9911796707
TMI Blog2008 (12) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue in ground No. 1 of its appeal for asst. yr. 1997-98 and in the solitary ground raised in appeals for asst. yrs. 1998-99, 1999-2000 and 2000-01. 3. The material facts relevant to this issue are that the assessee, 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. The AO after reading the contract entered into by the assessee with its customers, came to the conclusion that the assessee had sent its employees to India to conduct network survey and undertake negotiations and carried out market activity and on the ground that the company which was to do the installation and the after sale service and which originally was under the name of AT&T India (P) Ltd., renamed Lucent Technologies India Ltd. (LTIL), held that the profit on the supply of hardware and software is taxable as per the provisions of the IT Act, profit on the hardware is taxable as per art. 7 r/w art. 5 of the Double Taxation Avoidance Agreement (DTAA) between India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE of LTII, the assessee herein. He drew our attention to the contracts entered into between the assessee and M/s Escotel Mobile Communications Ltd. which was at pp. 69-137 of the paper book as also the contract entered into between Escotel Motile Communications Ltd. and M/s AT&T (India) (P) Ltd. which was at pp. 139-186 of the paper book. It was also placed before us the copy of the technical explanation of the convention and protocol between the USA and the Republic of India signed on 12th Sept., 1989, issued by the Treasury Department of USA. He further placed before us the Notification No. GSR 990(E), dt. 20th Dec., 1990 in regard to the DTAA between USA and India. He also drew attention to the art. 3 of the said notification wherein as per sub-cl. 2, it had been clarified that the terms not defined in the convention were to have meanings which it has under the laws of the State concerning the taxes to which the convention applies. It was also his submission that though on a similar issue the Special Bench of this Tribunal in the case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB) had held that there was no PE therein, in a subsequent Mutu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning of the various equipments by Escotel. In para 3.4 of the said contract the 8.1 software version release for mobile switch center etc. was to support certain features required for GSM standard. As per cl. 3.5, assessee was to install the said software along with the call monitoring system for Escotel. As per cl. 5, the assessee was to appoint the project manager responsible for ensuring that the assessee complies with the project management processes and the identity of the project manager was subject to Escotel's prior written approval. As per cl. 6, within one calendar month of the date of the contract the assessee and M/s AT&T India were to submit the schedule of works to Escotel for its approval. As per cl. 12, the assessee was to perform certain structural testing programmes, sufficient to the satisfaction of Escotel that the hardware, software, sub-system, system to meet the requirement of the contract and achieve provisional acceptance and final acceptance. He drew our attention to cl. 17 of the said contract which required the assessee to keep available of necessary spare parts for the system, repair any defective hardware modify, enhance or otherwise update the softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther drew our attention to the various clauses of the agreement between the assessee and Escotel as also the agreement between LTIL, AT&T (India) (P) Ltd. and Escotel. It was his submission that as per the contract between the assessee and Escotel, the assessee was to prepare the designs, solutions, manufacture, supply and deliver all hardware, software and related services in accordance with the provisions of the contract and the contract between Escotel and LTIL was for the installation, testing, commission and achieving provisional acceptance and final acceptance. He drew our attention to cl. 3 of both the agreements which provided for the said different responsibilities. It was his submission that all other clauses in the contracts were basically mirror images. It was his submission that it was only to protect the interest of Escotel that Escotel had required that both the assessee and LTIL enter into identical contracts with Escotel except for the specific acts required by each of the persons. It was his submission that the contract had not been signed in India and for this he drew our attention to affidavit of Shri Kenneth G. Jackson on pp. 1877-190. Shri Kenneth G. Jackson h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el 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. In short, what is noticed is that by entering into the contract by Escotel with both the assessee and its LTIL, Escotel has made both the assessee and LTIL responsible for the turnkey completion of the GSM project, individually and severally. Thus, if either one breaks its terms and conditions of contract with Escotel, the other would be responsible for its completion. In short, a consortium or partnership has been created between the assessee and its Indian subsidiary, LTIL. With this situation, the next question that comes up is, can either the assessee or its subsidiary LTIL complete the contract with Escotel on a turnkey basis without the assistance of the other. Obviously, the assessee is to supply the hardware and the software and LTIL is to do the installation, testing, commissioning a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly shows that the subsidiary LTIL is also acting on behalf of the assessee. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. On the other hand, the case of the appellant was that it did not transfer copyright in the software to the Indian operator. What it sold was a copyrighted article. The Indian operator had no right to sub-lease or sub license the software. All the arguments of the rival parties are not reproduced here for the sake of brevity. However, it is pointed out that the provisions of the DTAA are more favourable to the appellant and, therefore, the discussion is restricted to these provisions only. These provisions have been discussed in OECD Commentary and IRS of USA has also issued guidelines on what constitutes copyright and what constitutes copyrighted article. These guidelines are most beneficial to the appellant. Insofar as Indian cases are concerned, there is only one decision of Andhra Pradesh High Court in which levy of sales-tax on branded software was upheld. The Hon'ble High Court went only to the extent of saying that branded software, sold off the shelf, is liable to sales-tax and the relevant provisions in the UPGST were not ultra vires the Constitution. However, it also held that that will not apply to customized software or the software not sold off the shelf. 11.2 I hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity is feasible without loading a part of the software on the handset of the customer. Once the connectivity is allowed, the customer can enter the GSM, and use its software for doing his business, namely get connected to another person outside the GSM. The process involves the use of software of the GSM by the customers. Therefore, the learned AO was right when he mentioned that with every call, the customer of India operator used the GSM and its software. It cannot be pleaded that the appellant was not aware of the importance of this connectivity. Even if such a plea would have been taken, then that plea would have been wrong for the simple reason that the preamble to the supply contract states that the appellant wishes to provide supply of GSM mobile telephone system and application software. It was in this context that the software was licensed and not sold as goods. All these were not unintended errors in the contract or choice of wrong words. It is also not a case where the connectivity is provided by the operator by breach of contract or by stealth. The connectivity to customers and their use of GSM were of essence of the contract. In this scenario, we may now examine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral interpretation in favour of the appellant. "Here, I am not accepting it to be the final word, but as the appellant's case fails even under these interpretations, it is not necessary to go into other arguments advanced by learned AO and the learned counsel. Thus, the case of the appellant is covered under art. 12 of the DTAA and, therefore, he is liable to pay tax on the royalties received from the operators." 10. The learned CIT(A) thus held that there was a transfer of copyright by the assessee company in relation to the software and the amount received on account of such transfer was royalty as per the relevant article of DTAA which was chargeable to tax in India. 11. At the time of hearing before us, the learned counsel for the assessee, at the outset has submitted that this issue involved in the case of the assessee is squarely covered by the decision of Special Bench of Tribunal in the case of Motorola Inc. vs. Dy. CIT. He has taken us through the relevant portion of the order passed by the Special Bench in this case and has pointed out that the issue has been examined by the Tribunal from all the relevant angles. He has contended that on such examination, the Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he territory of sovereign, the loss promulgated by the Indian sovereign was applied. He has contended that similarly, the OECD Commentary making a distinction between a Copyright Act and copyrighted article cannot be used to interpret Indian Copyright Act in a different fashion than what the words-used therein suggest. He has contended that the distinction between the copyright right and copyrighted article created artificially and not recognized by the Indian Copyright Act or Indian IT Act is liable to be ignored and cannot be applied to decide the issue involved in the present case. 13. The learned Departmental Representative has also submitted that even the facts involved in the present case are different from that in the case of Motorola Inc. decided by the Special Bench of the Tribunal inasmuch as in the case of Motorola Inc., the software was to be used in respect of various handsets whereas in the present case, the software is to be installed on the network system supplied by the assessee company. The learned Departmental Representative has also contended that in the case of Tata Consultancy Services vs. State of Andhra Pradesh [(2004) 192 CTR (SC) 257-Ed.] decided by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase price of the article and the same, therefore, cannot be considered as royalty either under the IT Act or under the DTAA. 16. A perusal of the decision rendered by the Special Bench of Tribunal in the case of Motorola Inc. cited by the learned counsel for the assessee shows that an identical issue was involved before the Special Bench in that case and while addressing the same, it was considered by the Tribunal from all the relevant angles. First of all, a reference was to the definition of "copyright" as given in s. 14 of the Copyright Act, 1957, wherein it was defined as the exclusive right to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof viz.: "(a) in the case of a literary, dramatic or musical work, not being a computer programme,- (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as royalty either under the IT Act or under the DTAA. 18. The Special Bench of the Tribunal then proceeded to examine from the relevant license agreement as to whether any of the licensees was allowed to exercise any such rights mentioned in the relevant provisions with reference to the software provided by the assessee. On such examination, it was noted by the Tribunal from the relevant clause of the agreement that the licensee was granted a non-exclusive restricted license to use the software but only for its own operation and not otherwise. The licensee thus was permitted to use the software for the purpose of its own operation and there was a clear bar on the software being used by the licensee in the public domain or for the purpose of commercial exploitations. The grant of a non-exclusive restricted license to use the software again meant that the supplier of the software could supply similar software to any number of persons to which the licensee could have no objection. As held by the Tribunal, the words "restricted" and "not otherwise" used in the relevant license agreement thus were sufficient to show that the licensee had a very limited right so far as the use of softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue them to the public. Relying on the said observation, the contention raised on behalf of the Revenue that if a person owns a copyright article, then he automatically has a right over the copyright also was found to be not acceptable by the Tribunal. It was observed by the Tribunal in this context that even though one cannot have the copyright right without a copyrighted article, it does not follow that one having the copyrighted article has also the copyright in it. 21. The Tribunal then referred to para 14 of the Commentary on OECD Model Convention (dt. 28th Jan., 2003) which reads as under: "14. Commentary on art. 12-Paper book V-In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the programme, for example, where the transferee is granted limited rights to reproduce the programme. This would be the common situation in transactions for the acquisition of a programme copy. The rights transferred in these cases are specific to the nature of computer programmes. They allow the user to copy the programme, for example onto the user's computer hard drive or for archival purposes. In this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amme." 23. The Tribunal also referred to the Commentary of Charl P. du TOIT on this issue wherein it was opined that articles such as books and records are copyrighted articles and if they are sold, the user does not obtain the right to use any significant rights in the underlying copyrights itself which is what should determine the characterization of the revenue as sale proceeds rather than royalties. The Tribunal thus held that the payment by the transferee was not for any copyright in the software but the same was only for the software as such as the copyrighted article and the payment for such transfer, therefore, could not be considered as royalty within the meaning of Expln. 2 below s. 9(1)(vi) of the IT Act or the relevant article of the DTAA. 24. At the time of hearing before us, the learned Departmental Representative has made an attempt to submit that the facts involved in the present case are different from the facts involved in the case of Motorola Inc. decided by the Special Bench. The learned counsel for the assessee, however, has pointed out that the material facts relevant to this issue as involved in the present case are similar to that of the case of Motorola I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shipment in origin itself outside India. Sweden to city of India. The Indian customer entered The assessee company was a into a separate contract 100 per cent subsidiary of with an Indian subsidiary of another foreign entity which the assessee for erection also owned two Indian and installation of the subsidiaries. These Indian equipment purchased from the companies entered into assessee. separate contracts with the Indian customers for installation of the equipment &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of assessee's employees visited India employees came to India during the relevant for network survey and previous year. The Indian negotiation of terms of subsidiary utilized the contract and the Indian services of expatriate companies provided certain employees for short periods facilities to the visiting from other affiliated employees of the assessee. companies outside India. The assessee granted a The assessee transferred limited non-transferable certain application software and non-exclusive license to Indian customers for to Indian buyer for use operating the hardware of software applications for supplied by it without operating the hardware granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; is loaded onto Therefore, with handset of subscriber every call by a is incorrect. customer of India operator, the software supplied to Escotel would be publicly used by the customers of mobile services. That the license That the preamble The Bench noted that of software to to the supply the right received by Escotel amounted contract makes a the Indian customer to a transfer of distinction between did not result in copyright and the hardware acquisition of any of not merely a purchased and the rights mentioned in transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; maintenance. The Bench held that it did not amount to a transfer of copyright as: The supply Granting a license agreement was by the author of a in fact, two copyright only agreements f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. exploitation. -In contradistinction to terms of the Copyright Act, the license was granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; that tax authorities could not split such monies into different components to hold payments made for & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; once put on media in form of a floppy or disc, etc. becomes a tangible 'good' and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in the case of Motorola Inc. by the Larger Bench is binding on us, we cannot entertain such contentions raised by the learned Departmental Representative. Moreover, as pointed out by the learned counsel for the assessee, all such contentions as attempted to be raised by the learned Departmental Representative before us were also raised on behalf of the Revenue before the Special Bench in the case of Motorola Inc. and only after dealing with the same extensively, a decision has been rendered by the Special Bench by passing a well discussed and well reasoned order. 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 learned CIT(A) on this issue and allow ground No. 1 of the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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