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TMI Blog2018 (10) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... y permanent Establishment of said non-resident in India. In case of software embedded with the hardware of computers, being contract for supply of the goods which is a copyrighted articles and not a copyright itself and therefore not liable for tax in India either as royalty or fee for technical services. When the payment to the non-resident is not subject to tax in India, there was no requirement for the assessee to obtain clearance certificate from the Assessing Officer or to file accountant certificate as held by the apex court in the case of GE India technology Centre [2010 (9) TMI 7 - SUPREME COURT OF INDIA]. Royalty payment - assessee submitted that payments are not in lieu of use or right to use any copyright in the software and the assessee has been given the right to use the software only - Held that:- We note that in Article 12(6) exceptions to the fee for technical services are mentioned. One of the exception mentioned in 12(6)(a) is that the fee for technical services does not include amount paid for services that are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of the property. The contention of the Assessing Officer is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Delhi ( AO ). 2.(a) The Ld.CIT(A) has erred in law and on the facts of the case in confirming that the appellant had failed to deduct the tax of ₹ 39,09,666/-. (b) The Ld.CIT(A) has erred in law in ignoring the fact that supply of hardware and software by Network Appliances BV, Netherland ( NABV ) was made pursuant to outright sale and no right on such hardware and software was retained by NABV. (C) The Ld. CIT(A) has erred in law and on the facts of the case without appreciating that the sale of hardware and software do not give rise to income chargeable to tax in India and hence no tax was required to be deducted in accordance with section 195 of the Act. (d) The Ld.CIT(A) has erred in law and on the facts of the case in holding that payment of ₹ 3,186,279/- made towards installation and support services and post warranty services are in the nature of Fees for Technical Services and Royalty as defined under article 12 of India Netherlands DTAA. (e) The Ld.CIT(A) has erred in law and on the facts of the case whilst observing as under:- Judging from either point of view, there is no escapement of the fact that the appellant has not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pertaining to the aforesaid remittances made and observed that following payments were made during the previous year corresponding to Assessment Year 2007-08 and Assessment Year 2008-09:- S.No. Invoice/PO No. Date Amount(USD) Amount (INR) Annexure No. Purpose 1. PO 800525 23.05.2007 32,709 1,333,714.34 1 Purchase of storage shelf. 2. A660017822 22.04.2006 96,542 4,288,849.39 2 Software 3. B660017822 20.04.2006 31,602 1,466,961 3 4hr parts replace, install and SW subs 36 months (installation support services. 4. A660020466 13.09.2006 34,154 1,542,736 4 Computer hardware 5. B660020466 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, in respect of the payments made for installation, maintenance support services and warranty support services, as these payments were in the nature of royalties and key for technical services under article 12 of the DTAA between India and the Netherland. The Assessing Officer is of the view that the chartered accountant had classified the payment for hardware and maintenance services, whereas the invoices refers to the description of payment as 4 hours part replacepost WTY( warranty) and SW subs ( subscription) 1 year which was in the nature of post-warranty period maintenance services and also the software subscription for one year. The Ld. Assessing Officer concluded that purpose of payment mentioned by the chartered accountant is incorrect. According to the Ld. Assessing Officer, the chartered accountant had relied on the article 12 of the DTAA between India and the USA and committed an error by not applying the provisions of the tax treaty between India and Neatherland, as the Network appliance claimed to tax resident of Netherland. The Ld. Assessing Officer referred to Examples 8 and 9 of the Memorandum of Understanding (MoU) concerning fee for included services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,666/- and interest under section 201(1A) of the Act was worked out to ₹ 6,73,627/-. 6. The Ld. CIT(A) upheld the order of the Assessing Officer observing as under: 2.4 The fact of the case is that the appellant has remitted the amount and was no deduction of tax. The only argument against this by the appellant is that 195 not be attracted as the payment made was towards purchase of equipment and towards installation and maintenance of such instrument. In realty, such claim of the appellant is devoid of any material facts. The memorandum of understanding (MoU) and analysis of example 8 9 clearly shows that payments for such services is not exempted and it is of the nature of fees and technical services as rightly concluded by the Ld. AO. Similarly, the payments for post warranty services in the present facts of the case are also technical services. The appellant, reason best known to itself has not filed application to the AO u/s 195(2). 2.5 Judging from either point of view, there is no escapement of the fact that the appellant has not deducted TDS which is obligatory on its part as per the provisions of the law. There is no such mention the DTAA which empower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificate from the AO u/s 195(2) or the accountant's certificate. Case Law Relevant para and page of case law compilation. GE India Technology Centre P. Ltd. v. CIT(327 ITR 456) The Supreme Court held that where the payer is certain that payment is not chargeable to tax, it can by itself not withhold tax and need not approach the revenue for dispensation. Page no. 328 and 329 Circular no. 10 of 2002 and 759 dated 18 November 1997 issued by CBDT Remittance may be allowed by the RBI without insisting upon a NOC from the income tax department provided the person making the remittance furnished an undertaking addressing to assessing officer which is accompanied by a certificate from an accountant as defined in the explanation below section 288 of the Income Tax Act, 1961. Page no. 330334 8.2 Offshore supply of equipment is not taxable 8.1.1. Payment made by the appellant towards the purchase of hardware is not taxable under the provision of the Act or the DTAA between India and Netherlands/USA since the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the tax authorities to split the same and consider a part of the payment for software to be treated as royalty. Page no. 86-para no. 172,73,174 DIT vs. Ericsson A.B., Ericsson Radio System A.B. and Metapath Software International Ltd. [2011] 343 ITR 470 (HC Del) We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. Page no. 129-para no. 61 ADIT vs Siemens Aktiengesellschaft [2012] Page no. 19 ITR (T) 336 (ITAT Mum) Following the decision of Delhi HC in the case of Ericsson and Delhi ITAT in the case of Motorola, the Mumbai ITAT held that software supplied along with hardware is not taxable as royalty. 134-135 Nokia Networks OY vs ADIT [2012] 253 CTR 417 (Delhi HC) The payment received for supply of software as an integral part of supply of equipment was not roylalty either u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or enjoyment of a right for which a royalty is being paid or such services should make available any technical knowhow etc.. It is submitted that neither of the two conditions is satisfied. As stated above, since the software update will not lead to any royalty payment, Article 12(5)(a) would not come into play. Further, such payment may not be regarded as FTS as per article 12(5)(b) of the DTAA between India and Netherlands because the same has not made available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 8.4.3 The Ld. AO has cited two examples from the MOU to the India-US DTAA to buttress his argument that if any technical services are provided that are not inextricably linked with sale of property then such services are liable to be covered under FTS clause. It is submitted that the clause relating to inextricable link with sale of property is provided in Article 12(6)(a) as an exception to Article 12(5). Therefore, before we look into the exceptions in Article 12(6), it is mandatory to check whether the services are covered at all under Article 12(5). Since the servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, subscription of license for software. 16. Regarding the 1st category of payment the Assessing Officer has held the assessee in default on the ground that amount was paid without obtaining any certificate from the Assessing Officer under section 195(2) of the Act or the accountant certificate. In this regard the Assessing Officer has relied on the decision of the Hon ble Supreme Court in the case of transmission Corporation of AP Ltd. (supra) and decision of the Tribunal in the case of Van Oord ACZ India Private Limited (supra). The Ld. Counsel submitted that the decision of the Hon ble Supreme Court in the case of transmission Corporation of AP limited (supra) is not applicable over the facts of the instant case and the decision of the Tribunal in the case of Van Oord (supra) has been overruled by the Hon ble Delhi High Court. The Ld. DR could not controvert this fact. 17. The Ld. Counsel submitted before us that the purchase of the hardware is not taxable in India either under the provisions of the Act or under the DTAA between the India the Netherland since the payment of purchase of hardware is business income in the hand of the recipient seller and in absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nataka High Court in the case of Samsung, Electronics Ltd (supra), which has been relied upon by the Ld. DR. The relevant finding of the Hon ble Delhi High Court is reproduced as under: 98. We are not in agreement with the decision of the Andhra Pradesh (sic- Karnataka) High Court in the case of Samsung Electronics Co. Ltd. (supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking back-up copy would amount to copyright work under s. 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a back-up copy purely as a temporary protection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in Section 195(1). The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. [See: Vijay Ship Breaking Corporation and Others vs. CIT 314 ITR 309] 9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression sum chargeable under the provisions of the Act is used only in Section 195. For example, Section 194C casts an obligation to deduct TAS in respect of any sum paid to any resident . Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of any amount referred to in the specified provisions. In none of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t imposes statutory obligation on the payer to deduct TAS when he pays any income chargeable under the head salaries . Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act , which expression, as stated above, do not find place in other Sections of Chapter XVII. It is in this sense that we hold that the I.T. Act constitutes one single integral inseparable Code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the I.T. Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r allowances under the Income Tax Act for the said sum as an expenditure . Under Section 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the I.T. Act. In a given case where the payer is an assessee he will definitely claim deduction under the I.T. Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-Section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind to any person in consideration for the rendering of any technical or consultancy services (including through he provision of services of technical or other personnel) if such services: (a) (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 28. The Ld. Counsel has also distinguished the analysis of Example 8 and 9 of the MOU to the India US DTAA made by the Assessing Officer in the assessment order. According to the Assessing Officer the services of updating the software/renewal of license or warranty services are not inextricably and essentially linked to the sale of the property as provided in Article 12(6)(a) of the treaty and therefore same are in the nature of fee for technical services . The Ld. Counsel before us submitted that when no technical knowledge or know-how has been provided, then as per Article 12 (5)(b), the services are not liable as fee for technical services and in such circumstances, it is not required to examine that services are inextricably and essentially linked to the sale . 29. We note that in Article 12(6) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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