9911796707
TMI Blog2008 (12) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... a) (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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Member(s) : P. M. JAGTAP., GEORGE MATHAN. ORDER-P.M. JAGTAP, A.M.: Out of these seven appeals, six appeals, i.e., three by the assessee and three by the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and were provided perquisites like car, use of staff facilities by the Indian company and held that the office of AT T (India) (P) Ltd., subsequently renamed LTIL was the fixed place of business of the assessee herein. The AO further held that the contract had been signed by the assessee company in India and the terms were also negotiated in India. The network survey was carried out in India and a complete interface was provided in the form of project co-ordinators, managers, etc. and these activities were not possible unless the assessee did not have a fixed place of business in India. Further, the AO had held that the assessee company herein had provided training courses in India to its customers and the perusal of the contract clearly indicated that the hardware is supplied through the PE in India. Consequently, to his conclusion, the AO had held that the Indian company, M/s LTIL was a dependent agent and consequently, the PE of the assessee company, in regard to software supplied. The AO had held that the payment for the same was fees for included services which is described in the treaty between USA and India. Consequently, the AO had taken the value as per the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iated enterprise for even one day there will be a PE. It was also his submission that no formal permission to use the subsidiaries' premises was required and even a casual use would lead to the existence of a PE. He further drew our attention to p. 71 of the assessee's paper book which is the copy of the agreement between the assessee and M/s Escotel, wherein the assessee has been categorized as the contractor and as per the said agreement the assessee was to supply the GSM network in accordance with the functional specifications and the product and design specifications set out. The assessee was to complete the GSM network project on a turnkey basis. He further drew attention to p. 77 of the paper book wherein cl. (1) under the head "Definitions and interpretations" it has been specifically mentioned that AT T India (P) Ltd., a wholly owned subsidiary of the contractor (assessee), was to supply all hardware and software services under the terms of the separate contract entered into between the Escotel and AT T (India) (P) Ltd. dated on or about the date of the contract entered into between the assessee and M/s Escotel. He further drew attention to p. 82 of the paper book under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cl. 46 wherein Escotel reserved itself the right to have any of the assessee's support personnel replaced for various reasons specified therein. He further showed us the chart in regard to division of responsibilities between the assessee and its Indian subsidiaries in the contract with M/s Escotel. It was also his submission that as per art. 5(2)(1)(i) of the DTAA between USA and India, if any of the employees or other personnel of LTII, the assessee was involved in furnishing of any services for a period of or periods aggregating more than 90 days within 12 months' period for the Indian subsidiary LTIL, even then there was a service PE. It was his submission that the personnel of LTII did function under the control and did provide services to LTIL being a subsidiary and consequently there was a PE. 6. In reply, the learned counsel for the assessee submitted that as per the art. 5(2)(1) of the DTAA between USA and India, it was required that employees of the assessee company should have provided the services to the subsidiary in India. He drew our attention to p. 260 of the paper book which is a copy of the list of expatriates during the year 1996-97 which runs into 17 names. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not establish a PE in India in regard to the contract. He further drew our attention to p. 201 of the paper book which is the certificate issued by LTIL specifying that they did not hold any spares on behalf for the equipments supplied by the assessee under the contract with Escotel. He also drew our attention to pp. 202-234 of the paper book which is a copy of the support service agreement between Escotel and AT T (India) (P) Ltd. (LTIL). It was his submission that as per the support service agreement, the Indian subsidiary was to provide all the support services and repairs and replacements of the turnkey project. It was thus his submission that the assessee has not undertaken any other obligations with Escotel other than supply of hardware and software. It was also his submission that the decision of the Special Bench of the Tribunal in the case of Motorola Inc., referred to supra would squarely cover the facts of the assessee's case and just because Motorola has entered into a mutual agreement procedure it did not make the decision of the Special Bench of the Tribunal, otiose. It was also his submission that the equipments supplied by the assessee were through sale and the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s completed its part of its contract, i.e., the supply of the hardware and the software. It is also specifically noted here that the installation, commissioning, testing and bringing upto operational status of the hardware and the software supplied by the assessee herein have been undertaken by the Indian subsidiary, LTIL. For this purpose, LTIL has also undisputedly taken the assistance of the expatriates, here the employees of the affiliates of the assessee herein. Thus, what is noticed here is that the parent company being the assessee herein has made personnel in form of the employees of the affiliates of the assessee available to the LTIL, the subsidiary, for remuneration. Further, a perusal of the agreement between Escotel and the assessee clearly shows that the warranty provided by the assessee company is in relation to the defects in the hardware. This is noticed in cl. 16 of the agreement. As per this clause, in the hardware, if any defect is noticed, the same has to be replaced or repaired within the time scale detailed in the support contract. This warranty clause in identical form is also found in cl. 16 of the agreement contract between Escotel and LTIL. Thus, what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elates to the treatment given by the AO as well as by the learned CIT(A) to the payments received by the assessee company under license agreement of allowing use of computer software as 'royalty' as against the claim of the assessee company that the same constituted its business profits. 9. The amounts received by the assessee company under the license agreements in allowing use of computer software were claimed to be its business profit. In this regard, the 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. The AO did not accept this stand of the assessee. According to him, the software constituted intellectual property right and not goods or equipment. He held that the amount received by the assessee for transfer of such rights thus was in the nature of royalty income and the same was chargeable to tax in the hands of the assessee company as such. When the matter was carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of software amounted to transfer of copyright and not merely transfer of copyrighted article. The case of the appellant is caught within the mischief of art. 12 of the DTAA and is not saved under OECD Commentary or IRS guidelines. For this purpose, let us first describe the facts briefly. The appellant entered into agreement of sale of hardware and software to the operator in terms of the supply contract with a view to set up GSM. Three types of software, namely, prepaid software. BTS software and MSC software, of the value of US $ 71,24,680 were licensed. In view of these distinctions and also due to difference in nature of the two properties, it is quite clear that the supply agreement was, in fact, two agreements for transfer of the respective properties. It is not necessary that there should be two separate agreements for arriving at this conclusion. Consequently, hardware was sold and the software was licensed as per two separate agreements in the light of aforesaid discussion. The purpose of the GSM was to enable the operator to provide mobile telephony services to its customers. This fact was very well-known to the appellant. On obtaining the license, the contractor loade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be perpetual. Analysis . The right to copy software on 50 workstations without the right to distribute it to the public is not the transfer of copyright but it is transfer of copyrighted article. Paraphrasing the appellant's case 'A' licenses software, contained in a medium, to 'IO' and permits 'IO' to get the software loaded into its equipment by 'IO'. Equipment is also installed by 'IO'. 'A' trains the personnel of IO in case of equipment and software. 'IO' is permitted to transfer a part of the software on the handsets of 'IO's customers so that he uses the IO's GSM for telephone. Analysis The terms of license permit public display or use of license to and by IO's customers. In fact, they use the software of 'A' while using the GSM. It is not a sale of copyrighted article, but transfer of the copyright. There is sea of a difference in the fact of Example 10 and the facts of appellant. The facts are not at all in pari materia. The whole complexion changes when we examine the intent and purpose of the setting up of the GSM, which both parties knew and which has been set forth in the preamble. The software was not to be used exclusively by the operator. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Copyright Act with regard to the software. He has contended that a perusal of this definition clearly indicates that in case of computer programmes. selling or giving on hire of software for sale or hire any copying of computer programme regardless of whether such copy has been sold or given on hire on earlier occasions constitutes a grant of or right to use copyright. He has contended that the said definition also makes it clear that copy of legally obtained software on an electronic medium which may either be a computer or a network constitutes grants or exercise of a copyright. According to him, if a person obtains a copy of the software and he uses thus for his personal or commercial use for copying it on an electronic medium, it constitutes exercise. of a copyright. He has submitted that para 3(2) of the Indo-US DTAA makes it mandatory to adopt the definition of the word "copyright" as given in the law of the State applying the provisions of the treaty and therefore, the definition as given in domestic Copyright Act, 1957, shall be applicable in the present case. He has contended that even though the Special Bench of the Tribunal in the case of Motorola Inc. has placed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act especially when express definition is already given in the IT Act. 14. We have considered the rival submissions and also perused the relevant material on record. We have also carefully gone through the various judicial pronouncements cited by the learned representatives of both the sides as well as relied upon by the learned CIT(A) in his impugned order. The main issue which is required to be considered and decided by us in the present context is 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. The issue as to whether the same is in the nature of royalty is required to be decided in the light of art. 12 of the relevant DTAA. 15. There is no dispute that the amount in question has been sought to be treated as royalty income by the Revenue authorities on the basis that there was a transfer of some rights in respect of the copyright. It is, therefore, relevant to ascertain as to whether there was transfer of any rights including the granting of a license in respect of copyright by the assessee in the present case under the licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er programmes where the programme itself is not the essential object of the rental; (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-cls. (i) to (iv); (d) in the case of cinematograph film,- (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) in the case of a sound recording.- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording, regardless of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed on the licensee under the license agreement so far as use of the software was concerned and found that the licensee had been denied the right of making the copies of the software or parts thereof except for archival back up purposes. This meant that the licensee could not make copies of the software for commercial purposes which condition was contrary to s. 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. Referring to s. 52(1)(aa) of the Copyright Act, it was also held by the Tribunal that merely because the licensee had been permitted to take copies just for back up purposes, it could not be said that he had acquired a copyright in the software. The Tribunal also took note of the restrictions placed on the licensee not to license or sell the software which was running counter to s. 14(b)(ii) of the Copyright Act which permits a copyright holder to sell or let out on commercial rental the computer program. It was held by the Tribunal that even from this angle, it could not be said that the licensee had acquired a copyright in the software. 20. The Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of whether this right is granted under law or under a license agreement with the copyright holder, copying the programme onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the programme. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the programme by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with art. 7." According to the Tribunal, the Commentary on OECD Model Convention although was of persuasive value only, the same threw considerable light on the character of the transactions and the treatment to be given to the payments for tax purposes. 22. The Tribunal also referred to the proposed amendments to Regulations of the International Regulation Service (IRS) in the US and found that a difference between a copyright right and the copyrighted article was clearly made out therein. It was also mentioned therein that if the transferee acquires a copy of the computer program but does not acquire any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 TTJ (Del){SB) 1 : (2005) 95 ITD 269 (Del)(SB) ------------------------------------------------------------- The assessee company, a The assessee company, a foreign company incorporated foreign company incorporated in USA, entered into in Sweden, entered into contracts with an Indian contracts with Indian, customer for supply of customers to supply telecommunication equipment telecommunication equipment comprising of hardware and comprising of hardware and software. software. The contract with Indian The contracts with Indian buyer was signed in buyers were signed in India. counterparts, with the assessee signing the same outside India and the Indian buyer signing the contract in India. The title in the goods The title in the goods supplied passed to the supplied passed to the Indian customer, as per Indian customer when the terms of the contract, delivered to the carrier at upon shipment at port of the port of shipment in origin itself outside India. Sweden to city of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hardware of software applications for supplied by it without operating the hardware granting any right of supplied by it under the commercial exploitation to supply contract. the Indian buyers. ------------------------------------------------------------- -------------------------------------------------------------- Department's Department's Relevant observations contention in contentions in the of Special Bench of the present case case of Ericsson Tribunal in the case of Ericsson -------------------------------------------------------------- That part of the That a part of The Bench observed that Software software was it is common knowledge transferred by loaded onto the that a person may the assessee to handset of the purchase any brand of Escotel was subscribers handset from the loaded onto the depending upon market and still handset of the their requirements have access to customer, to achieve mobile telephony of requiring mobile connectivity, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use a copyright. The sale of a -The Indian buyer could computer programme not use the software in contained in public domain or for software is a sale the purpose of of copyright commercial itself. exploitation. -In contradistinction to terms of the Copyright Act, the license was granted on a non-exclusive basis. The Bench also held that the payments to the foreign company were made collectively for the hardware and the software under the supply contracts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of s. 14 of the Copyright Act, 1957 dealing with copyright with regard to software differently than what was done by the Special Bench of the Tribunal in. the case of Motorola Inc. However, keeping in view that the decision rendered 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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