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TMI Blog2017 (7) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... in A.Y. 2002-03. This issue has not arose in subsequent years wherein the CIT (A) has rightly held that the same should be taxed as per provisions of Section 44BB of the Act. As regards to the rental of software which was in connection with the exploration/extraction of mineral oils in India, the Assessing Officer was not right by applying 15% of rate by applying decision of Advance Authority Ruling in case of Ishikawajima Harima Heavy Industries Co. Ltd. v. DIT [2004 (10) TMI 87 - AUTHORITY FOR ADVANCE RULINGS] as the facts of the said case is different from that of the present appeals. Thus, for subsequent years the issue of permanent establishment is not in question and hence the applicability of the judgment of ONGC is very much necessary as all these activities which assessee took are coming under the purview of Section 44BB. AO is therefore, directed to tax the income of the assessee as per Section 44BB for A.Y. 2003-04, 2004-05, 2005-06, 2006-07 and 2008-09. Needless to say the assessee be given the opportunity to hear before the Assessing Officer. X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer observed that the software supplied by the Respondent is available off the shelf for any person and accordingly held that supply of software is not considered to be in the nature of 'royalty' as defined in Article 12 of India-US DTAA. The Assessing Officer further observed that the title of goods (being software) was to pass outside India. However, owing to the fact that the installation and commissioning of the software was required to be carried in India, it was held that a part of the income from supply of software along with income from installation and training from software (calculated on notional basis) was taxable in India. The Assessing Officer held that 5% of the contract value (or actual value of installation, if separately quantified in the contract) pertains to installation and commissioning of software and accordingly brought it to tax @ 15% as 'fee for included services' as provided in Article 12 of India-US DTAA. It was further held that 10% of the contract value of the software (or actual value of installation, if separately quantified in the contract) was in relation to the training of employees of the Indian customers and same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave any office in India and that its activities are not covered by the deeming fiction of Article 5(2) of India-US DTAA. Accordingly, it was held by the CIT (A) that the Assessee did not have a PE in India and in the absence of PE, the business profits from sale of software could not be brought to tax in India. The CIT (A) also relied on the judgment of Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 and that of Delhi Bench of ITAT in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 296 and held that the sale of software by the assessee was in the nature of sale of goods. The CIT (A) thereafter held that since the goods were sold by the Assessee outside India, income from such sale could not be brought to tax in India. The addition of ₹ 24,08,514/- made by the Assessing Officer as income from sale of software was therefore deleted. The CIT (A) cited the provisions of Article 12(5)(a) of India-US DTAA and held that where the installation and commissioning and training services were inextricably linked to the sale of goods other than property described in Para 3(a), of DTAA, the income from these services could not be inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' as provided in Article 12 of India-US DTAA and taxed income from renting of software at the rate of 15%. Accordingly, the assessment for the A.Y. 2003-04 was completed with following additions: Taxable income as per Return of Income NIL Add: Income from sale of software (2% of contract value) Income from fee from included services (taxed at corporate tax rate applicable to a foreign company) -Installation and commissioning as a part of sale of software (5% of contract value) -Income from training services (included with sale of software) -Income from training service (standalone contract) -Income from rental of software -Income from HOS ₹ 16,25,444/- ₹ 75,34,373/- ₹ 1,00,63,623/- ₹ 1,04,48,070/- ₹ 20,55,260/- 1,45,38,153/- Total Taxable Income as per A.O ₹ 4,62,64,920/- Tax Liability -Tax on income from software @42% -Tax on income from fee from included services @15% ₹ 6,82,686/- ₹ 66,95,922/- Total Tax Liability ₹ 73,78,608/- 6.2 The CIT (A) has given similar findings as given for Assessment Year 2002-03 by the then CIT (A) and held that the sale of software by the Assessee was in the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts. The assessee has not challenged such decision of the CIT (A) in Assessment Year 2006-07, it is therefore prayed by the Ld. DR that the rental receipts in this Assessment Year 2003-04 (as well as in other AYs where applicable) be held to be taxable as royalty. The Ld. DR submitted that three relevant contract for rental income are at para 2.2, 2.6 and 2.7 of the Assessment Order for this Assessment Year 2003-04. The Ld. DR further submitted that it is undisputed that the assessee is supplying computer software that is used for prospecting and/or exploration and/or production of mineral oil in India. The CIT (A) has held certain revenues such as training simpliciter when such training is not coupled with sale of software to be taxable u/s. 44BB of the Act. The assessee itself has argued before the A.O that if certain receipts are to be brought to tax, these are to be brought to tax u/s. 44BB of the Act. Such submissions of the assessee have been referred by the A.O in the Assessment order for this Assessment Year 2003-04 at Para 2.1 & 2.2 (Page 2), Para 2.6 & 2.7 (page 4), Para 2.10 (page 6), Para 2.12 (page 7), Para 2.14 (page 8). The Ld. DR submitted that the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the customers for use of software wherein the training of the customers for use of software wherein the training is also in India, rental receipts from software rented out to Indian concerns, are all covered by the said judgment (supra) of the Hon'ble Supreme Court. Therefore, the Ld. DR prayed that the entire receipts of the assessee be brought to tax u/s. 44BB. In any case, and without prejudice, all the services rendered in India, including that of installation & commissioning and training be brought to tax u/s. 44B. The Ld. DR further submitted that in Roxar Maximum Reservoir Performance WLL, In re [2012] 207 Taxman 293 (AAR), the applicant, a company of Bahrain, entered into a contract with ONGC for supply, installation and commissioning of manometer gauges for carrying out operations title to the goods passed outside India; that the payment therefore was received outside India; and therefore, the transaction of sale was not taxable in India. As per the ruling of the AAR in this case even the supplies are to be brought to tax under u/s. 44BB at 10% specified under that Section. 6.4 The Ld. AR relied on the order of CIT (A) and submitted that the Assessee does not have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. It is submitted that where the income of a resident of a contracting state is not taxable due to application of DTAA, the same income cannot be brought to tax by applying provisions of the domestic law. It is only when income is taxable under the provisions of domestic law read with DTAA, then the more beneficial taxing provisions (whether DTAA or domestic law) applies to that income. Since income from supply and installation etc., of software is not taxable for the reason that the Respondent has no Permanent Establishment in India, such income cannot be taxed by invoking provisions of section 44BB of the Act. Further, the Ld DR has raised an issue which was not even the AO's case, nor was it raised as a ground to challenge the impugned order of the CIT (A) in any year. Besides, the Advance Ruling cited in the written arguments (Roxar Maximum Reservoir Performance (supra)) is rendered in the peculiar facts of that case. Such ruling, as per section 245S of the Act is binding only on the Applicant, in respect of that particular transaction, and on the Principal Commissioner or Commissioner and Income-tax authorities subordinate to him, in respect of the applicant and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one contract) ₹ 11,75,946/- ₹ 73,83,647/- ₹ 23,65,267/- Income from royalty (providing software on rental basis) ₹ 45,89,056/- Total Taxable Income as per A.O ₹ 1,55,13,920/- Tax Liability -Tax on income from fee from included services and royalty @15% ₹ 23,27,088/- Total tax liability ₹ 23,27,088/- 8.2 The CIT (A) followed the appellate orders for A.Y. 2003-04 and A.Y. 2005-06 and held that where the installation and commissioning and training services were inextricably linked to the sale of goods other than property described in Para 3(a), the income from these services could not be included within the ambit of fee for included services. Accordingly, the CIT (A) deleted the addition of ₹ 11,75,946/- which was added as income from installation and commissioning of software provided along with supply of software by the AO. The CIT (A) held that income of ₹ 23,65,267/- from standalone training contracts was taxable in India. However, it was held that income from such services ought to be taxed under section 44BB of the Act and not at the rate of 15% as levied by the AO. 8.3 The Ld. DR relied upon the Assessment Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on account of provision for training to employees on software was held taxable u/s. 44BB. It is pertinent to note that the issue related to taxability of Revenue pertaining to supply of software in India for Assessment Year 2002-03, 2003-04 the issue is squarely covered as supply of software is not royalty as per Article 12 of the DTAA and also the decision of Special Bench in case of Motorola Inc. (supra) which was subsequently affirmed in cases of DIT v. Nokia Network OY [2013] 358 ITR 259 (Delhi), DIT v. Ericsson AB [2012] 343 ITR 470, DIT v. Infrasoft Ltd. [2014] 220 Taxman 273, Datamine International Ltd. v. Addl. DIT [2016] 158 ITD 84. The issue that of contract for training is covered by decision of the Hon'ble Supreme Court in case of ONGC Ltd. (supra). In this particular case, the assessee claimed that these services have been provided in connection with the exploration, and the extraction of mineral oils in India and these revenues should be tax in terms of provisions of Section 44BB of the Income Tax Act, 1961. Though the CIT (A) deleted the additions made by the Assessing Officer and held that the said additions should be as per the provisions of Section 44BB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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