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TMI Blog2006 (7) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; and ( iii ) the signing of the supply and installation contracts. The Tribunal sustained 20 per cent of the net profits in respect of the Indian sales as income attributable to the PE - In the present case, it is already stated that the PE was merely doing the job business of negotiations - From the material available in the present case, the CIT (Appeals) was justified in reducing the profits attributable to PE to 8 per cent. The above percentage would also meet the requirements of rule 10( ii ) of the I. T. Rules - there are no merits in the first ground of appeal of the Revenue and consequently, the same is dismissed. Whether the consideration received by the assessee on licensing of software should be taxed as the business income or as royalty? - HELD THAT:- In the light of the similarity of facts as it exists in the case of the assessee and that of the case of Motorola Inc. as is evident from the comparative chart filed, the plea of the assessee was rightly accepted by the CIT (Appeals) - it was held in the case of Motorola Inc. that Since we have held that the payments cannot be assessed either as royalties or as business profits, the ground is dismissed. - the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of software and hardware supplied by the assessee to Indian customers during the assessment year 1997-98, the details of which were as follows : Financial Year 1996-97 [April 1, 1996 to March 31, 1997] Supply of Software : Name of party and address Particulars Amount In GBP Bharti Cellular Ltd. Qutab Ambience H-5/12, Old Mehrauli Road, New Delhi - 110 030. Supply of Software Planet, automatic frequency planning module and Databuild. 141,693 BPL US West Cellular Telecommunications Services Pvt. Ltd., Rockline Centre, 54 - Richmond Road, Bangalore - 560 025. Supply of software Planet, FICS software licence TEMS to Planet conversion. 67,475 2,272 Skycell Communications Ltd. Tarapore Towers, 826/827, Annai Salai, Chennai - 600 002. Supply of software Planet 71,955 [ Name of party and address Particulars Amount In GBP Sterling Cellular Ltd. Suit No. 318, Hotel Samrat, Chanakyapuri, New Delhi. Supply of software Planet 199,846 Supply of Hardware [Prior to December, 1996] : Name of party and addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entral Board of Direct Taxes regarding the applicability of section 9 of the Act, wherein it has been clarified that income derived by a non-resident exporter selling goods to Indian importers would not be deemed to accrue or arise in India and consequently not be subject to tax in India provided the some conditions are satisfied. The assessee submitted that the assessee does not carry on any business operations in India. The hardware in question is supplied by the assessee to Indian third party customers directly from overseas. Title in the hardware is transferred outside India i.e. before the hardware reaches India and consideration for the same is also received overseas. Additionally, the contracts for supply of hardware have been executed between the assessee and the Indian parties on a principal to principal basis i.e. : ( a )in their capacity as independent buyers and sellers, with the assessee exercising no control over the business of the Indian customers; and ( b )on terms and conditions prevalent in the market and on an arms length basis; and further ( c )the payment for the hardware is not dependent in any manner on the resale of hardware by the Indian purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee had during the relevant financial year supplied software called, "Planet" to Indian telecommunications operators, in form of single-user site licence for internal use. The assessee took a stand that since the supply of software by the assessee to its customers in India is in the nature of sale of software from overseas, for the same reasons outlined earlier while discussing the taxability of sale of hardware, income derived by the assessee from supply of software to Indian customers is not taxable in India either under the domestic law or based on the provisions of the India-UK tax treaty. The assessee also further submitted that notwithstanding our above contention, even where the supply of software is construed as licensing of software, the same should not qualify as "royalty" income both under the provisions of the Act as well as the India-UK tax treaty. It may be clarified here that if the income from supply of software is held to be in the nature of Royalty then notwithstanding the fact that there is no PE of the assessee in India, the same is taxable in India under the Indo-UK DTAA. 2.7 As per Explanation 2 to section 9(1)( vi ) of the Act, "royalty" mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on hire, but is merely permitted to use the subject-matter of the copyright (software in the instant case), it cannot be said that the payer has acquired the copyright or the right to use the copyright of the software supplied, but has in fact merely acquired the right to use the subject-matter of the copyright ( i.e. the product). The assessee pointed out that the software acquired by its customers does not give any right to the customers to reproduce and commercially distribute them. In other words, the customers have no right to exploit the underlying copyright but are merely permitted to use the subject-matter of the copyright. Accordingly, payments made by the Indian parties for acquisition of software from the Assessee fall outside the scope of the definition of royalty as per clause ( v ) of Explanation 2 to section 99(1)( vi ) of the Act. The assessee also pointed out that Article 13(3) of the tax treaty between India and UK defines the term royalties to mean payments of any kind received as a consideration for the use of or the right to use ( a )any copyright of a literary, artistic or scientific work, including cinematograph films or work on films; ( b )any pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprises)] and continue for a period or periods aggregating to more than 30 days within any 12 months period. 5. The Assessing Officer concluded that the assessee had a PE in the form of its employees as per article 5( k ) of the treaty and that these employees were carrying on the business for the assessee in India and have stayed in India for more than one year. The Assessing Officer held that the salaries of these employees were paid by the assessee. The Assessing Officer also held that the assessee-company had been deputing expatriates for negotiations and finalizing the contracts and for after sale services and that these visiting expatriates were nothing but permanent establishment of the assessee. The Assessing Officer, therefore, concluded that the income of the assessee was taxable in India. 6. As far as the income from supply of software is concerned, the Assessing Officer held that the income for supply of software was taxable as royalty, for the following reasons : "The assessee has given the definition of Permanent Establishment in its letter but has avoided service PE. It has only submitted that the assessee does not carry out any business in India. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en sold to the customer as per the Sales of Goods Act. The right to use the software has been granted which is covered under article 13 of the Indo-UK Treaty. The assessee has given detailed submissions why the same should not be taxed as royalty and has submitted that since the software is not a customized software and is available off the self and the customer has not been granted right to use the copyright, the payment is not covered under royalty. However the assessee has no reply to the fact that the software is not sold but licenced. The licence is granted for the use of the software. Further it can neither be sub-licenced nor can be altered or sold. Therefore, the payment on supply of software is covered under Royalty, but since the assessee has a permanent establishment in India, royalty will be taxed at the rate of 30 per cent. With the above remarks, income of the assessee is computed as follows : 1.Total hardware supply = 255670 Pounds. Profit @ 40 per cent = 1,02,268 Pounds. Converted into INR @ Rs. 60 = Rs. 61,36,080 Tax @ 55 per cent = Rs. 33,74,844..................I 2.Total Software supply = 483241 Pounds. Converted into INR @ Rs. 60 = Rs. 2,89,94,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had to be drawn against the assessee. From the fact that the sales have been made in India of software and hardware the CIT (Appeals) held that there was presumption of accrual or arising of income in India. He, therefore, held that income accrued and arose to the assessee in India; ( b )With regard to the assessee having a permanent establishment in India the CIT (Appeals) held that the assessee again failed to furnish details and admittedly two employees for the assessee stayed for the whole year in India and thus they constituted its PE under article 5(2)( k ) of the DTAA. He also held that the transfer of ownership in goods both with regard to hardware and software passed only in India and there was nothing on record brought by the assessee to rebut the presumption; ( c )With regard to the application of 40 per cent of the turnover for computation to profits the CIT (Appeals) held that the same was excessive. From the own audited profits and loss account filed before the CIT (Appeals) he noticed that the weighted average of profit was only 10.5 per cent, but the Assessing Officer applied a rate of 40 per cent without any basis. The assessee also pointed out before the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le leading business profits and not royalties. Therefore, this ground of appeal is allowed." 10. There was also another issue with regard to the charging of interest under sections 234A and 234B of the Act. On this issue the CIT (Appeals) held that in the case of Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 the Hon ble Delhi Bench of the Tribunal has held that where any payment is made to a non-resident, the same is subject to deduction of tax at source. Wherever there is an obligation to deduct tax at source in the case of a non-resident there was no liability to pay advance tax. Thus the CIT (Appeals) held that the interest for non-payment of advance tax cannot be levied. The Revenue is aggrieved by the adverse findings of the CIT (Appeals) and has preferred the present appeal before the Tribunal. 11. The first ground of appeal of the Revenue is with regard to the action of the CIT (Appeals) in reducing the profit attributable to profits from 40 per cent to 8 per cent. On this issue we have heard the learned Depart- mental Representative, who relied on the order of the Assessing Officer. The learned counsel for the assessee, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve already stated the PE was merely doing the job business of negotiations. From the material available in the present case, we are of the view that the CIT (Appeals) was justified in reducing the profits attributable to PE to 8 per cent. The above percentage would also meet the requirements of rule 10( ii ) of the I. T. Rules. We find no merits in the first ground of appeal of the Revenue and consequently, the same is dismissed. 13. The next issue that arises for consideration is as to whether the consideration received by the assessee on licensing of software should be taxed as the business income or as royalty. This issue has again been elaborately dealt with in the case of Motorola Inc. ( supra ). 13.1 The assessee-companies in the case of Motorola Inc. ( supra ) were leading suppliers of telecommunication equipments comprising of both hardware and software. They had entered into supply agreements with cellular operators in India for supply of hardware and software during the relevant assessment years and received payments therefore. The assessee had no permanent establishment in India and, therefore, payments received by it could not be taxed as business profits u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it the assessee s requirement and was, therefore, not an off the shelf product. 13.4 In the assessee s case a copy of the software PLANET (an "off the shelf" software) is stored on a CD and sold to the buyers. In order to protect its copyright in this software and enable the buyer to use it, the assessee executes a licence agreement (which is customary) with its clients. The typical rights and obligations of the assessee s clients by virtue of the transaction are as follows : u Article 3 of the contract envisages that the software can be used in perpetuity; u The client is free to exploit the software for the purpose of its business. The same is however subject to certain restrictions e.g. use on specific computer, prohibition on duplication, transfer etc. These restrictions are customary and with a view to comply with the relevant copyright legislation; Article 5.10 of the contract, provides that risk of loss and damage to the software and supporting documentation will be with the client (licensee). 14. We have also perused the agreements under which the software PLANET has been licenced for use in India. Some of the clauses in the agreement, which are relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained on such original version also appear on any such copy; 4.2 The licensed software shall not be used for any other purpose including but not limited to providing a data processing service to any third party whether by trade or otherwise; 5.3 The Licensor shall retain the exclusive right to the copyright and to reproduce, publish, patent, sell, license and otherwise make use of all such inventions, discoveries, improvements, enhancements, methodologies, techniques and know-how." 14.1 A comparative chart of the various clauses of the agreements in the case of the assessee and that of the Agreements in the case of Motorola Inc. ( supra ) has also been filed before us by the learned counsel for the assessee. We are of the view in the light of the similarity of facts as it exists in the case of the assessee and that of the case of Motorola Inc. ( supra ) as is evident from the compara- tive chart filed before us, the plea of the assessee was rightly accepted by the CIT (Appeals). We, therefore, confirm the order of the CIT (Appeals) on this issue and dismiss this ground of appeal of the Revenue. 15. The third ground of appeal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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