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TMI Blog2017 (9) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... not require adjudication by us. ITA/3506/Mum/2014, AY.2007-08: 2. During the course of verification of 15CA certificates, the AO found that the assessee had made various foreign remittances without deduction of tax. Therefore, he issued notice to it on 16/02/2010 and directed it to file details of remittances. After considering the submission of the assessee, the AO observed that the assessee had entered into a distribution agreement with M/s. Aveva Solutions Ltd. of England (ASL) on 01/07/2005, that ASL was the license holder to use various software products, that it owned all Intellectual Property Rights (IPR) related to the software, that as per the agreement the assessee had to distribute and sub-license software products developed by ASL to the customers within Indian territory and to provide training and sales support to the customers, that as per the agreement ASL had appointed assessee to sub-license the software product to end users and to provide marketing services. The AO referred to the salient features of the Agreement dated 01/07/2005 and held that software was an intellectual property of the vendor, that it was developed with the intention to utilize it for perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee preferred an appeal before the First Appellate Authority (FAA), before whom it filed detailed submissions. The assessee also relied upon certain case laws. After considering the submissions and order passed by the AO u/s. 201 of the Act, he held that the distribution agreement specifically mentioned the terms of payment of license fee as royalty in terms of Clause 11.4.1 and 11.4.2, that there was no ambiguity in the agreement, that the assessee was liable to deduction of tax at source for such remittances as per section 195 of the Act, that the assessee had failed to do so, that the AO had rightly held the assessee as an A-I-D for not deducting tax at source, that the AO had rightly held that the assessee had to deduct tax as per Circular No. 621 issued by the CBDT on 19/12/1991, that the assessee was receiving annual fee from the end users and was transferring major portion of the same to ASL as royalty, that by no stretch of imagination the software license of ASL could be sold to the assessee, that it was right to use the product for which ASL was charging royalty from the assessee as per the agreement dated 01/07/2005.Finally, he upheld the order passed by AO u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the assessee and ASL, as same would help us to decide the issue before us. As per the agreement 'Aveva end user' was defined as under :- Aveva End User shall mean a third party within the Territory who is licensed by Aveva or an Aveva License to use one or more of the Products Clause 2 and Cl.3 deals with licence and delivery as follows: 2 Licence 2.1 AVEVA hereby grants to the Company with effect from the Effective Date a non-exclusive, non-transferable licence to do the following only within the Territory and in -accordance with this Agreement: 2.1.1 market, promote and demonstrate the Products; 2.1.2 grant Sub-licences of and distribute the Products; 2.1.3 provide training and First Line Support to End Users and AVEVA End Users; and 2.1.4 copy the Products for the purposes only of fulfilling its obligations under this Agreement. Delivery of Products 3.1 AVEVA shall provide to the Company within 10 business days of the Commencement Date copies (in such number as AVEVA shall determine) of the latest version of each of the Products in object code only. 3.2 Upon receipt of an executed Sub-licence the Company shall deliver a copy of the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idelines 11.2 The Company may amend such Sub-licence Fees from time to time in accordance with the Pricing Guidelines and shall promptly provide written notice of such amendment together with an updated list of Sub-licence Fee to AVEVA. 11.3 AVEVA shall be entitled at its sole option at any time to adjust the Pricing Guidelines. Such adjustments shall take effect immediately. Royalty 11.4 Royalty shall be calculated on the remainder of all Sub-licence Fees less any relevant Third Party Royalties in accordance with the following provisions: 11.4.1 in relation to Initial Fees paid or payable by an End User during each Quarter, the Royalty shall be calculated in accordance with Schedule D on the remainder of such Initial Fees less any relevant Third Party Royalties; 11.4.2 in relation to Annual Fees paid or payable by an End User during each Quarter, the Royalty shall be calculated in accordance with Schedule D on the remainder of such Annual Fees less any relevant Third Party Royalties; and 11.4.3 in relation to any other forms of Sub-licence Fees paid or payable by an End User during each Quarter, such Sub-licence Fees shall be treated as follows for the purposes of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se facts it becomes clear that the assessee was functioning as a distributor of ASL. There is no doubt that ASL is a tax resident of UK and as per the provisions of India-UK DTAA was eligible to be governed by the tax treaty to the extent it was more beneficial vis-a-vis the provisions of the Act. 5.1 The AO and the FAA had held the assessee was in receipt of royalty as the payments made by it to ASL for the distribution of software products would qualify as royalty in the hands of ASL, as per the Expl.2 to section 9(1)(vi) of the Act as well as the provisions of Article-13 of the India UK tax treaty. On the other hand, the assessee claimed that payment made by it could not be treated as royalty. 5.1.1 Before deciding the issue of Roylaty, we want to hold that ASL did not have any PE in India in terms of Article 5 of the treaty.Article-13 of the treaty defines the term royalty as under :- (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the recipient chargeable under the head "Capital gains' for. . . . (v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. The Finance Act 2012 inserted Explanation 4 to the Section 9(1)(vi) of the Act with retrospective effect from 1/06/1976. The same is reproduced below: Explanation 4. - For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred. From the amendment it is clear that it covers the transfer of all or any right for use/right to use of computer software including grant of licence. The amendment has been made to the section i.e., to domestic law. But, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rketed by it were in the nature of shrink-wrap-software-products that are also known as off the shelf software products. The assessee had no role in developing a software, it was just distributing the software to the end users. Therefore, we are of the opinion that payment by the assessee to ASL for procuring and distributing copyrighted software on principal to principal basis could not be treated as payment towards royalty.ASL was not having a PE in India, therefore, the assessee was not liable to deduct tax at source as per the provision of section 195 of the Act, hence, for its failure it cannot be treated as A-I-D u/s. 201.Reversing the order of the FAA we decide effective First effective Ground of appeal (Gs. OA-1 to 3) in favour of the assessee. 6. With regard to grossing up of tax rate (GOA-4), the AR stated that liability to pay tax, as per the agreement, dtd.01.07.2005, was on UK Co. The DR supported the order of the FAA. As far as grossing of tax-rate is concerned, we want to state that we have already held that assessee was not liable to deduct tax at source, therefore, the issue of grossing up would not arise. Secondly, even if the taxes were to be paid same were to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deduct tax and application of section 40a(ia) of the Act, we would like to mention that in the case of Dynamic Vertical Software India (P.) Ltd. (supra) the Hon'ble Delhi High Court had held the identical issue. In that case the Hon'ble Court had observed that the assessee had purchased a software from Microsoft and had sold in the Indian market, that it acted as a dealer, that payment made by it could not be termed as royalty, that section 40(a)(i) of the Act had no application. Respectfully, following the above judgment, we allow ground no. 4. 12. Ground No. 5 deals with MAT Credit. Representatives of both sides agreed that it needs verification on part of the AO. Therefore, we are restoring the issue of MAT credit to the file of the AO. The assessee is directed to furnish necessary details before AO. Ground No. 5 is allowed in favour of the assessee, in part. 13. Grounds no. 6, dealing with levy of interest u/s. 234B, is of consequential nature. ITA/2759/Mum/2016: 14. Following our order for the earlier year, we allow grounds no. 3 and 4.Grounds no. 6 and 7 dealing with interest levied u/s. 234 B and 234C of the Act are of consequential nature. 15. GOA-5 is abou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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