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TMI Blog2021 (7) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... of software as Royalty - HELD THAT:- Respectfully following the decision of the co-ordinate Bench as approved by the jurisdictional High Court [ 2017 (8) TMI 1638 - DELHI HIGH COURT] we rule in favour of the Assessee. We also agree with the alternate argument of the Assessee that since the sale of software is inextricably linked with sale of software than the provision of Article 12(5) of the India-China DTAA would be applicable and such income from supply of software could be taxed only as business profits in terms of Article 7 of the India-China DTAA. - I.T.A No.1930/Del/2020, SA No.364/Del/2020 (Arising out of ITA No.1930/Del/2020), I.T.A No.8185/Del/2019, C.O. No.07/Del/2021 (Arising out of ITA No.8185/Del/2019), I.T.A No.1474/Del/2020 - - - Dated:- 30-6-2021 - Shri Anil Chaturvedi, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Appellant : Sh. Harpreet Ajmani, Adv., Mrs. Ananya Kapoor, Adv., Sh. Rohan Khare, Adv. For the Respondent : Dr. Prabha Kant, CIT-DR ORDER PER SUDHANSHU SRIVASTAVA, JM: 1. Assessee and Department have filed cross-appeals for Assessment Year 2016-17, ITA No. 1474/Del/2020 is the appeal of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . During the relevant year/s also, Assessing Officer relied on the survey proceedings and earlier year/s assessment orders for A.Y. 2004-05 to A.Y. 2015-16. 4. Since all the appeals and cross objection pertain to the same Assessee involving common grievances, we will adjudicate the same together. 5. At the very outset, we note that there is a delay of 274 days in filing of appeal by the Assessee for AY 2016-17. The Assessee had preferred an application for condonation of delay wherein it has been stated that the order of the CIT (A) dated 20.08.2019 was received by the Assessee on the communication address on 09.09.2019. In Paragraph 11 and 12 of the application for condonation of delay it is submitted that immediately after getting the information regarding the order being passed by the CIT(A), the assessee decided to file an appeal before the Tribunal and designated Mr. Cheng Yu Xiang, an authorised signatory to coordinate in drafting and filing of appeal in India. Mr. Cheng earlier had visited India for facilitating in follow-up with clients on outstanding payments. Owing to visa related issues, travel of Mr. Cheng was delayed and he could visit India only on 11.11.2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has also preferred cross-objections in Department's appeal for A.Y. 2016-17, which is in line with the grounds agitated in the Assessee's appeal and thus, considering that the crossobjections have been filed within limitation, even otherwise the matter requires adjudication on merits. 8. On the other hand, the Ld. DR has opposed the condonation of delay and adjudication of appeal for AY 2016-17 on merits. 9. We have heard the submissions of both the parties and are of the considered opinion that there is a bona fide justification for the delay in filing appeal and no contrary material has been brought on record by the Department to refute that the averments in the condonation application which is supported by an affidavit are false, thus, to advance substantial justice the delay in filing of Assessee's appeal for AY 2016-17 is condoned. We even find force in the alternative submission of the Ld. AR that the cross-objections involve identical grounds as the appeal and either ways the matter requires consideration on merits. A bona fide litigant should not suffer merely on account of an inadvertent omission on the part of its employee / agent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we now embark on the merits of the matter and take up appeals for AY 2016-17 and AY 2017-18. 12. The first common grievance in Assessee s appeal for AY 2016-17 (Ground No. 1 to 4) and Assessee's appeal for AY 2017-18 (Ground No. 1 to 7) relates to the existence of Permanent Establishment ( PE )of the assessee in India. 13. At the very outset, the Ld. AR submitted that he has instructions from his client to submit that to avoid protracted litigation the grounds of appeal dealing with the profusely litigated issue of existence of a PE are not pressed. Whereas, the Ld. DR has relied on the orders of the lower authorities. 14. We note that a similar concession was given by Assessee before the Tribunal in the preceding years i.e. AY 2004-05 to AY 2009-10 as well as AY 2010-11 to AY 2015-16. The co-ordinate bench in Assessee's own case in ITA No. 2805/Del/2016 [AY 2010-11]at Paragraph 4 and 5 incommon judgment dated 15.02.2019 for AY 2010-11 to AY 2015-16 has recorded that:- 4. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below qua the issue. We find that in assessment years 2004-05 to 2009-10, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such activities ought to be taxed in India. He also argued that the activities identified by the Assessing Officer viz. negotiation or place of signing of contract or formal acceptance of contract or general supervision being undertaken by the Assessee are irrelevant factors, as these are merely incidental in nature. When the main business of the Assessee is different, the incidental activities which are only to aid and support the main activity would fall under exclusionary clause of DTAA (India- China) being preparatory and auxiliary in character. He further argued that considering that the transaction/s between the Assessee and its Indian subsidiary i.e., ZTE Telecom India Private Limited have already been subjected to transfer pricing, no further attribution is justified. 19. Alternatively, on a without prejudice basis the Ld. AR also argued that considering the activities identified in relation to the PE, the rate of attribution of 35% is far too high and ought to have been restricted to attribution rate of 20% as originally applied by the Assessing Officer during AY 2004-05 to AY 2008- 09 or a lesser rate in terms of the activities being subsequently restricted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coordinate Bench vide a detailed common judgment dated 30.05.2016 for AY 2004-05 to AY 2009-10 has adjudicated the issue of attribution of profit and observed as follows: 24. The issue of attribution of profits depends on the facts in particular case and is fully dependent on the level of operations of the activities carried out in India. This is evident from Article 7 of DTAA and Explanation 1 to clause (i) of section 9(1). Facts in two cases cannot be identical. The AO had attributed only 20% (from AYs. 2004-05 to 2008-09) of the operating profit as per the global financial statement submitted by the assessee. This implies that 20% of the profits were generated on account of involvement of PE in the revenue generating structure and the 80% profit accrued in the resident state. However, for AY 2009-10, the AO has attributed 45% of the operating profit. Considering the different modes adopted by AO and ld. CIT (A), it becomes necessary to examine the level of operation carried out by PE in India so as to arrive at reasonable percentage of profit to be attributed to PE in India. XXXXX 46. From the aforementioned discussion it is evident that each case has to be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see relatable to the supplies made to India more income is to be attributed to the assessee as accruing in China and from sale activity, it is not to that extent. We find that ld. CIT (A) has adopted the reasoning in the case of Alcatel Lucent. In this decision ld. CIT (A) himself noted that assessee had accepted and not contested in appeal attribution @ 2.5% of total sales revenue. Therefore, this decision, considered by ld. CIT (A), cannot be the basis for arriving at the conclusion that 2.5% of entire sales revenue should be attributable to Indian PE, which is primarily as per Rule 10(1) methodology provided. We are not inclined to accept this plea of ld. CIT (DR). Therefore, in our opinion, attribution is to be done as per Rule 10(2) of the IT Rules. 48. Ld. counsel has endeavoured to distinguish the decision in the case of Rolls Royce PLC by referring to absence of identical Article 7(3) of India UK DTAA being present in India China DTAA. In our opinion, this is not of much significance because it only considers the involvement of assessee s representatives in negotiations. We have to consider the overall operations carried out by PE in India. Mere involvement of expatria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of income because overall tax effect will be less as compared to tax computed by AO/CIT (A). 51. Now we proceed to decide the assessee s submission that since for AY 2006-07 (₹ 20,56,87,472/-), 2007-08 )₹ 17,10,23,750/-)and for AY 2008-09 (₹ 2,38,84,545), the assessee had paid marketing support services, therefore, no attribution should be made. The submission is that TPO in the case of ZTE India has accepted that the payment for market support service is at arm s length and, therefore, in view of the decision of Hon ble Supreme Court in the case of DITVs. Morgan Stanley 292 ITR 416, since the assessee had been remunerated on an arm s length basis, no further profit could be attributed. We are unable to accept this plea of ld. counsel of the assessee because it is only after the survey operations were carried out that extensive involvement of PE came to light. 24. We also note that the decision of Tribunal in Assessee's own case for AY 2004-05 to AY 2009-10 has been followed in subsequent years i.e., AY 2010-11 to AY 2015-16 vide common judgment dated 15.02.2019. Now considering that there is no material change in facts and the legal issue on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case for AY 2004-05 to AY 2009-10 vide common judgment dated 30.05.2016 had decided the issue in favour of Assessee whilst observing as follows: 73. We have considered the submissions of both the parties and have perused the record of the case. We find that in the case of Alcatel Lucent, France Tribunal in para 12,13 14 it has been held as under: 12. We have carefully considered the arguments of both the sides and perused relevant material placed before us. We find that learned CIT(A) allowed the relief to the assessee following the decision of ITAT in assessee's own case for AY 1997-98 in ITA No.407/Del/200l. The ITAT had delivered the above decision following the decision of Special Bench of ITAT in the case of Motorola Inc. (supra). We find at Hon'ble jurisdictional High Court upheld the decision of ITAT of Special Bench in the case of Motorola Inc. (supra) in the case of DIT Vs. Ericsson A.B. (supra). In the appeal by the Revenue, question No.3 pre posed before the Hon'ble Jurisdictional High Court and admitted by their Lordships reads as under.- Whether in law, the learned Delhi Tribunal was justified in holding that the consideration for supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the telecom equipment, which facilitates running of the said equipment. (c) The subject software has no independent value of its own. (d) No copyrights in the software are transferred to the customers. (e) No access to the source codes in the software is granted to the customer. (f) Payment for software is not related to the productivity, use or number of subscribers. (g) Customers do not have the right to commercially exploit the software. (h) Software supply is in the nature of transfer of copyrighted article and not transfer of a copyrighted right . 6. The assessee also relied on the definition of copyright under Section 14 of the Indian Copyright Act, 1957. It also relied on the decision of Delhi Special Bench Tribunal in Motorola Inc. v. Dy. CIT [2005] 95 ITD 269/147 Taxman 39 (Mag.) (Delhi) (SB). It was therefore stated that the receipts from sale of computer software is in the nature of payment for the use of copyrighted article as against payment for use of a copyright in the software and hence such payment shall not constitute royalty under IndiaChina tax treaty. 7. The AO also referred to the decision of the Authority for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in subclauses(i) to (vi) (b) In the case of a computer programme,- (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) In the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation;(iii) to perform the work in public, or communicate it to the public;(iv) to make any cinematograph film or sound recording in respect of the work;(v) to make any translation of the work;(vi) to make any adaptation of the work;(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in subclauses(I) to (vi) inhere in the owner of copyright of a computer programme. Therefore, the copyright owner's rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods significantly enough, Section 14(1) talks of sale or rental of a copy . The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the owner. iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is reco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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