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Income Tax Appellate Tribunal, DELHI BENCH: “B”, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
PER : O.P.KANT, AM
These two appeals filed by the Assessee are directed against a common order dated 10/12/2010 passed by the Ld. Commissioner of Income-tax (Appeals)-XI, New Delhi [in short the Ld. CIT(A)] for Assessment Year 2007-08 and 2008-09 respectively; in relation to tax liability under section 201(1) and
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201(1A) of the Income Tax Act, 1961 (in short the ‘Act’) for holding the
assessee in default for non-deduction of tax at source. In view of the common
issue involved in both these appeals, same were heard together and disposed of
by way of this consolidated order for convenience and brevity. The assessee has
raised common grounds of appeal in both the Assessment Years, which are
reproduced as under:
A.Y. 2007-08
“ 1. That the CIT(A) has erred in law and on the facts of the case whilst confirming the demands raised by the Income Tax Officer, TDS Ward- 1(1), International Taxation, New 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 Rs. 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 Rs. 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 deducted TDS which is obligatory on its part as per the provisions of the law. There is no such mention in the DTAA which empowers the
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assessee not to deduct tax. It was entirely on its own volition, the appellant chooses not to pay the tax which is otherwise liable to be paid…..” 3. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the levy of interest under section 201(1A) of the Income Tax Act 1961. Each of the above grounds of appeal are independent and without prejudice to each other. The Appellant reserves its right to add, alter, amend or withdraw any of the above grounds either before or at the time of hearing. In view of the above ground, the Appellant requests you to cancel the order passed by the Ld. CIT(A).”
Briefly stated facts of the case are that the assessee is an Indian
company, which was set up in the year 2005 as wholly-owned subsidiary of
Ciena Corporation, USA. It was set up as 100% Export Oriented Undertaking
(EOU) under the STPI scheme of Government of India. The assessee was
engaged in the business of providing software development support to its
parent company in the field of telecom, multiservice switching, broadband
access and network management etc. During the previous years corresponding
to the Assessment Year 2007-08 and 2008-09, the assessee made payment to
certain non-residents for acquisition of the computer hardware, software and
related support services for installation and maintenance under various invoices.
No tax was deducted at source by the assessee. The assessee submitted
information to the authorized dealer of foreign currency, in respect of
remittance of payment for purchase of the hardware and services and software
in prescribed form along with Chartered Accountant certificates stating the
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reason of non-taxability of the amounts remitted to the recipients. On receipt of
the said information from the respective dealer, the Assessing Officer noted that
the amount of 31602 US dollars was remitted to Network Appliance BV,
Netherland without deduction of tax. As no specific reasons for non-deduction of
tax were found by the Assessing Officer in the prescribed information,
accordingly, he issued a letter to the assessee explaining the reasons for non-
deduction of tax at source on the said transactions. The Assessing Officer called
for the invoices and other related documents 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 Date Amount(USD) Amount (INR) Annexure Purpose No. No. 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 13.09.2006 7,264 328,122 5 Installation & support services 6. 660023351 06.02.2007 10,200 448,904 6 4hr parts replace-post WTY and SW subs 7. 660023350 06.02.2007 10,200 449,517 7 4hr parts replace-post WTY and SW subs 8. A660023589 25.03.2007 30,849 1,338,235 8 Disk storage
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(computer hardware) 9. B660023589 23.02.2007 6,841 292,007 9 4hr parts replace, install and SW subs 24 months. 10. B660025544 23.05.2007 4,981 200,768 10 4hr parts replace, install and SW subs 24 months. Total 265,342 11,689,814
After considering the submissions of the assessee, the Ld. Assessing
Officer held that:
(a) In respect of payments at serial number No. 1 ,2, 4 and 8 in above table, which indicates purchase of hardware as as well as software of various types, the assessee is assessee-in-default under section 201 of the Act for having failed to deduct tax at source under section 195 of the Act in respect of the payments, and the assessee had not obtained any certificate under section 195(2) of the Act from the Assessing Officer and it had also not filed an accountant certificates thus, considering the provisions of section 195(2) and decision of the Hon’ble Supreme Court in the case of Transmission Corporation of AP limited 239 ITR 587 and decision of the Tribunal Delhi bench dated 30/11/2007 in the case of Van Oord ACZ India private limited in ITA No. 2126/12/2007, the assessee defailure in deducting taxed source.
(b) In respect payments at serial No. 3, 5, 6, 7, 9 and 10 of the above table, the assessee was assessee-in-default under section 201 for having failed to deduct tax at source under section 195 of the 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 replace- post WTY( warranty) and SW subs ( subscription) 1 year” which was
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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 in Article 12 with regard to US India tax treaty, which being pari-materia with the scope of the definition in India Netherland tax treaty.
In view of the analysis of the Examples 8 and 9 of the memorandum of
understanding, the Ld. Assessing Officer concluded as under:
“In view of the analysis of example 8 the services of updating the software/ renewal of license, are not inextricably and essentially linked to the sale of computer hardware/ initial sale of software and, therefore, the payments for such services is of the nature of fees for technical services. Similarly, the payments for the post warranty services are also treated as fees for technical services. The payments for the renewal of license/ further subscription of the license for the software, is also of the nature of royalty covered by the provisions of paragraph 4(a) of the Article 12. The payment is for the use or the right to use an intangible and such right is given by the Network Appliances by way of licensing, the software. In this case, the licensing of software is not the sale of a copyrighted article but the granting of the right to use the copyright in article. The licensing of software is not a one time sale and the rights are not sold, but only the use has been allowed and the rights are retained by the Network Appliances. If it was a case of one time sale then there was no need of obtaining the licenses effective for limited periods. On these facts, even the payments for the warranty services and support services, can be treated as fees for technical services in view of provisions of paragraph 5(a) of Article 12 of the India- Netherlands tax treaty. To sum up, the payments made by Ciena India on account of various invoices referred in at Sr. Nos. 3, 5, 6, 7, 9 and 10 are treated as royalties and fees for technical services. Such royalties and fees for technical services have arisen in India in view of paragraph 8 of Article 12 of the treaty and, therefore, such payments are taxable @10% of the gross amount.”
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In respect of payments at serial No. 1,2,4 and 8, the Assessing Officer
applied the tax rate of 42.23% of the gross amount and in respect of payments
at serial No. 3, 5, 6, 7, 9 and 10, the Assessing Officer applied, tax rate of 10%
on gross amount. The amount payable as tax computed under section 201(1) of
the Act was worked out to Rs. 39,09,666/- and interest under section 201(1A)
of the Act was worked out to Rs. 6,73,627/-.
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 empowers the assessee not to deduct tax. It was entirely on its own volition, the appellant chooses not to pay the tax which is otherwise liable to be paid and the AO has rightly treated the appellant as assessee in a default and imposition of tax of Rs. 35,91,041/- and Rs. 3,18,625/- and interest u/s 201(1A) of Rs. 6,22,068/- and Rs. 51,559/- respectively is correct and such order does not require interference of any sort from this office.”
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Aggrieved, the assessee is in the appeal before the Tribunal raising the
grounds as reproduced above. In both Assessment Years, common grounds of
appeal have been raised.
The Ground No. 1 of the appeals is general in nature, and thus covered
by the other grounds, which we are not required to adjudicate upon specifically.
The Ground No. 2 is in respect of tax liability under section 201(1) of the
Act for holding the assessee liable in default for not deducting tax at source in
respect of computer hardware and software, as well as installation, support
services and post-warranty services.
Before us, the Ld. Counsel of the assessee argued matter and filed
written submissions which are reproduced as under:
“8.1 No objection certificate is not required to be obtained from AO u/s 195(2) of the Act where the payment to non-resident is not subject to tax in India.
8.1.1 Per provisions of section 195 of the Act, any person making payments to a non-resident is obligated to withhold tax if such income is subject to tax in India. As discussed below, since the payment made to non-resident sellers for the off-shore purchase of hardware/equipment is not taxable in India and accordingly, there is no obligation on the appellant to withhold tax in respect of the said payment. The ITAT ruling in Van Oord relied upon by the Ld. AO has been over-ruled by the Delhi High Court and the Apex Court in GE India Technology Centre has laid down that there is no requirement for an assessee to obtain a clearance certificate from the AO where it was certain the amounts payable were not chargeable to tax. It is important to bear in mind that the Ld. AO has not held that the payments made by the Appellant for acquisition of hardware are taxable in India either under the Act or the
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DTAA. He has held the Appellant to be an assessee in default merely on the ground that the amount was paid without obtaining any certificate 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. Page no. 328 CIT(327 ITR 456) and 329
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.
Circular no. 10 of 2002 and 759 dated 18 Page no. 330- November 1997 issued by CBDT 334
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.
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 payment for purchase of hardware is business income in the hands of the recipient seller and in the absence of Permanent Establishment ("PE") of the sellers in India, such income will not be taxable in India as provided in Article 5 of the Indo-Netherlands and Indo-US DTAAs.
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Case Law Relevant Para and Page of Case Law Compilation
Ishikawajima-Harima Heavy Page No. 20 Industries Ltd. vs. DIT[2007] 288 ITR 408(SC)
The amount received by the assessee, a non-resident company, in respect of offshore supply of equipments and materials in terms of a composite contract executed in India was not liable to tax in India because the transaction was carried out outside India and the assessee’s permanent establishment in India was not involved in the Transaction.
Hyundai Heavy Industries co. Ltd. 321 Page no. 61, ITD 385 (Del ITAT) para 118
The assessing Officer was correct in not taxing the revenue relating to offshore supply of material in view of the decision of Tribunal and Jurisdictional High Court in assessee’s own case and also the decision of Hon’ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd.
DIT vs LG Cable Ltd [2011] 197 Page no. 72- TAXMAN 100 (HC Del) para 27
Offshore suppliers are not taxable in Page no. 74- view of the law as upheld by Hon’ble para 37 Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd.
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8.3 Supply of software along with Hardware is not taxable
-payment for acquiring software along with hardware will not be regarded as royalty / FTS since such hardware cannot be used without the software embedded in it and such software becomes a part and parcel of the hardware and will generate business income only. As mentioned above, in the absence of PE of the non-resident sellers in India business income will not be subject to tax in India.
Case Law Relevant para and page of Case Law Compilation
Motorala Inc. vs DCIT [2005] 96 TTJ 1 Page no. 86- (ITAT Del) para no. 172,73,174 Where the payment is not for any copyright but for copyrighted article itself, the payment cannot be construed as royalty. Furthermore, where the software is supplied along with te hardware, it was not open for the tax authorities to split the same and consider a part of the payment for software to be treated as royalty.
DIT vs. Ericsson A.B., Ericsson Radio Page no. System A.B. and Metapath Software 129-para no. International Ltd. [2011] 343 ITR 470 (HC 61 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.
ADIT vs Siemens Aktiengesellschaft [2012] Page no.
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19 ITR (T) 336 (ITAT Mum) 134-135
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.
Nokia Networks OY vs ADIT Page no. [2012] 253 CTR 417 (Delhi HC) 146-148 para 25-30 The payment received for supply of software as an integral part of supply of equipment was not roylalty either u/s 9(1)(vi) or under the DTAA relying upon the delhi HC in the case of Ericsson A.B.
Relaince infocom Ltd vs DDIT Page no. [2013] ITA no. 5468/M/08 & 212 and Others (ITAT Mum) 213- para no. 27 The Tribunal upheld the principla laid down by the Delhi ITAT in the case of Motorola as ;affirmed further by Delhi HC in the case of Ericsson that software supplied embedded in hardware in not taxable as royalty.
8.4 8.4 Installation and Support Services are not Fee for Technical 8.4 8.4 Services; Software subscription provided along with installation and support will not lead to payment of "royalties" within the meaning of the India-Netherlands and India-US DTAAs
8.4.1 The Appellant has made lump-sum composite payments under the invoices for installation and support service and subscription/license fee for the
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software update that is provided during the installation. These payments are not in lieu of use or right to use any copyright in the software. The Appellant has merely been given right to use the software. Mere right to use a software under a license arrangement does not lead to royalty unless the licensee gets a right to commercially exploit the copyright by making copies or other commercially exploit the same. In this case, what has been made available to the user (appellant) is a copyrighted article and not a copyright. Based on this principle, several rulings have been pronounced by the Hon'ble Tribunal and High Courts, most notable being DIT vs, Ericsson A.B., Ericsson Radio System A.B. and Metapath Software Internation Ltd. [2011] 343 ITR 470 (HC Del) ((Please refer to Paras 59 and 60 of the ruling provided at Page 129 of the Case law compilation) . Relying on the same, it is contended that no part of lump-sum fee provided in the service invoice can be treated as "royalties" under Article 12(4) of the DTAAs.
8.4.2 Further, the payment made for installation and support services like replacement of parts would not qualify as fee for technical services/included services under Article 12(5) of the India-Netherlands and India-US DTAAs because none of the two conditions provided therein is satisfied. As per Article 12(5)(a) for a payment to qualify as FTS, the services apart from being technical or consultancy in nature must be ancillary to the application 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
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"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 services are not covered under Article 12(5) at all either under clause (a) or (b), there is no point in examining the applicability of Article 12(6).
8.4.4 Retrospective amendments have been made to the definition of "royalty" in Section 9(l)(vi) of the Act to include payments made for right to use a software. However, such an amendment does not impact the definition of royalty in the DTAA as held by the Hon'ble Delhi High court in Nokia Networks (supra). Please refer to page 146 of the case law compilation for the relevant extract in this regard. Further, it is submitted that the India- Netherlands DTAA does not include right to use a software as part of the definition of "royalty" and the assessee is entitled to rely on the beneficial provisions of the DTAA under Section 90(2) of the Act.”
The Ld. Counsel also relied on the decision of the Hon’ble Delhi High 11.
Court in the case of DIT Vs Infrasoft Ltd reported in 264 CTR 329.
The Ld. DR on the other hand, relied on the order of the lower
authorities and submitted that Hon’ble Karnataka High Court in the case of
Samsung Electronics Co. Ltd reported in (2011) 16 taxmann.com 141
has held that payment for sale of software constitute transfer of copyright
resulting into royality income in the hands of the recipient and therefore, the
assessee was liable for deduction of tax at source. The Ld. DR also relied on
the decision of the Hon’ble High Court of Karnataka in the case of Customer
Assets India P Ltd reported in (2014) 42 taxmann.com 338.
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Regarding non-deduction of tax on the payment towards other services,
the Ld. DR submitted that case of the assessee is of the composite contract and
therefore the assessee was liable for deduction of tax at source. In support of
the contention, he relied on the decision of the Hon’ble High Court of Andhra
Pradesh in the case of Shakti LPG Ltd reported in (2015) 54
taxmann.com 18.
We have heard the rival submission and perused the relevant material on
record.
The Assessing Officer has grouped the payment in two categories. The 1st category of payments listed at serial No. 1, 2, 4 and 8 of the above table
have been held as corresponding to purchase of hardware and software. The 2nd category of payment at serial No. 3, 5, 6, 7, 9 and 10 have been held as
corresponding to updating the software/renewal of license, payment for post-
warranty services, subscription of license for software.
Regarding the 1st category of payment the Assessing Officer has held the 16.
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
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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.
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 of
permanent Establishment (PE) of the seller in India, such income would not be
taxable in India as provided in Article 5 of the Indo Netherland DTAA. The Ld.
Counsel has also submitted that payment for acquiring software along with the
hardware would not be regarded as royalty/FTS as such hardware cannot be
used without the software embedded in it and such software becomes a part
and parcel of the hardware and would generate business income only and in the
absence of any PE of non-resident sellers in India, business income would not
be taxable in India. The Ld. Counsel has relied on the various decisions
mentioned in his submission. The Ld. Counsel also relied on the decision of the
Hon’ble Delhi High Court in the case of DIT Vs Infrasoft Ltd. (supra), wherein
shrink wrap software has been held to a copyrighted article and not copyright
and sale from outside India of such software embedded in hardware is not
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taxable in India. The relevant finding of the Hon’ble High Court is reproduced as
under:
The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to s. 9(1 )(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.”
In the case of Infrasoft Ltd. (Supra), the Hon’ble Delhi High Court has
considered the decision of the Hon’ble Karnataka 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 against loss, destruction or damage has been held by the Delhi High Court in
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Director of IT vs. Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software. 19. In the case of Customer Assets India P Ltd. (supra) relied upon by the
Ld. DR, the Hon’ble High Court has relied on the decision in the case of
Samsung Electronics Co Ltd. (supra).
In the instant case also the software has been sold to the assessee as
shrink-wrapped software, which is commercially off the shelf software sold in
retail, in contract to the specially developed (unique) software written by own or
contracted programmers. This fact has not been disputed by the Revenue.
Thus, in view of the binding precedence of the jurisdictional High Court in the
case of infrasoft Ltd (supra), we hold that sale of the hardware along with the
software embedded therein is not taxable in the hands of the non-resident
recipient in absence of any permanent Establishment of said non-resident in
India.
In the case of Transmission Corporation of AP Ltd (supra) the Hon’ble
Supreme Court while answering the question of law held that the
(i) the assessee who made the payments to the three non-residents was under obligation to deduct tax at source under Section 195 of the Act in respect of the sums paid to them under the contracts entered into; and (ii) the obligation of the respondent-assessee to deduct tax under Section 195 is limited only to appropriate proportion of income chargeable under the Act, are correct.”
The Hon’ble Supreme Court has held the liability of deduction of tax at
source on appropriate portion of income chargeable to tax in case of composite
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nature consisting of income chargeable and not chargeable to tax in India. In
the instant case, as far as sale of Hardware coupled with software is concerned,
we have already observed that it is case of income not chargeable in India in
the hands of non-resident.
The Ld. Counsel also submitted that in view of the decision of the Hon’ble
Apex Court in the case of GE India technology Centre Private Limited (supra)
there is no requirement for an assessee to obtain clearance certificate from the
Assessing Officer where it is certain that amount payable is not chargeable to
tax. The relevant finding of the Hon’ble Supreme Court is reproduced as under:
“ 8. If the contention of the Department that 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]
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 provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a
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nonresident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195 (1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. vs. Eli Lilly and Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it 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, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a
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situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non- residents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, Section 195 uses the word payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in- default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in- default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the I.T. Act. When the payer remits an amount to a non-resident out of India he claims deduction or 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 and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue
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leakage.”
The Hon’ble Supreme Court in the above case has also considered the
decision in the case of Transmission Corporation (supra) and distinguished as
decision of composite payment instead of pure taxable income payment in the
hands of recipient.
On perusal of the various decisions cited by the Ld. Counsel and
particularly the decision in the case of infra soft Ltd (supra), which being
Jurisdiction High Court, it is settled that 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 (supra).
In respect of the 2nd category of payments, the Ld. Counsel has 26.
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. According to the Ld. Counsel merely right to use a software under a
license arrangement does not lead to royalty unless the licensee gets a right to
commercially exploit the copyright by making copies or commercially exploit the
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same. In the case the assessee has purchased a copyrighted article and not a
copyright and thus the lump-sum fee provided in service invoice cannot be
treated as royalty under Article 12(4) of the relevant DTAA.
Further, agree with submission of the Ld. Counsel that no knowledge or
technical know-how has been made available by way of the services of
installation and other support services as required under Article 12(5)(b) of the
DTAA for qualifying a payment as FTS. The relevant Article of the DTAA
between India and the Netherland is reproduced as under:
“ Article 12(5)- For purpose of this Article, ”Fees for technical services” means payments of any 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.”
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
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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”.
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 that since the services
availed by the assessee are not inextricably and essentially linked with the sale
therefore, the assessee not being covered by the said exception, the services
should be treated as fee for technical services. This finding of the Assessing
Officer is not justified. We are agreed with the submission of the Ld. Counsel
that the clauses related to “inextricably link with sale of property” in Article
12(6)(a) are as exceptions to Article 12(5). Since the services are not covered
under Article 12(5) either under clause (a) or (b), applicability of Article 12(6) is
not required to be examined. Accordingly, we reject the finding of the Ld.
Assessing Officer on this issue.
Further, we are also agreed with the contention of the Ld. Counsel that
support services or warranty services has not made available any technology or
know-how to the assessee and therefore payment made for such services does
not qualify for FTS under the relevant DTAA.
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In the case of Shakti LPG Ltd (supra), separate components of the sale of
machinery and installation of machinery was not mentioned and thus severalty
of two components was not accepted and accordingly, the amount paid was
held as taxable, wherein the instant case the amount paid has not been held as
taxable in the hand of the recipient.
In view of the aforesaid discussion, the payment for services of
installation, support, services, subscription and warranty is also not liable for tax
in India either as royalty or FTS and therefore the assessee is not required to
deduct tax at source on the same.
Thus the Ground Nos. 2(a) to 2(e) of both the appeal are allowed.
The Ground No. 3 in both the appeals relate to confirming the levy of
interest under section 201(1A) of the Act. Since we have already deleted the
liability of the assessee under section 201(1) of the Act in Ground No. 2 of the
appeal, the Ground No. 3 is rendered infructuous.
In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on 29/6/2018. Sd/- Sd/-
AMIT SHUKLA O.P.KANT (JUDICIAL MEMBER) (ACCOUNTANT MEMBER)
Dated: 29.06.2018 Pooja/- Copy forwarded to:
26 ITA No-959 & 984/Del/2011 Ciena India Pvt. Ltd. 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
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Date of dictation On dragon..27.6.2018
Date on which the typed draft is placed before the 28.6.2018 dictating Member Date on which the typed draft is placed before the Other Member
Date on which the approved draft comes to the Sr. 28.6.2018 PS/PS
Date on which the fair order is placed before the 28.6.2018 Dictating Member for pronouncement Date on which the fair order comes back to the Sr. 29.6.2018 PS/PS Date on which the final order is uploaded on the website of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant Registrar for signature on the order
Date of dispatch of the Order
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