMI 207 - AT - Income Tax

Existence of a business connection - P.E. in India - fastening the tax liability on the income earned on supply of telecommunication equipment to the Indian Customers - whether the profit on such supply of telecom equipment in India was attributed to assessee? - Article-5 of the India-Singapore DTAA - Held that - The income of the assessee from supply of equipment in India was not chargeable to tax in India and therefore any such income or any part thereof is not attributable to the activities of assessee in India following the decision in assessee s own case reported in (2016 (5) TMI 373 - DELHI HIGH COURT) answer the grounds in the appeals preferred by the assessee accordingly in favour of the assessee. Royalty - supply of embedded Software - Held that - The payment for the embedded software is not separately taxable in the hands of assessee in India either as royalty or as business income. Initiation of penalty - no-grant of credit of TDS - Held that - Initiation of penalty proceedings challenged by the assessee is premature and it cannot be adjudicated - we direct the Assessing Officer to given eligible credit of TDS, as per rules, after verification. Levy of interest under section 234B - Held that - Issue being consequential in nature, the Assessing Officer is directed to act accordingly as per Rules. Allowability of deduction of Research and Development expenses while computing the taxable income of the asessee s alleged PE in India - Held that - The view is covered by the assessee s own case reported in (2016 (5) TMI 373 - DELHI HIGH COURT) - thus we dismiss these grounds of appeal of the Revenue.

Issues Involved:
1. Tax liability on income from supply of telecommunication equipment.
2. Tax liability on income from supply of software as "royalty."
3. Initiation of penalty proceedings.
4. Non-grant of credit for taxes deducted at source.
5. Levy of interest under Section 234B of the Income Tax Act.
6. Allowability of deduction of Research and Development expenses.

Issue-wise Detailed Analysis:

1. Tax Liability on Income from Supply of Telecommunication Equipment:
The primary issue was whether the income earned from supplying telecommunication equipment to Indian customers was taxable in India. The authorities held that the assessee constituted a Permanent Establishment (PE) in India under Article-5 of the India-Singapore Double Taxation Treaty, attributing profits from such supplies to the PE in India. The assessee contested this, citing a previous ITAT decision in its favor for earlier assessment years. The Tribunal found that the facts and legal questions were identical to those in the previous case, where it was decided that the income from equipment supply was not taxable in India. Consequently, the Tribunal ruled in favor of the assessee, stating that no part of the income from equipment supply was attributable to activities in India.

2. Tax Liability on Income from Supply of Software as "Royalty":
The second issue concerned whether the income from supplying software to Reliance was taxable as "royalty" under Article 12 of the India-Singapore Tax Treaty. The Assessing Officer categorized this income as royalty, while the CIT(A) considered it business income taxable in India. The Tribunal referenced a previous decision where it was held that the software embedded in telecommunication equipment did not constitute royalty but business income, provided the software was integral to the hardware's functioning and could not be used independently. Following this precedent, the Tribunal ruled that the payment for embedded software was not taxable as royalty or business income in India.

3. Initiation of Penalty Proceedings:
The assessee challenged the initiation of penalty proceedings for various assessment years. The Tribunal found these challenges premature and ruled that they could not be adjudicated in the quantum appeals. Therefore, these grounds were dismissed.

4. Non-Grant of Credit for Taxes Deducted at Source:
For the assessment year 2007-08, the assessee raised an issue regarding the non-grant of credit for taxes deducted at source. The Tribunal directed the Assessing Officer to verify and grant eligible TDS credit as per the rules.

5. Levy of Interest under Section 234B of the Income Tax Act:
The issue of levying interest under Section 234B was raised by both the assessee and the Revenue. The Tribunal noted that this issue was consequential and directed the Assessing Officer to act according to the rules.

6. Allowability of Deduction of Research and Development Expenses:
The Revenue challenged the deduction of Research and Development (R&D) expenses while computing the taxable income of the assessee's alleged PE in India. The Tribunal referenced a previous decision where it was held that R&D expenses were a business necessity for the supply of advanced telecom equipment and should be allowed proportionately. The Tribunal found no new contrary material and dismissed the Revenue's appeal, allowing the deduction of R&D expenses.

Conclusion:
The Tribunal ruled in favor of the assessee on most issues, holding that the income from equipment and software supplies was not taxable in India, the initiation of penalty proceedings was premature, and the deduction of R&D expenses was allowable. The Tribunal directed the Assessing Officer to grant eligible TDS credit and act according to the rules for levying interest under Section 234B. The appeals of the assessee were partly allowed, and the appeal of the Revenue was dismissed.

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