9911796707
TMI Blog2013 (9) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... rty laws and treaties, and that Microsoft (or its suppliers of software code, if any) own the title, copyright and other intellectual property rights in the product - user is paying for getting a copy of the software and not certain limited rights in software, which rests with the copyright owner of the software programme - There is nothing either in the Income tax Act or Indo-US DTAA that once a case falls in one of the clauses of Explanation 2 of section 9(1)(vi) it cannot be considered in any other clause. Held that:- though the amount constitute royalty, but the same is not assessable in the hands of the present assessee. - such royalty cannot be assessed in the hands of the assessee as it will tantamount to assess the same income which has been assessed in the hands of Gracemac and it has been held by the Tribunal that the aforementioned amount of royalty cannot be assessed in the hands of the assessee as the same is taxable in the hands of the Gracemac - Following decision of Gracemac Corporation Versus Assistant Director of Income-tax, International Tax Division, Circle 2(1), New Delhi [2010 (10) TMI 583 - ITAT, DELHI] - Decided partly in favour of assessee. - ITA Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this view was confirmed by the Learned CIT(Appeals) also in his consolidated order dated 14.1.2005. He confronted the assessee as to why the revenue receipts from licensing of software should not be taxed as royalty income. The assessee raised a number of arguments. It has pointed out that in the assessee s own case, ITAT has upheld that the taxation of royalty in the hands of Gracemac Corporation and not in the hands of assessee, therefore, it is a covered issue in favour of the assessee and both the assessees cannot be taxed for the same amount i.e. assessee as well as M/s. Gracemac Corporation. Learned Assessing Officer made the addition of Rs.1274,55,32,704 as against nil income on the ground that the Dispute Resolution Panel has considered this aspect and observed that assessee as well as revenue are in appeal before the Hon'ble High Court on the issue whether royalty income is taxable in the hands of assessee or in the hands of Gracemac Corporation, therefore, in this year, the penal is of the view that no change in the stand of the revenue is required. The Assessing Officer has noticed the direction of the DRP as under: 10. The assessee filed grounds of objection be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, this ground is rejected. 5. We have duly considered the rival contentions and gone through the record carefully. On an analysis of the facts and the circumstances, we find that there is no disparity on facts in assessment year 2006-07 as well as in these two assessment years. The ITAT in assessment year 2006-07 in ITA No.4588/Del/2010 has taken cognizance of the grounds of appeal raised by the assessee as well as factual inaccuracy available in the order of the learned Dispute Resolution Panel. It reads as under: 2. Quantum appeal filed by the assessee is in respect of Assessment Year 2006-07. Grounds of appeal relates to an addition made on account of royalty of an amount of Rs. 993,19,78,224/- which amount has been assessed in the hands of the assessee as royalty against the returned nil income filed by the assessee. The said addition has been upheld by the DRP and order in conformity has been passed by the Assessing Officer against which the assessee has filed an appeal raising various grounds which read as under:- 1. That on facts and in law, while passing the assessment order, the Assistant Director of Income Tax, Circle 3(2), New Delhi ('Learned AO') has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty' under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the draft assessment order as against the Returned Income by holding that revenue earned by the Appellant from sale of Microsoft Retail Products to distributors in India is royalty under Article 12 of the India US tax treaty. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is also erroneous both in law and on facts. 4.2 That on facts and in law, the Hon'ble DRP ,and Learned AO failed to appreciate that the sale of software is sale of 'Copyrighted Article' and not 'Copyright' in Microsoft software and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the 'Permanent Establishment' of the Appellant in India. 4.3 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by the Learned AO that inclusion of word 'computer software' in the definition of royalty in some of the treaties recently executed by India is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant, however, it allows the use of copyright to the Indian distributors; (e) That the license of mere usage is sort of a lease of a software and thus, the software has been merely given on rental; (f) The Appellant possesses right over the Intellectual Property Right (IPR) in the software which it is further licensing for distribution to the end users in India; (g) That the Appellant possesses right in copyright, which it can enforce in India, if any violation of such right is noticed by it; (h) That the source of revenue derived by the Appellant is from licensing of software from utilization of the license granted to the users in India; (i) That delivery of the product to distributors outside India does not affect taxability of the receipt, as per section 9(1 )(vi) of the Act, the place of utilisation/ exploitation of the software is important; (j) That the Appellant has shown the receipts from companies in India as 'royalty' and has paid taxes. 10 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by relying on the decisions of Hon'ble Supreme Court and Hon'ble High Courts which are on completely different f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icense to manufacture Microsoft products b) exclusive license to distribute the products so manufactured directly to retailers or to MS Corp or to subsidiaries of MS Corp; and c) exclusive right to license any third party to directly grant customers the right to reproduce Microsoft software products for internal use. In lieu of the abovementioned rights, Gracemac has issued its entire share capital to MS Corp. In pursuance of the rights granted under the PSA, Gracemac has entered into a License Agreement with MO, (a company incorporated under the laws of Singapore and a WOS of MS Corp), on January 1, 1999 wherein Gracemac has granted MO the: a) non-exclusive license to manufacture Microsoft products in Singapore; b) non-exclusive license to distribute the products so manufactured to retailers or to MS Corp or to subsidiaries of MS Corp; and c) non-exclusive right to license or sublicense the right to reproduce Microsoft software products to certain end users (large account customers) for their internal use. In lieu of the abovementioned rights, Gracemac earns royalty from MO. The royalty was computed on the basis of the net selling price of Microsoft products manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from sale of software could not be taxed in hand of appellant which was only distributor of the software of MS Corp and copyrights of these software were owned by MS Corp not by appellant. For these reasons it was claimed that business income of appellant was not taxable in India for the years under consideration accordingly, appellant did not file returns of income for the years under consideration. Later on, the AO issued notice to the appellant for the years under consideration u/s 148 of the Act. In response to notice appellant filed return of income declaring Nil income for the years under consideration stating above reasons for non taxability of its business profit in India. Later on, the cases of appellant for the years were selected for scrutiny by issue and service of notice U/S .143(2). During the course of scrutiny assessment the A.O assessed the income of the appellant for the years under consideration at US$ 1,01,75,235, US$ 5,87,64,099 and US$ 8,35,51,260 under the head 'Royalty' against the Nil income disclosed by the appellant in the returns of income filed for the years under consideration for following grounds: a) The software falls under the category 's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-licencee (MO). Each product package would include a pre-approved diskettes label attached to the diskettes and MS Corp. standard End User Licence Agreement for the territory. From the above it is evident that MRSC is not simply a distributor appointed by Microsoft Operations, but was authorized to reproduce certain computer programmes. The End User Licence Agreement was to be in the standard format of Microsoft Corporation. Article 3.2 also provides that the marketing programme released by the distributor will be approximately equivalent in quality of the software product manufactured by MS Corp. The Microsoft Operation also provided up-dated master copies of marketing programmes as and when the same were up-dated by MS Corp. Since the Microsoft Corporation has granted the right to reproduce and distribute Microsoft Products in lieu of Shares to Gracemac and no further royalty is payable by Gracemac and also the End User Licence Agreement is to be in the standard format of Microsoft Corporation, the Microsoft Corp. is under obligation to sign EULA on behalf of Gracemac. Thus it has to be logically concluded that Microsoft Corporation has signed the EULA on behalf of Gracemac t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of aforementioned royalty. The learned AR of the assessee has referred to the aforementioned decision of the Tribunal wherein on similar facts, it has been held by the Tribunal that such royalty cannot be assessed in the hands of the assessee as it will tantamount to assess the same income which has been assessed in the hands of Gracemac and it has been held by the Tribunal that the aforementioned amount of royalty cannot be assessed in the hands of the assessee as the same is taxable in the hands of the Gracemac. Therefore, it is the case of the learned AR that for all the aforementioned years in which learned CIT (A) has granted relief to the assessee in quantum, will be covered by the aforementioned decision and, hence, the order of the CIT (A) for deletion of the aforementioned amount should be upheld. As against that it is the case of the learned DR that royalty has rightly been assessed in the hands of the assessee and learned CIT (A) has wrongly deleted the same. 8. In the penalty proceedings, it is the case of the learned AR that it has been held by the Tribunal that income is not assessable in the hands of the assessee. Therefore, he pleaded that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
