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TMI Blog2018 (5) TMI 1758X X X X Extracts X X X X X X X X Extracts X X X X ..... 05-06 and AY 2007-08 dated 19 August 2010 and thereby not accepting the Appellant's claim for refund of Rs. 4,60,83,230/- alongwith interest. Taxability of Income 2. On the facts and in the circumstances of the case and in law the Learned AO and the Dispute Resolution Panel (hereinafter referred to as "the DRP") have erred in holding that the amounts received by the Appellant from supply of software to Reliance Communications Limited (previously known as Reliance Infocomm Limited) (hereinafter referred to as "Reliance") are "Royalty" in nature under the provisions of the Act and under Article 12 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as "DTAA") and thus liable to tax in India. 3. On the facts and in the circumstances of the case and in law the Learned AO and the DRP authorities have erred in holding that Lucent Technologies Hindustan Private Limited becomes a permanent establishment (hereinafter referred to as "PE") for the Appellant in India. 4. On the facts and in the circumstances of the case and in law, the Learned AO and the DRP authorities have erred in holding that the sale of software is effectively connecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit rate of 40% on their own surmises and conjectures and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in computing the profits attributable to the PE @ 32%, which is very high as compared to the actual activities carried out in India in relation to the supply of software. 11. Without prejudice to the above, the DRP authorities have erred in not appreciating that all the critical activities in relation to the sale of software were carried on by the Appellant outside of India and all risks resided outside of India and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in higher amount of profits being attributed to the PE in India. 12. On the fact and in the circumstances of the case in law, the DRP authorities and consequentially, the Learned AO have erred in not considering and not taking cognizance of the profit attribution study filed before the DRP to substantiate the profit attribution ratio. 13. Non-granting of TDS Credit - i. On the facts and in the circumstances of the case and in law, the DRP has erred in not directing and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax in India. Accordingly, the grounds raised by Lucent from Ground No.2 to 5 are rejected. 53. The next issue to be considered is attribution of business profit to the PE. Vide para 4.18 of the order of the AO for the impugned year, the AO gave a finding that payment made for software would be treated as royalty payments and necessary tax rates have been mentioned in the table. Further, considering the agreements entered by Reliance with Lucent Group the AO was of the opinion that there existed an Agency PE. Vide para 5.8 of the order the AO also considered that in case it is held that assessee's income is not taxable as royalty, the assessee's business profits have to be worked out in view of it having a PE in India. We have already held that payments made by Reliance have to be considered as royalty and accordingly the same are to be taxable as royalty only. Therefore, there is no need to consider the same as business profits. However, the issue of PE has to be decided, as existence of PE makes business profit taxable in India. Therefore, it is necessary to give a finding on the existence of PE to the assessee Lucent. 54. The AO invoking provisions of Article-5 of DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate that any one of them is authorized to enter into contract on behalf of the assessee Lucent and further, agreement was dated 06.09.2008 does not pertain to any of the impugned assessment years. Nothing was brought on record by the Revenue that there is a PE except relying on the so called agreement which was entered on a principle to principle basis. 56. The ld. Counsel however relied on the orders that the AO as supported by DRP. It was further submitted that assessee chose not to file return after TDS was made and therefore, since proceedings are initiated under section 148 assessee can not seek any benefit in the proceedings initiated for the benefit of the revenue . He relied on the judgment of Hon'ble Bombay High Court in the case of K. Sudhakar S. Shanbhag Vs ITO (241 ITR 865) for the proposition of "doctrine of election". 57. We have considered the rival submissions. In the case of Lucent Technologies International Inc. (28 SOT 98) the co-ordinate Bench at Delhi considered the facts and held as under :- "The agreement entered into between the assessee-company and the Indian Company, Escotel, as also the agreement entered into between Escotel and the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdware. That warranty clause in identical form was also found in the agreement entered into between Escotel and LTIL. Normally, the warranty for a particular product to be supplied by one person is the responsibility of that person alone, but in the instant case, that burden was also shifted to the subsidiary, being LTIL. Though LTIL had certified that it did not keep any spares on behalf of the assessee for the equipments supplied by the assessee under the contract with Escotel, yet the fact that LTIL had also assumed the responsibilities of the warranty in regard to the hardware supplied by the assess, as also the responsibility to replace the same within the period specified in the support contract between Escotel and LTIL clearly showed that the subsidiary, LTIL was also acting on behalf of the assessee. A perusal of article 5(2)(1) of the DTAA between India and the USA clearly shows that it is not only the employees through whom if services are provided, the PE is to said to come into existence, it also includes other personnel. Obviously, the term 'other personnel' has to be read with reference to the earlier words, as provided in the said article 5(2)(1). The other personnel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or it has any business connection in India nor carried out any business activities in India. Assessee's company is a standalone legal independent entity. Therefore, 109 Reliance and Lucent Group assessee's ground nos. 6 to 12 are upheld, as there is no PE in India, so attribution of profits does not arise. 59. Non granting of TDS credit:- AO did not give credit to the TDS claimed by assessee. At the outset it was submitted that this issue is covered by the decision of co-ordinate Bench of the Tribunal in assessee's own case in 45 SOT 311 Lucent technologies GRL LLC vs. DR. director IT (Intl. taxation) Circle-4(1(, Mumbai wherein it was held:- "The assessee-company with fiscal domicile in U.S.A. was engaged in business of supply of copyrighted software in connection with telecommunication project. The assessee received certain amount From 'R' Ltd., towards supply of software out of which tax was deducted at source by 'R' Ltd. It also issued TDS certificates to the assessee. On the basis of said TDS certificates the assessee claimed, credit for tax deducted at source. In the meantime, 'R' Ltd. claimed that no taxes were deductible from payment made for supply of copyrighted sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose rights were being sought to be abridged, was not even a party to the administrative exercise or was known of refund being granted to 'R' 'Ltd. Refund granted to 'R' Ltd. By revenue authorities could not have adverse impact on the rights of the assessee. That was a matter between the tax authorities and 'R' Ltd., one was sure that the revenue authorities, while granting the refund, must have safeguarded their interests effectively, and perhaps by now 'R' Ltd. might have even returned the monies, but assessee could not be expected to get into these aspects of the matter. in the instant appeal, one was confined to the issue that the assessee, from whose payments taxes had been deducted at source and who was also in receipt of the appropriate certificates in accordance with the scheme of the Act, must get credit admissible under section 199 and that such a credit was not declined on the basis of an action which was neither contemplated by the provisions of the Act, nor even in the control of the assessee. [Para 9] In view of the above discussions, the Assessing Officer was directed to grant due credit to the assessee, on the basis of original tax deduction at source certific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled the order. Subsequently a corrigendum was passed and in the corrigendum dated 07.02.2018 the Tribunal had directed as under: - "3. Only request was to consider Ground No. 2 whereas due to typographical error, the entire order has been recalled. Now Para 12 may read as under: - 12. In view of the above discussion, we recall the ground No. 2 passed by the Tribunal and Registry is directed to fix the appeals for hearing afresh by regular bench." 5. Pursuant to the above recall we have heard ground No. 2 raised in this appeals. Ground No. 2 reads as under: - "2. On the facts and in the circumstances of the case and in law the Learned AO and the Dispute Resolution Panel (hereinafter referred to as "the DRP") have erred in holding that the amounts received by the Appellant from supply of software to Reliance Communications Limited (previously known as Reliance Infocomm Limited) (hereinafter referred to as "Reliance") are "Royalty" in nature under the provisions of the Act and under Article 12 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as "DTAA") and thus liable to tax in India." 6. We find that in the case or Reliance Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re analysed. Similarly, remaining question will have positive answers. In the earlier paragraphs, we have summarised the main characteristics of the agreements. All the agreements stipulate that the assessee would be using the software for 'operation of its wireless network only'. Thus, it is clear that it was prevented from utilising the software for commercial uses. Had the ultimate authority been with the assessee, it could have used the software in the manner it wanted. It could make copies of Software or the documentation or parts thereof for archival purposes only. Restriction on copying the software clearly establishes that the suppliers of the softwares were the sole and exclusive owner of the rights, title and property in Software and the Source Codes. Software Agreements forbid the assessee from transferring, assigning, sub-licensing, using by outsourcing, decompiling, reverse-engineering, disassembling/decoding the software. None of the agreement talks of transferring of copyright to the assessee by the suppliers - rather it is clearly mentioned in the agreements that copyright would remain with them. Agreements provide returning of the copies of the software to the vend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of Article 12/13(3) of the DTAA.s and it was not obliged to deduct tax at source. 8.1. Submissions of the DR in respect of software being Process Invention/ Equipment were considered in the matter of ZTE Corporation(supra).The Tribunal, in the case of Baan Global BY(71 taxmann.com 213), held that receipts from sale of shrink-wrapped software cannot be considered as royalty within the meaning of DTAA as the same is consideration for the copyrighted product and not for the use of copyright. In the said case, the assessee was engaged in the business of development and sale of software and other services related to software products. While deciding the issue, the Tribunal observed that the sale of software cannot be held to be covered within the expression 'use or process'. Further, in the cases of Shell Information Technology International BV (80 taxmann.com 64), National Stock Exchange of India Ltd (supra), First Advantage (P.) Ltd. (163 ITD 165) Datamine International Ltd. (68 taxmann.com97); Black Duck Software Inc. (86 taxmann.com 62); I.T.C. Ltd. (79 taxmann. com 206), the Tribunal has considered the term 'process' while deciding the issue of software is not roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme High Court has held as under: "We make it clear at the outset that when we shall speak of software, we shall be referring to the tangible software of the nature of discs, floppies and CD rom and not to the intellectual property, also called software, that is recorded or stored thereon." Therefore, we hold that the aforesaid case is not applicable to the facts of the present case. In Elkem Technology (supra), the question raised before the Hon'ble Andhra Pradesh High Court was dealing with composite contract involving supply of equipment and providing of engineering service. The High Court held that the consideration for engineering service would be independent of consideration for the supply of equipments. We are of the opinion, that the judgment is of no help to decide the issue before us. Considering the above and confirming the orders of the FAA, we decide the effective grounds of appeals against the AO.s, as, in our opinion, same does not suffer from any factual or legal infirmities." 7. Referring to the above order of the ITAT the learned counsel for the that the payment did not amount to royalty and the payer, M/s. Reliance royalty and hence no tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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