9911796707
TMI Blog2013 (9) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case in assessment year 2006-07are that assessee M/s. Microsoft Regional Sales Corporation is a company incorporated in USA and engaged in distribution of Microsoft products in Asia (with restriction in China, Korea and Taiwan ). The Microsoft Regional Sales Corporation, US, a leading software developer is the sole owner of intellectual property rights vested in micro software. It has granted exclusive license to manufacture and distribute Microsoft products to one of its wholly owned subsidiary M/s. Gracemac Corporation (now merged with MOL Corporation) which in turn granted similar non-exclusive rights to its wholly owned subsidiary, Microsoft Operation Pvt. Ltd., Singapore (which is referred to MO Singapore) to manufacture Microsoft products in Singapore and distribute such products in Asia. The assessee has been appointed as a distributor of Microsoft products in Asia by MO, Singapore. It has filed its return of income on 31.10.2007 declaring nil income which was later on revised on 31.3.2009. According to the Assessing Officer, assessee is engaged in selling/licensing of software through independent distributor to the end user under License end User License Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble High Court the panel is of the view that no interference is called for in the draft order of the Assessing Officer on this issue". 4. Similar treatment has been given in assessment year 2008-09. The assessee has taken twelve grounds in assessment year 2007-08 and nine grounds in assessment year 2008-09. We find that the grounds taken by the assessee in substance in both the assessment years are verbatim same, they are similar to the ground taken in assessment year 2006-07, except variation of quantum. The ground No.3 taken in assessment year 2006-07 which we are going to reproduce in the later part has not been taken in these two assessment years. Similarly, in ground No.9 in assessment year 2007-08, assessee has pleaded that draft assessment order passed by the Assessing Officer is beyond the statutory time limit available in sec. 153(1) of the Income-tax Act, 1961. However, no such ground has been taken in assessment year 2008-09 except these variation and the variations in quantum of additions all other arguments and the grievance pleaded in the grounds are identical. The learned counsel for the assessee relied upon the order of the ITAT whereas Learned DR was unable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment made by the Indian distributors is towards the use of copyright and not for the purchase of copyrighted article and therefore, is royalty under section 9(1 )(vi) of the Act; 2.2.2 alternatively, consideration received for use of software can also be held to have been received towards use of 'information developed out of scientific experience', literary or scientific work, patented article, 'scientific knowledge, invention, secret formula or process' and, hence, taxable as royalty under the Act. 2.2.3 second proviso to section 9(1 )(vi) of the Act excludes such royalty payments from the purview of section 9(1 )(vi) of the Act only when the computer software is supplied by a nonresident manufacturer along with computer or computer based equipment under any approved scheme. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is also erroneous both in law and on facts. 3. That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by the Learned AO in the draft order that the provisions of section 115A of the Act characterizes the income from sale of software (deemed to be income of Appellant) as 'Royalty' under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's own case for Assessment Years 1999-00, 2000-01 and 2001-02, thereby completely disregarding the factual legal position. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is also erroneous both in law and on facts. 8 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by distinguishing from decisions of the Hon'ble Supreme Court in case of Associated Cements Companies Ltd (2001) [AIR 862] and Tata Consultancy Services Ltd (271 ITR 401). Accordingly, the order passed by the Learned AO on the basis of DRP's directions is also erroneous both in law and on facts. Factual inaccuracies: 9 That on facts, the Hon'ble DRP and Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following: (a) That the Appellant is engaged in licensing of software through independent distributors under EULA; (b) Reproducing from submissions of the Appellant purportedly filed on 5 November 2008 whereas the reproduced portions were never filed by the Appellant. He completely failed in taking cognizance of the submissions actually filed by the Appellant for the relevant asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on the said grounds of appeal." 6. The ITAT thereafter noticed the facts from the order of the Learned CIT(Appeals) in assessment year 1999-00 and other years which are common in these assessment years also. The facts noticed by the ITAT as well as the findings of the ITAT recorded in the case of M/s. Gracemac Corporation reported in 132 TTJ 257 read as under: "4. The basic facts as found mentioned in the consolidated order passed by the CIT (A) in respect of assessment years 1999-2000, 2000-01 and 2001-02 are as under:- "4. Facts of the case The Appellant is a company incorporated in US and is a wholly owned subsidiary ("WOS") of Microsoft Corporation, USA ("MS Corp") with a branch in Singapore. The operating structure of the distribution model along with the flow of distribution rights from MS Corp to Appellant through Gracemac Corporation, USA ("Gracemac") and Microsoft Operations Pte Limited, Singapore ('MO") was explained by appellant as follows: Gracemac is a company incorporated under the laws of USA on September 23, 1994 having its registered office at 300 South Fourth Street, Suite 1100, Las Vegas, Nevada, USA-89109. Gracemac is a WOS of MS Corp. MS Corp entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corp affiliates. Pursuant to the distribution agreement, the assessee had entered into agreements with various distributors in "approved territories". The distributors had a right to distribute the products in India. The products supplied by the assessee are often stocked by distributors and then supplied against specific orders. The products were delivered by the assessee to distributors "ex warehouse" from the warehousing facility nominated by the assessee. Further, the distributor sold the products to a reseller in India who in turn sold it to a consumer/ distributor sells directly to consumers. The resellers/ consumers did not have the right to make copies of the software for "commercial exploitation". The distributor was not liable to pay the assessee only upon sale by the distributor to the reseller/ consumer. It was liable to pay the assessee even if it was not able to sell the products to the reseller/ consumer. 4.3 According to appellant the income earned from the sale of computer software to independent distributor in India was in the nature of business profit in the years under consideration and was not taxable in India as appellant did not have a PE in India under pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rector of Income-tax vide order dated 26th October, 2010 which is since reported as 132 TTJ 257 (Del); 8 ITR (Trib.) 522 (Del); 42 SOT 550 (Del). Though it has been held by the Tribunal that the said amount was in the nature of royalty, but it was held that the said amount cannot be assessed in the hands of the present assessee and it has been held to be taxable in the hands of the Gracemac Corpn. The relevant observations of the Tribunal while holding so are contained in para 128 and 132 and it will be relevant to reproduce the said observations of the Tribunal with regard to taxability or otherwise of the aforementioned amount in the hands of the assessee:- "128. From the above it is evident that MRSC was also authorized to reproduce certain products and distribute the same to end users through the distributors appointed by MRSC. MRSC vide agreement dated 3rd May, 1999 was authorized to copy the marketing programmes in object code form from the master copy provided by Microsoft Operations (MO) on to either diskettes or such approved media and prepare the product documentation and packaging based on the material provided and approved by MO. We would like to mention here that sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red from the in-depth reading of the agreements, the matter becomes crystal clear. Since we have held that end users have made payments in respect of the granting of licence in respect of copyright in computer programmes the payments made by end-users as consideration for the same will be taxable in the hands of Gracemac. 132. As discussed above, MRSC reproduced certain software products and distributed the same through chain of distributors in India. Therefore, the very appointment of distributors by MRSC in India, had business connection in India and the portion of income earned by MRSC perhaps could have been chargeable to tax as business income under section 9(1)(i) of the Act. But since the assessing officer as well as the ld. CIT (Appeals) has chosen to assess the entire receipts under the head 'royalty' in the hands of MRSC also, in our considered opinion, MRSC cannot be taxed again on the same income by way of royalty for exploitation of same rights which had been assessed in the hands of Gracemac, otherwise it would result in double taxation. Therefore, we delete the addition in the hands of MRSC for all the three years." 7. The question involved in the quantum appeals f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in aforementioned decision that though the amount constitute royalty, but the same is not assessable in the hands of the present assessee. One of us (AM ) is party to the aforementioned decision. No case has been made out by the department to differ from the earlier decision which has been found to be delivered on the basis of similar facts. The facts for all the years are similar and this fact is not disputed by the revenue. Therefore, respectfully following the aforementioned decision of the Tribunal, the relevant observations of which has already been reproduced, we hold in the quantum appeals that the additions have rightly been deleted by learned CIT (A) and we decline to interfere in his order. Similarly, for penalty appeals, as income has not been held to be assessable in the hands of the assessee, we find no justification in levy of penalty, therefore, the order of the CIT (A) deleting the penalty is upheld on the ground that as the income itself is not assessable in the hands of the assessee according to the aforementioned order of the Tribunal, there is no question of levy of penalty. 12. So far as it relates to assessee's appeal, the facts being similar, adopting the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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