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TMI Blog2018 (8) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... . 678/Mum/2016): 1. Whether on the facts and in the circumstances of the cases and in law the Ld. DRP is justified in holding that assessee does not have a permanent establishment in India. 2. Whether on the facts and in the circumstances of the cases and in law the Ld. DRP is justified in holding that in the absence of a permanent establishment the action of the AO proposing to attribute 32% of total receipts from supply of software as taxable business profits is not correct. 3. The appellant prays that the order of the Ld.DRP on the above ground(s) be set aside and that of the Assessing Officer be restored. Assessee s appeal (in ITA No. 1239/Mum/2011): 1. On the facts and in the circumstances of the case and in law, the Assessing Officer ( AO ) / Dispute Resolution Panel ( DRP ) erred in holding that the income of the Appellant of ₹ 87, 44, 067/- is chargeable to tax in India. 2. On the facts and in the circumstances of the case and in law, the AO / DRP have passed the assessment order in an arbitrary manner and without application of mind and, hence, the order is bad in law. Taxability of Income 3. On the facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Communications Ltd., from whom payment has been received by the assessee company, ITAT has passed an order wherein it has been held that the impugned payment would not qualify as royalty. In the said order dated 02.02.2018 in the case of DDIT vs. Reliance Communications Ltd. in ITA No. 837 Others the Tribunal had adjudicated the issue as under: - 7. After considering the various clauses of the above mentioned agreements, we are of the opinion that below mentioned factors can be very helpful to solve the knotty problem of taxation of royalty payments to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 vendors upon termination or cancellation of the agreements. So, we hold that the consideration paid by the assessee to the suppliers for acquiring copy of software was not for the use of copyright or transfer of right to use of copyright the payment was made for the copyrighted article and that the payments made by the assessee to the vendors of software cannot be taxed as royalty. 8. While deciding the appeals, filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 royalty. We also find that in the case of AVEVA Information Technology India (P.) Ltd. (85taxmann.com 14), the Tribunal had considered the argument that software was Invention/Patent, etc. and had held that payment made for procuring and distributing copy - righted software was not royalty. Judgment of Samsung was considered in the cases of Solid Works Corpn. (supra); Shell Information Technology International BV (80taxmann.com 64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra), 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. 5. Following the above, the tribunal concluded as under: Accordingly as discussed above, since it has already been held in the hands of Reliance Communications supra by the elaborate order referred above that the payment made by it was not royalty in the hands of the assessee, these amounts are not taxable as income in the hands of the assessee. 6. Accordingly, respectfully following the pleadings, we decide the above issue in favour of the assessee. 7. As regards the issue that there is no PE in India and hence no income can be attributed, the issue is covered in favour of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and Assumption Agreement, including the scope of services for maintenance of software entered by LTHPL. The AO was of the opinion that in this case, not only original agreement has been entered into by the Indian Company but services relating to making software operation or warranties or maintenance were also being done by LTHPL only. In addition to that terms of the agreements, the AO also relied on documents found in the course of survey in the premises of Alcatel Lucent International Ltd. (got merged entity of LTHPL) more particularly with respect to letter of agreement dated 06.09.2008 between group concerns with Reliance Communications regarding restructure of payment mile stone. The AO ultimately concluded that there existed an agency PE and accordingly, since assessee has a PE in India, the business profits are taxable and worked out profits at 32% of the total receipts. 55. It was the submission of the assessee that LTHPL was acting independently and assessee has no agency agreement or no business. connection in India except supply of software. It was also further submitted that no service personnel came to India so as to come under Service PE. The ld. Counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments provided for the turnkey functioning of the project of the GSM network. Therefore, by entering into the contract with both, the assessee and LTIL, Escotel had made both the assessee and LTIL responsible for the turnkey completion of the GSM project, individually and severely. Thus, if either one would break its terms and conditions of the agreement with Escotes, the other would be responsible for its completion. Thus, consortium or partnership had been created between the assessee and its Indian subsidiary, LTIL. With that situation, the next question for consideration arose as to whether either the assessee or its subsidiary, LTIL could complete the contract with Escotel on a turnkey basis without the assistance of the other. Obviously, the assessee was to supply the hardware and the software and LTIL was to do the installation, testing, commissioning and bringing up to operational stage the turnkey project. If the assessee did not provide the hardware and the software, it would be the duty of LTIL to provide the requisite hardware and the software for the completion of the turnkey project. Similarly, if LTIL did not comply with its duties of commissioning, installation, tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage of the hardware and the software sold by the assessee to Escotel through its contract in regard to GSM project which was to be completed on a turnkey basis. Those employees of the affiliates over whom the assessee had a control would fall within the term other personnel and, consequently, it would have to be held that a PE did exist as per the inclusive term as provided in article 5(2)(1) of the DTAA. A copy of the returns of the aforesaid employees also clearly showed that they had been staying in India for more than 90 days within the 12 month period from April, 1996 to March, 1997. Consequently, the requirements of article 5(2)(1) of the DTAA were fulfilled. In such circumstances, it was to be held that LTIL, in fact, was a service PE of the assessee-company. As a result, the findings of the Commissioner (Appeals) on the aforesaid issues were to be set aside. 58. However, the facts in the present case are different for the above case. Here LTHPL entered into an agreement for supply of hardware, software and also installation and that company is an Indian company. After entering into an agreement supply of software was assigned to the assessee Lucent by way of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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