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TMI Blog2015 (5) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... -08 in ITA 221/Del/2013 be taken as the lead case and the decision in this appeal can be applied for all the other appeals. Hence we first take up the appeal for the AY 2007-08, i.e. ITA No 221/Del/2013. ITA.No.221/Del/2013- AY 2007-08 For the subject AY, Assessee has raised 13 grounds out of which, ground No.1 is general in nature and therefore does not require adjudication. The other grounds are briefly summarized by the assessee as below:- (a) Ground 2, 2.1 and 2.2 The learned DRP and the AO erred in holding that the revenue earned from supply of software to customers in India as "Royalty" under section 9(1)(vi) of the Act and under Article 12 of the DTAA between India and USA ('Tax Treaty') (b) Ground 3 and 4 The learned DRP and the AO erred in holding that the revenue earned from rendering of implementation services and maintenance services to customers in India as "Royalty"/"FTS" under Section 9(1)(vi)/(vii) of the Act and under Article 12 of the Tax Treaty. (c) Ground 5.1, 5.2 and 5.3 The learned DRP and the AO erred in holding that the assessee has a Fixed place, Installation and Dependent Agent Permanent Establishment ('PE') in India within the meaning of Article 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customer interactions via voice, email, web and fax. The assessee derives its revenue primarily from supply of "contact solutions", software license and provision of services including, installation, maintenance and professional services. The assessee has also provided installation/ implementation and maintenance of the supplied hardware and software. 2. Aspect US had two subsidiaries in India - Aspect Contact Center Software India Private Limited (hereinafter referred to as 'ACC' or 'Aspect India') and (ii) Aspect Technology Center (India) Private Limited (hereinafter referred to as 'ATC'). ACC is involved in business of installation of the equipment and providing marketing support to the assessee. ATC is the R&D entity, which involves as well as provides, testing, providing maintenance support to the assessee. 3. For the year under appeal, the assessee has earned revenues from the Indian customers as follows: * Licensing of software: USD 65,84,468 * Sale of hardware: USD 35, 24,795 * Implementation Services : USD 4,91,174 * Maintenance Services: USD 28,79,639 * Professional Services: USD 2,07,083 4. Revenue earned from professional services, was offered to tax on gross ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Shri. Sanjeev Sharma, the learned CIT, D.R. on behalf of the Revenue. We have also gone through elaborate written submissions filed by both the parties from time to time and perused the materials on record. We now proceed to dispose of the grounds raised by the assessee issue wise: Ground No 2, 2.1 and 2.2 7. Ground 2 deals with revenue earned from supply of software taxed as "Royalty" under the Act and the Tax Treaty. The Assessee sells contact solutions to the customers in India which is combination of software and compatible hardware that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The software and hardware both are integral parts of the solutions which the assessee sells to the customers and channel partners in India. While the hardware is sold, the software is licensed. With respect to software, the customer is granted partial rights permitting the use of software for internal use. The Assessee has submitted before the AO that, the revenue received from sale of software embedded with hardware is not taxable in the hands of the assessee as royalty under the provisions of the Act or under the Tax Treaty relying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbination of both hardware and software components that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The customer buys a complete solution which is manufactured outside India. The software and hardware are both integral parts of the contact solutions which the assessee sells to the end user and Channel Partners in India. The contract is between Aspect US and the customer directly. The software is provided on a Compact Disk and is shipped directly to the end user/ Channel Partner as the case may be. In support of her submissions, the learned Counsel invited our attention to the invoices raised on customers and to Clauses 1 and 5 of the agreement between Aspect US and Infovision Information Services (P) Ltd (page 83 to 116 of PB 1) forming part of paper book-I, to demonstrate that what is sold to the customer, is product comprising of hardware and software embedded in it. It was also submitted that the hardware and software sales are made outside India by Aspect US and the title and risk of goods is passed to the end customers outside India. Therefore, in view of the decision of the Hon'ble Jurisdictional High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mporary protection against loss, destruction or damage, in order only to utilise the computer programme for the purpose for which it was supplied; or making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use does not amount to infringement of copyright. It was further submitted that right to use a copyright in the software is distinct from right to use the programme embedded in the software. She contended that payments made for acquisition of rights in relation to the copyright which are limited to rights which are necessary to enable the user to operate the program, classify as "Business profits". 14. Further the Ld.Counsel submitted that, for the purpose of classifying the nature of revenue stream to the Assessee as "royalty", the Assessee should have granted at least, any one of the rights stated in Sec.14 of the Indian Copyright Act. In the present case, there is no grant of any such rights mentioned in Sec. 14(a) clause (i) to (vii) of the Indian Copyright Act to the customer. The customer is granted only a limited right to use the copyrighted article and various restrictions are imposed on the use of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the information or knowledge resides). The object code is sufficient to carry out the desired function i.e. operate the software but does not convey the technical knowledge or trade secrets of the Appellant. Accordingly, no rights in a "secret process" can be said to be transferred. Further, she submitted that a computer software programme cannot be classified as equipment. She invited our attention to the report of Technical Advisory Committee constituted by the OECD to state that digital products such as software cannot be considered as "equipment" since the word "equipment" can apply only to a tangible product. In the instant case, the customers are given a computer software programme and there is no equipment of the assessee which is used by the Customer. 18. Further, she argued that despite the amendments made by the Finance Act 2012 to the definition of "royalty", the revenues arising from the sale of software are not taxable under the provisions of the Tax Treaty as the said amendment shall not have any impact on the protection available under the Tax Treaty. For this preposition, she relied on the following case laws. * DIT vs Ericson A.B. (343 ITR 470, Del HC) * Nok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India nor outside India. The user of the software gets only partial rights in the software to use it and the channel partner got right to sublicense the software. He further submitted that the Assessee has not provided a copy of the agreement between the Channel partner and the end user of the software. However, based on available documents it is explicitly clear that the end user gets rights to use the software and they must return or destroy the software copy after agreement is terminated. (b) He argued that the transaction is in the nature of license and not that of a sale. The license agreement between the assessee and the end user provides that in case of termination of the license, the end user shall promptly remove all copies of the software from its systems and discontinue the use or destroy or return of the software. License agreement also provides that software cannot be sub-licensed assigned or transferred without the permission of the right holder. Referring to section 4 of the Sale of Goods Act, he argued that the section requires that in case of a sale, the property in goods should transfer to the buyer for a price. In case of licensing of software full transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder possesses the "exclusive right" to do the specified acts in respect of a work and only he can authorize someone else to do those acts. No one else can exercise the specified acts. The channel partner is granted the right to give on commercial rental (i.e. right to sub-license) a copy of the computer program. The owner of the copyright can assign either wholly or partially such rights to any other person. There is no requirement under the Copyright law that the owner of rights should grant exclusive right to the other to do all or any of the acts to which the author/ owner is having exclusive rights. 22.1. The Ld. D.R. pointed out that the Government of India Publication "Handbook on Copyright Law" states that the expression "reproduce" as used in Section 14(a)(i) of the Copyright Act, mean the right to make " one or more copies". Therefore, he contended that there is no requirement that the reproduction take place only when mass copies are produced or only if these are produced for sale or commercial exploitation. Under the End User Agreement, the licensee has been given right to make one copy of the software for archival and backup purposes (clause 3(iii) of the sample agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o claim the benefits of tax treaty in view of specific provisions in Article 24 "Limitation of Benefits" of the Indian DTAA with the USA. Article 24 of the Tax Treaty denies the benefits of the tax treaty to tax resident of the USA if such tax payer does not satisfy the requirements of Article 24 and in the instant case, it was submitted that the assessee is a wholly owned subsidiary of a Cayman Islands based company (page 20 of PB I) therefore the condition for eligibility of benefits is not satisfied. We find that this fact is not emanating from the orders of the lower authorities and further that this issue was not considered by any one of the lower authorities. Hence, we have not considered it necessary to adjudicate this issue. 27. He further submitted that a tax treaty is interpreted on the basis of the definition of the terms available in the treaty. The definition of terms is normally given in the respective Articles. Article 3 of the Tax treaty deals with definition of general terms used in the Tax Treaty. Paragraph 2 of Article 3 provides rules for interpretation of undefined terms. Referring to Article 3(2) of the Tax Treaty, he submitted that any term not defined in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which is essential for the solution to work. (b) Some customers purchased license for the software from the assessee without purchase of the equipment: Only 8 customers out of a total of 63 customers have been sold software exclusively, implying majority of customers having purchased both hardware and software. Even this minority pertains to certain upgrades etc. which have been provided at cost. A selective sampling by the learned DR cannot be the basis to argue that software is being sold independently. Even otherwise, the question of whether software is embedded or not, becomes academic as in either situation the jurisdictional High Court in Nokia, Ericsson and Infrasoft decisions (SUPRA) has held that the payment cannot be royalty. (c) Software is not sold but licensed: This issue has been dealt by the Hon'ble Delhi High Court in the case of Infrasoft, where also the software was licensed- Para 6 of the ruling. (d) Equipment is different from software- The learned AO himself in the assessment order held that the software/ solution to be equipment (page 21 of the assessment order enclosed in appeal set). (e) No transfer of title: The Learned DR having submitted that the "t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are manufactured outside India in USA and the supplies are made from outside India to various customers on Ex work/ FOB basis. The title and risk is passed outside India on shipment. 34. For the year under appeal, the assessee has contracts with 63 customers in India for supply of contact solutions and licensing of embedded software. The products are sold to customers in two ways: (i) directly to end users and (ii) through channel partners (i.e. resellers and distributors). Further, 8 out of 63 customers have been sold software exclusively, implying a majority of customers having purchased both hardware and software. Sample copies of the agreement with the end user and the channel partners along with invoices have been filed before us. 35. Considering the business model of the assessee with respect to supply/ licensing of software, we have considered the following sample agreements relied by both the parties during the course of the hearing: * Agreement between Aspect US and Infovision Information Services (P) Ltd ('end user customer') -page 83 to 95 of PB-I. * Channel sales agreement between Aspect Software Inc and C.S. Infocomm Pvt. Ltd ('Channel Partner'), Mumbai- page 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Ancillary Programs where applicable) also includes all fixes and new releases provided by Aspect (or its representatives) to customer, as well as copies thereof. Ancillary Programs- "Ancillary Programs" means a third party computer program(s) in object code form which is provided by Aspect for use with the software and Equipment. Clause 8- Termination clause (Page 90 of PB-I) Aspect may at its discretion terminate the license by written notice upon happening of following events; (i) if the customer breaches material license provision herein; or (ii) the customer fails to cure any other material breach of the terms of this agreement with 30 days after receipt of written notice from Aspect. Upon expiry or termination of the license, the customer shall immediately return or destroy the software and ancillary programs and all copies thereof as directed by Aspect. Clause 10- Ownership rights (Page 91 of PB-I) All right, title and interest in and to any software, ancillary Programs and Services deliverables provided hereunder, including, without limitation, all intellectual property and other proprietary rights associated therewith ('IP Materials") shall vest in and be held by As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and service only those new Product offerings for which Partner has received authorization. (bb) "Services" means System Implementation Services, Training Services, Professional/Enterprise Solutions Services, Support (Maintenance) Services, Equipment Relocation Services, and/or Time & Materials Services (each of which is described more fully in the Guide). (cc) "Software" means Concerto's proprietary computer programs, in object code form, for which Partner has received appropriate Documentation, fixes, modifications, updates, upgrades, new versions and/or copies of the Software provided to Partner pursuant to Concerto's obligations under this Agreement, including, without limitation, Service deliverables provided hereunder. (c) "Software Sub-Licensing" :- (i) Partner shall promote, solicit and accept orders for the Software and Ancillary Programs subject to the provisions of this Agreement, specifically including without limitation, the provisions set forth in the guide. Partner shall be deemed to be the Sub-Licensor, pursuant to the provisions of this Agreement, of any software provided to the end user. Partner shall expressly detail in any quotation to an End-User and, as ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vocable. (v) Partner will effectively enforce against all its End-Users the Minimum License Terms, specifically including, without limitation, those provisions that affect proprietary or confidentiality rights of Concerto or its Third Party Licensors. If Partner learns that any End-User has breached any such provision, Partner will immediately notify Concerto and Partner shall take, at its expenses, all steps that may be available to enforce the Minimum License Terms, including availing itself of actions for seizure or injunctive relief. If Partner fails to take these steps in a timely and adequate manner. Concerto or its Third Party Licensors may take them in its own or Partner's name and at Partner's expense. (vi) In the event Partner obtains or uses any item of Software and/or Ancillary Programs for its own internal use. Partner shall be deemed to be an End-User subject to the Minimum License Terms, in addition to the other applicable terms of this Agreement. In the event Partner obtains or uses any item of Software and/or Ancillary Programs for demonstration purposes such Software and Ancillary Programs shall be provided pursuant to, shall be subject to, and Partner hereby ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Territory. Partner shall provide such special shipping instructions either in the Order or otherwise in writing to Concerto at least 30 days prior to the scheduled shipment date. In the absence of such special shipping instructions, Concerto shall select a common carrier on behalf of Partner, in no event shall Concerto be liable for shipment by common carrier nor shall such common carrier be construed to be an agent of Concerto. 36. From the above clauses, it is evident that what is sold to the end customer is a product comprising of both hardware and software. The software is not separately licensed. Further, Aspect US retains all the intellectual property rights in the software and the end user is merely provided with limited right to use the licensed product solely for internal use. 37. Further, the learned Counsel for the assessee has filed before us 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 Ericsson A.B and Infrasoft Ltd. (Supra). 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 Ericsson A.B. and Infrasoft Ltd th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia and therefore the question of the Nonresident having a permanent establishment in India did not arise for consideration at all. On the issue whether the payment to the non resident was of the nature of royalty which could be brought to tax in India, the Hon'ble Delhi High Court held as follows: "WHETHER THE INCOME FROM THE SUPPLY CONTRACT CAN BE TREATED AS 'ROYALTY' UNDER SECTION 9(1)(vi) OF THE ACT: 50. Section 9 (1) (i) of the Act which deals with the taxability of "royalty income" reads as under:- "Section 9 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) The following incomes shall be deemed to accrue or arise in India :- (i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India" 51. The submission of Mr. Prasaran, learned ASG was that software part of the equipment supply would attract royalty as copy right of the said software programme still vests with the assessee. Therefore, payments made for the licence to use the software programme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place, since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifically Article 13, para 3 of the DTAA (Article 12, para 3 of the Model Convention) which defines royalties to mean "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work". The ITAT, it was submitted, has not appreciated that the royalty is for the use or right to use any copyright. According to him, since title of the software continued to vest with the assessee as provided in clause 20.2 of the Supply Agreement and the assessee was free to grant non exclusive licenses to other parties, it follow that there was no full time transfer of copyright but it was only a case of right to use the software, and thus payment for use of software is to be treated as royalty. He further argued that reference to OECD Commentary was not apposite as it could not be used to interpret the scope of the relevant pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical services rendered by a nonresident company, it must be deemed that there was a "business connection", and it attracts the provisions of Section 9(1)(vii) of the Income Tax Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfillment of the main contract entered into principal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment therefore can be classified as payment towards royalty." 39. Similar view is expressed by the Hon'ble Jurisdictional High Court in the case of Nokia Networks OY (supra). 40. As far as the cases where only the software is separately licensed (i.e. with respect to 8 out of 63 customers to whom the assessee has licensed only the software), the issue is squarely covered by the decision of the Hon'ble Jurisdictional High Court in the case of Infrasoft Ltd. (supra), wherein their Lordships held as under:- "86. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the program 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 business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inheren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment for the same is not in the nature of royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/ PE in India as per adjudication on Ground No 5. Ground No 3 and 4 43. The above grounds deal with revenue earned from rendering of implementation services and maintenance services to customers in India as "Royalty/ FTS/ FIS" under the Act and the Tax Treaty 44. Aspect US provides the following services which enable the call center companies to better manage customer interactions via, email, web and fax: (i) Implementation services - These services include providing specifications of the system server and environment conditions for adaption of the system (hardware and software). These services are provided as under: * Where the supply of the product is directly by Aspect US, the services are provided remotely by Aspect US to the end customer * Where the supply of the product is made by Aspect US through Channel Partners, the services are provided by Channel Partners * Where the end customer or Channel Partner insist on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lify as FIS under Article 12(4)(a) of the Tax Treaty since the supply of software itself does not qualify as royalty. Further, the implementation services would also not fall within the ambit of Article 12(4)(b) of the Tax Treaty as these services do not make available technology, skill or experience, etc to the end users i.e. such service are not geared towards enabling the end user's personnel to undertake similar activities independently in future. 47. On maintenance services, it was argued that these services are provided remotely to the end users and only in rare cases, where end users/ channel partners insist on onsite support, the Indian AEs of the assessee provides the same. The services are not rendered in India and hence not taxable u/s 9(1)(vii) of the Act. 48. Without prejudice to the above argument, it was submitted that the revenues earned from maintenance services are not taxable as FIS as these services do not make available technology, skill or experience to the end user as per Article 12(4)(b) of the Tax Treaty. Maintenance services provided under an annual maintenance contract basically include resolving day to day problems and such service do not enable the cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services are provided by Channel Sales Partner. Implementation and maintenance services are technical services and these services can only be provided by employees of channel sales partners which in fact are provided by employees of Aspect India. The description of maintenance services indicate that such services can only be provided through trained personnel of customers. While providing the services through the involvement of customers, Aspect India in fact makes available the services to Channel sales partner and customers. 51. He submitted that, in the present case, available facts explicitly indicate that maintenance services encompasses providing new release of software, provide tracking tool that enable the customer to track the performance of equipments and software, provide self help environment, support to named and trained personnel. The Ld.D.R. contended that these services make available technical knowledge, experience and skill and Know how. He further submitted that the implementation and maintenance services are not independent of licensing of software. Hence, the payments are in the nature of fee for included services under the provisions of paragraph 4(a) of Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice, within the meaning of paragraph 4(b). Similarly the use of a product which embodies technology shall not per se be considered to make the technology available". 56. In the present case, the undisputed fact is that the implementation service is inextricably and essentially linked to the supply of software. In view of our decision in Ground No 2 that the supply of software is not taxable as "royalty" under the Tax Treaty, the provision contained in clause (a) to Article 12 (4) would not apply to both Implementation and maintenance services. Further there is nothing to show that these services provided by the assessee actually made available to the End User/ Channel Partners any technical knowledge, experience, skill, know-how or processes so as to enable them to apply the said technology. Under these circumstances, we uphold the arguments of the learned Counsel of the assessee and allow the ground. 57. Coming to the submission of the Revenue that if the payments are not in the nature of FIS, then provisions of service PE applies and the entire transaction has to be considered as business income, we would deal the same in the ground relating to determination of PE. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aspect US as per its convenience. (b) The employees of Aspect US have visited India only for short trips for a total duration of 109 days. The purpose of the visits was to conduct business overview to understand the requirement of the existing customers, analysis of Indian markets etc. The travel log of the employee visits on sample basis and travel days of the employees to India was filed before us. (c) The assessee has not carried on any business operations in India. All the contracts for supply of soft ware, hard ware and services are concluded outside India. The terms of contract are negotiated and concluded by Aspect US through an i- approach system loaded on the server located outside India. Further, the property in the products supplied by the assessee to the Indian customers is passed/ transferred outside India. (d) In terms of service agreement entered into between Aspect US and ACC, ACC has a very limited market role which includes the following activities: * To provide information on a continuous basis regarding the products and services to the potential customer. * To define adequate promotion and marketing strategies * To provide support services to customers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' is used for projects which requires substantial effort in terms of time, money, technical enterprise planning subsidiary and hence the nature of services of the assessee cannot be called installation services as contemplated in the Treaties. The implementation services rendered by the assessee do not involve time/effort/physical activity. 69. On the finding that the assessee has a dependent agent PE, it was argued that: (a) ACC, the Subsidiary company of the assessee is not categorically dependent on the assessee. This contention is borne out from the record where the facts are as follows: (i) In the agreements there is "a limitation of authority" clause which specifically restricts ACC to have an authority to conclude sales contracts in the name and on behalf of the assessee. The Subsidiary can not bind the assessee to the customers in India. (ii) The relationship between the assessee and its subsidiary ACC is that of an independent contractor, which is specifically provided in the service agreement between them. 70. The assessee and its subsidiary shall not control the day-to-day activities of the other party and allow either of the parties to create any obligation on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of licensing of software. 74. He referred to the assessment order in installation/implementation services as well as maintenance services and pointed out that the maintenance services are provided for a period of one year as a part of the licensing of software and sale of hardware and this can be renewed each year thereafter. The services listed out by the Ld.DR are: a) Resolving bugs b) New release of software c) On line Pass Word protection, reporting, tracking tools and self help environment. d) On site support as per applicable policies and procedures. e) Telephone support to trained personnel. 75. The Ld.D.R. also pointed out that, for availing services it is necessary that the customers maintain current back up copies of all software, ancillary programmes and customary data and not to relocate any covered product from its original or subsequent location site. 76. The Ld.D.R. alleged that hardware sale and licensing of software is made through Indian subsidiaries and that all the services including maintenance, professional, warranty etc. are also performed by Aspect India which is remunerated on a cost Plus market basis. 77. He submitted that in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Aspect India prepares a comprehensive proposal including prices and sends to customer, channel partner who in turn submits its quote and a purchase order from the customer to the sale team of Aspect India. 83. The Ld.DR submits that based on these proposals by the subsidiary, the channel partner submits its report and purchase order from its customer to the sales team of Aspect India. Aspect India enters the requisite specification on the "I Approve" system, which is a platform where in all the information about the sale is entered into by the subsidiary, including customer I.D., price, discounts, requesting persons etc. reasons justifying the price, request price, discount etc. He contended that the information is completed by the sales team of Aspect India and it was subsequently assigned to various persons for approval including country Manager of Aspect India. Justification for the price/discount offered by Aspect India while negotiating terms and conditions are mentioned in the "I approve". The activities undertaken and decision taken by Aspect India in making sales gets fully documented in "I Approve". 84. In view of the above, the Ld.D.R contends that the documentation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs make purchases for the customers and the prices are negotiated by Aspect India. Purchase orders are placed by the customers that are secured by Aspect India. Assessee has not submitted information on sale of equipments and licensing of software that are done directly by Aspect India to customers and those done through channel partners. * Claim that Aspect India acts as a communication channel between the assessee and the customers is factually incorrect, as to act as a communication channel, Aspect India should have acted as a post office only without adding any value to the communication. As discussed above, Aspect India is performing all activities relating to sale/licensing of products in India including negotiating and approving the prices. There are no direct role/efforts made by Aspect Inc in India except the presence of its employees during the year for overseeing its business in India. Aspect India is the projection of Aspect Inc in India and Aspect India is authorised to act as such before Indian customers. Designations of employees are evidence of this position. * Assessee claim that it identifies customers in India and maintains the relationship is false and baseles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this claim is in vacuum. * The claim that Aspect India provides support to the assessee in rendering services is also contrary to facts as all services are provided by Aspect India. Assessee may have rendered services directly to Indian customers while employees of assessee were present in India. Aspect India provides support to the assessee but majority of these services are provided by Aspect India to customers. * Claim that assessee does not play any role in performance evaluation of employees of Aspect India could have been substantiated by submission of performance evaluation report of employees, say Shri Shankar Balu to indicate that his incentives/ promotions/salary is not dependent on sales targets achieved by him. * Assessee has claimed (page 191 of PB-2) that it had submitted copy of "IApprove" where the proposals of discounts made by Aspect India have been rejected. The Revenue could not find any such document in the Paper Books filed by the assessee. AO has adversely commented on this issue therefore such documents were also not filed before the AO. 89. Based on the above understanding of the facts the Ld.D.R. contended that the following claims of the assessee ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as used an ITC system of the assessee for the business in India and this international transaction is not recognized in the report that the assessee's assets are used by the Subsidiary in India free of cost; * In TPO's order the fact of earning commission of hardware sale is not identified as international transaction; * Thus as the Ld.DR contends that as the business of the assessee is carried out through the premises of Aspect India and through employees of Aspect India it is established that the assessee has a fixed place P.E. in India. 91. We have considered the rival contentions and the material on record. The existence of PE in India is the matter of dispute in this ground. Revenue has contended that the assessee has fixed PE, installation PE and Dependent Agent PE in India. Our finding in respect of each of the forms of PE is as under: Fixed PE: As per Article 5(1) of the India -USA DTAA, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5(2) deals with various instances resulting in PE. Article 5(3) deals with cases or facts which do not result in PE. One of the excepti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continue for a period of more than 120 days in any twelve-month period. There is no dispute that clause (j) above is not applicable. The dispute is with regard to existence of PE under clause (k) above. As per Article 5(2)(k), a building site or construction, installation or assembly project or supervisory activities in connection therewith is regarded as PE is such project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period. Article 5(2)(k) should be read as a whole. The term 'in connection therewith' would apply for the entire preceding words viz., a 'building site or construction, installation or assembly project or supervisory activities'. The term installation project cannot be read de-hors the words accompanying it. Thus, when the entire clause is red as a whole, it would be evident that the installation or assembly project or supervisory activities should be in connection with the building site or construction. In the present case, there is no dispute that the assessee does not carry on business in India through a building site or construction. Consequently, we are of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions between the agent and the enterprise are not made under arm's length conditions, the agent is not considered as agent of 'independent status'. In such circumstances, the agent would be regarded as 'dependent agent'. Further, the dependent agent has to satisfy any of the tests laid down in (a), (b) or (c) above in order to constitute a dependent agent PE of the non-resident. Coming to the facts of the present case, the assessee has argued that Aspect India neither secures orders nor habitually exercises an authority to conclude on behalf of the assessee. It is, therefore, contended that there is no dependent agent PE in India. The revenue, on the other hand, has argued that the assessee has not submitted proper facts to substantiate its contention. It is submitted that the assessee has not submitted information on sale of equipment and licensing of software that are done directly by Aspect India to customers and those done through channel partners. It is contended that the assessee has not demonstrated that it identifies customers and make sales. The statement recorded from the Director, sales of Aspect India is stated to be contrary to the claim of the assessee that Aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, the same is not taxable in India. She drew our attention to the provisions of Sec.5 of the Act and Article 12 of the Tax Treaty and submitted that as per Sec.5 of the Act, the 'total income' of a non-resident tax payer would be the income which has been received in India or has accrued or arisen or deemed to accrue or arise in India. Sec.9 of the Act which deals with Income deemed to be accrued or arise in India provides that any income by way of royalty or FTS shall be deemed to accrue or arise in the hands of a non-resident only if: * The royalty and/ or FTS is payable by a resident, except where royalty is payable in respect of right, property or information used or services utilized for the proposes of a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India or for the purpose of making or earning any income from any source outside India. * The royalty and/ or FTS is payable by a non-resident only if royalty is payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person in India or for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alties and FIS ", the consideration received for the sale of software and services from the payer based in Middle East and Sri Lanka cannot be taxed in India as the same has not arisen/ deemed to arise in India. The provisions of the India-USA tax treaty clarifies that once it is construed that the US enterprise has a PE in India, royalty and fees for included services shall be taxable as per the provisions of Article 7 of the India-USA tax treaty. Thus, the income from sale of software and services from Middle East and Sri Lanka has incorrectly been taxed in India. 101. The learned CIT-DR submitted that the assessee had always hidden the transaction from the tax authorities and these transactions were discovered from the employees of Aspect India during the statement recorded under Sec131 of the Act. It is unfortunate that the assessee is blaming the revenue that there is no material on prove that the services are rendered in India. Be that as it may, there is no dispute about provision of services by Aspect India, The services are provided are very high end and due to such services Aspect US is earning revenue from these countries without being physically present there. The inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-resident (i.e. customers located in Sri Lanka/ Middle East) in respect of any right, property or information used or services utilized: (a) for the purposes of business, or profession carried on by such person (i.e. customers located in Sri Lanka/ Middle East) in India; or (b) for the purpose of making or earning any income from any source in India. Thus to tax the income earned by Aspect US from customers located outside India under Sec. 9(l)(vi)(c)/ 9(1)(vii)(c ) of the Act, the Revenue must prove that the customers located in Sri Lanka / Middle East carry on business in India and that they have used Aspects US rights in the IPs/ services for the purposes of such business in India; or that they have used rights in the IPs/ Services for the purpose of making or earning income from a source in India. In the present case, the Revenue taxed the said income on the sole reason that these services are provided by Indian subsidiary of the asseseee and the asssessee is earning huge income from these customers. The AO has not brought anything on record to show that the customers located in Sri Lanka/ Middle East have used the rights in the IPs/ services for carrying on business in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of this tribunal has held that the assessee is not eligible to choose the tax rate under the Tax Treaty and then claim the exemption from gross up of tax under the Act, in that case tax rate under the Act would apply. 110. We have heard both the parties. In view of the decision given in ground No.2, 3, 4 and 6 on taxability of revenue earned from supply of software and support services from customers located in India, Sri Lanka and Middle East, ground No.7 and 8 has become purely academic. Therefore no adjudication is required. Ground No 9 111. By way of this ground, the assessee, without prejudice to its arguments that it does not have a P.E. in India, contends the method of attribution of profits is not in accordance with the law. 112. The AO having held that the assessee has a fixed place, installation and Dependent Agent PE in India in the form of ACT attributed the following sums to the PE : * 15% of the revenue earned from software licensing and hardware sales from customers in India and outside India (i.e. Sri Lanka and Middle East). * 57.5 % of the revenues earned from rendering of services to the customers in India and outside India (i.e. Sri Lanka and Middle East ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out in India. (d) The Act does not prescribe any specific methodology for attribution of income. Rule 10 of the Income-tax rules, 1962 ('the Rules') relevant to Section 9(1 )(i) of the act inter alia specifies that where the actual amount of income accruing or arising to any nonresident, whether directly or indirectly, through or from any business connection in India; or through or from any asset/source of income in India, is according to the tax officer not definitely ascertainable, then the tax officer may calculate the amount of income, accruing or arising in India, in any of the following manner: * A percentage of turnover so accruing or arising as the tax officer may consider as reasonable. * An amount which bears the same proportion to the total profits and gains of the business, as the receipts so accruing or arising bear to the total receipt of the business. * An amount calculated in the manner in which the tax officer may deem suitable. However, where the amount attributable to the Indian operations is not definitely ascertainable, the apportionment of profits under the prescribed Rule 10 has to be on a rational basis. It has been judicially held that in adopting on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are negotiated and concluded by Aspect US through 'i-approve' system, loaded on the server that is located outside India; * The onsite implementation services provided by the Aspect US through Aspect India are incidental to the contract for supply of hardware and software and thus, would partake the character of sale of hardware and software itself. * No further business profits can be attributed to the alleged PE as Aspect India has been remunerated at arm's length price by Aspect US for the services provided. (h) It was further submitted that the AO without giving any reason, rejected the cost plus mechanism to compute the remuneration payable to Aspect India for the services rendered by it to the assessee. The AO held that computation of remuneration based on actual fees charged by the assessee from the customers, is a better method and adopted the same mechanism for attributing profits to the alleged PE. As long as remunerated paid to Aspect India is at arms' length price and in consonance with provisions of the Act, the AO has no jurisdiction to question the method of computation of remuneration. (i) Aspect India is a private company registered under Companies Act, 1956 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cillary services in the context of installation of software supplied. All the other functions/risks were exclusively carried out/undertaken in USA. In fact, the sales function involving conclusion of contracts and all decision making regarding pricing and terms were also undertaken in USA. The necessary support in form of directions and instructions in respect of installation and commissioning also happens in USA. The assessee neither assumes any risk of customers not does it holds any assets in India. 115. Alternatively and without prejudice to the above contention that no further income can be attributed to the alleged P.E., if any, of the assessee in India, it was argued that the attribution should be done having regard to the net income derived by the assessee from global operations and further restricted to the amount which can be attributed to the functions carried out in India. Listing out the various functions, she submitted that the functions performed in India are restricted to undertake the limited marketing function and provision of ancillary services (i.e. implementation services). She contended that the assessee neither resumed any risk of customers nor does it hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The income from licensing of software and support services is taxable as royalty/ FTS. Up to FY 2003-04, Aspect India was rendering distribution, maintenance and support services to assist implementation of global contracts. Aspect India was receiving commission at 11% on the sales value of software and hardware distributed and was getting actual fee charged by Aspect US in respect of consultancy and support services provided by Aspect India to the customers. During the FY 2004-05, the method of compensation of the Indian company was changed and now the assessee claims to have performed limited marketing activity in India. 118. He argued that while the business arrangement has changed in form, in substance nothing has changed. If the assessee's argument that the role of Aspect India became limited is to be accepted then the assessee has to explain who else is performing the remaining activities for the assessee in India. In the assessment proceedings of the Indian subsidiary, the assessee was totally non -cooperative and had not submitted the required information. The assessment order notes the inconsistent position taken by the assessee regarding its role with regard to sales an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. Therefore, the income on account of these operations is taxable in India as per the provisions of section 5(2) of the Act. 121. On the assessee argument that in absence of a PE no profits on account of sale of hardware can be attributed to the alleged PE, it was submitted that the assessee has PE in India and the PE was involved in all the pre-sales activities including price negotiation of equipments. Therefore, the AO has rightly attributed profits as per provisions of Article 7 of the Tax Treaty. Prior to the new arrangement of cost plus, a commission of 11% of the sale price was being paid to Aspect India for the services provided by them in connection with such sales. Thus, considering this measure the AO has rightly attributed the profits to the PE. 122. In her rejoinder, the learned Counsel for the assessee submitted that the statement made by the Learned CIT-DR that the assessee has no objection with regard to the taxability of revenue earned from hardware sales is invalid. She submitted that assessee's primary argument is that the Appellant does not have a PE in India and in the absence thereof, no profit on account of sale of hardware can be attributed as taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05-06, the transfer pricing analysis of Aspect India was referred to the Transfer Pricing Officer, TPO - 1(4), New Delhi u/s 92CA(3) of the Act. The TPO after due consideration of the services rpvided by Aspect India to Aspect US has held that the services were provided at Arm's Length Price. In respect of these A.Ys, as the TOP has held that the services are transacted at ALP, we fail to understand how a different view can be taken in the case of Aspect US who is a counterparty to the transactions. Further, S.92CA(4) requires the AO to consider the ALP determined by the TPO for computing the total income of the assessee. Thus, the order of the TPO is binding on the AO to the extent it is not prejudicial to the assessee. Accordingly, for AYs 2003-04 and 2004-05, we hold that no further income can be attributed to the PE in India. 128. For the other A.Ys under appeal, we direct the AO to refer the matter to the TPO wherever there is no existing reference either in the case of Aspect US or Aspect India. The TPO shall determine ALP and attribute the profits accordingly. In this regard, we place reliance in the case of Ranbaxy Laboratories Ltd. Vs. CIT (345 ITR 193, Del HC) wherein th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch deduction may be in line with the income that is attributed to the PE. 132. He further submitted in case of services the provisions of Article 12(6) will trigger and the provisions of Article 7 would apply since the support services are rendered through its PE. In that case, the revenue from services is attributable to the PE and expenses incurred by Aspect India in providing such services will qualify for deduction. However, the same would not apply to licensing of software unless the assessee demonstrates that such royalty income is attributable to the PE. In summary, the CIT-DR submitted that allowability of deduction of expenses incurred by Aspect India depends on the revenues that are taxable as business income. The expense incurred to earn such business receipts only are allowable as deduction and not full expenses as claimed by the assessee. 133. As we have directed the AO to refer the matter to the TPO for determining the ALP and thus decide on attribution of profits, we are of the view that this issue should also go back to the AO for fresh adjudication in accordance with law. Ground 11, 11.1 134. The ground is on applicability of transfer pricing provisions and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO. Therefore, the AO has rightly rejected the TP analysis in case of Aspect India so far as it concerns Aspect software Inc. He argued that the findings of the AO stands on very sound footing and are based on unassailable reasons. Therefore this ground of the assessee is required to be rejected. 139. In her rejoinder, the Learned Counsel for the assessee submitted that the allegation of the Revenue that the Transfer Pricing analysis of Aspect India is defective since the FAR analysis has not been captured properly is not correct. It was submitted that the while comparing the functions, the AO has listed down certain clauses which are in no manner be held to be functions performed by ACC. The clauses quoted by the AO in the order do not in any way expand the scope of functions performed by ACC. Therefore, the functions identified in transfer pricing study are complete and exhaustive. Aspect India has been remunerated at arm's length for functions provided by it. Accordingly, no further attribution is required to be made for Aspect US. She submitted that this is supported by the fact that tax return of Aspect India was picked up for scrutiny by the Transfer Pricing Officer ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensing, sale of equipments and service fee to tax. It is disputing the taxability of these sources of income and continues to dispute even before the Hon'ble Tribunal. The facts of the present case are covered by the decision of the Hon'ble Delhi High Court in the case of Alcatel Lucent (Supra) and the decision of the Delhi ITAT in the case of Nortel India International Inc and Baker Hughes. 145. We heard the rival contentions. The issue stands covered by the decision of the High Court of Delhi in the case of Jacabs Civil Incorporated/Mitsubishi Corpn. (supra) where in the Hon'ble High Court held that section 195 puts an obligation on the payer i.e. any person responsible for paying any tax at source at the rates in force from such payments and if payer has defaulted in deducting tax at source, the department can take action against the payer under the provisions of section 201. In such a case, the non- resident cannot be held liable to pay interest under section 234B on account of default of the payer in deducting tax at source from the payments made to the non-resident. 146. However in a subsequent decision in the Alactel Lucent, the Hon'ble Delhi High Court on a specific f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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