DCIT (IT) 3(1)(2), MUMBAI vs. LUCENT TECHNOLOGIES CRL LLC, MUMBAI

O R D E R Per Bench: These are cross appeals by the assessee and the Revenue arising out of the order of the Assessing Officer passed u/s. 1443(3) r.w.s 144C(1) of the Income Tax Act, 1961 pursuant to the direction u/s.144C(5) of the Dispute Resolution Panel vide order dated 03.12.2015, for the assessment year 2012-13.

Revenue’s appeal (in 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.

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

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 the circumstances of the case and in law, the AO / DRP 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 Income-tax Act ("Act") and also under Article 12 of the Double Taxation Avoidance Agreement between India and the USA ("DTAA") and, thus, liable to tax in India. Levy of Interest 4. On the facts and in the circumstances of the case and in law, the AO / DRP erred in levying interest under section 234B of the Act. The Appellant denies liability to the interest under section 234B. Initiation of penalty proceedings 5. On the facts and in the circumstances of the case and in law the AO / DRP erred in initiating penalty proceedings against the Appellant under section 271(l)(c) of the Act.

Nos. 7001 to 7004/Mum/2010 vide order dated 02.05.2018 on identical issue has adjudicated as under:

“4. Subsequently, in these appeals miscellaneous application was filed before the ITAT. The Tribunal vide order dated 09.10.2017 has noted that similar miscellaneous application filed by Reliance Communication Ltd. has been allowed by the Tribunal vide order dated 18.11.2016. The Tribunal has stated that it was brought to the notice of the Bench that the assessee was also party in the order passed by the Tribunal dated 06.09.2013 along with M/s. Reliance Communication Ltd. Accordingly the Tribunal had recalled the order. Subsequently a corrigendum was passed and in the corrigendum dated 07.02.2018 the Tribunal had directed as under: - 3. Only request was to consider Ground No. 2 whereas due to typographical error, the entire order has been recalled. Now Para 12 may read as under: - 12. In view of the above discussion, we recall the ground No. 2 passed by the Tribunal and Registry is directed to fix the appeals for hearing afresh by regular bench.

4 & 1239/Mum/2016 Lucent Technologies GRL LLC ii) the software was an integral part of the wireless-equipment, which facilitated running of the said equipment, iii) the subject software had no independent value of its own, iv) copyrights in the software were transferred to the customers, v) access to the "source codes" in the software was granted to the assessee, vi) the payment for software was not related to the productivity, use or number of subscribers, vii) the customers did not have the right to commercially exploit the software, viii) the software supply was in the nature of transfer of copyrighted article and not transfer of "a copyrighted right. If replies to questions no. iv) and v) are negative and replies to remaining questions are in positive, then it can be safely held that the payments made by an assessees cannot be treated royalty. We can summarise the above discussion by holding that the terms and conditions of the agreements will decide as to whether the payments made by the assessees to the suppliers of software for the wireless network can be considered royalty. In other words, rights of the Owner of the IPR.s on one hand and the rights and duties of purchasers/users on the other hand are the decisive factors. If the Owner retains absolute rights of the IPR.s with itself then the payments made by the user will not be royalty. But, if the Owner transfers the rights of the property against periodical or onetime payment to the user it will be a case of payment of royalty. Thus, it is the degree of transfer of the rights of IPR.s that is very crucial. 7.1. We do not have even slightest doubt in our mind that the answers to questions number four and five, at paragraph 7, are plain and simple NO, if the agreements entered in to by the assessee with the non-resident suppliers of softwares are analysed. Similarly, remaining question will have positive answers. In the earlier paragraphs, we have summarised the main characteristics of the agreements. All the agreements stipulate that the assessee would be using the software for ‘operation of its wireless network only’. Thus, it is clear that it was prevented from utilising the software for commercial uses. Had the ultimate authority been with the assessee, it could 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 5 & 1239/Mum/2016 Lucent Technologies GRL LLC 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.

9. We are aware that the Hon’ble Karnataka High Court has held that the payment for supply of software is royalty. Thus, we have two diagonally opposite views on the same issue. In such a situation the Hon'ble Supreme Court has, in the matter of Pradip J. Mehta (300 ITR 231), held that when two views were possible, then ‘invariably, the court would adopt the interpretation which is favour of the taxpayer’. The Hon’ble Court held as under: “29. It is well-settled that when two interpretations are possible, then invariably, the court would adopt the interpretation which is in favour of the taxpayer and against the Revenue. Reference may be made to the decision in Sneh Enterprises v. Commissioner of Customs [2006] 7 SCC 714, of this court wherein, inter alia, it was observed as under : "While dealing with a taxing provision, the principle of ' strict interpretation' should be applied. The court shall not interpret the statutory provision in such a manner which would create an additional fiscal burden on a person. It would never be done by invoking the provisions of another Act, which are not attracted. It is also trite that while two interpretations are possible, the court ordinarily would interpret the provisions in favour of a taxpayer and against the Revenue." Considering the above, we would like to follow the judgments of Hon’ble Madras and Delhi High Courts rather than judgment of Hon’ble Karnataka High Court.

7 & 1239/Mum/2016 Lucent Technologies GRL LLC rom and not to the intellectual property, also called software, that is recorded or stored thereon." Therefore, we hold that the aforesaid case is not applicable to the facts of the present case. In Elkem Technology (supra), 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.

“51. These appeals pertain to Lucent Technologies, GRL LLC. As briefly stated above, the issue in these appeals is with reference to the taxability of the amounts received from supply of software to Reliance. The AO held the same as royalty in nature and in the alternate, also considered that there is a PE in India and so the business profits are attributable to the PE. Along with the above two issues there are issues on non-granting of TDS credited, levy of interest also.

8 & 1239/Mum/2016 Lucent Technologies GRL LLC Accordingly, the grounds raised by Lucent from Ground No.2 to 5 are rejected.

53. The next issue to be considered is attribution of business profit to the PE. Vide para 4.18 of the order of the AO for the impugned year,, the AO gave a finding that payment made for software would be termed as royalty payments and necessary tax rates have been mentioned in the table. Further, considering the agreements entered by Reliance with Lucent Group the AO was of the opinion that there existed an Agency PE. Vide para 5.8 of the order the AO also considered that in case it is held that assessee’s income is not taxable as royalty, the assessee’s business profits have to be worked out in view of it having a PE in India. We have already held that payments made by Reliance have to be considered as royalty and accordingly the same are to be taxable as royalty only. Therefore, there is no need to consider the same as business profits. However, the issue of PE has to be decided, as existence of PE makes business profit taxable in India. Therefore, it is necessary to give a finding on the existence of PE to the assessee Lucent.

54. The AO invoking provisions of Article-5 of DTAA, was of the opinion that an agency PE is coming into picture as substantive functions of negotiations, entering into contract, stocking of goods or merchandising is being done by India enterprise i.e., LTHPL. He referred to various terms of agreement entered between the parties particularly the Assignment 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 for the assessee also relied on Article-5 of the DTAA and decision of co-ordinate Bench in the case of Western Union Financial Services Inc. vs. ADIT (104 ITD 34)(Del.) to submit that mere use of software for the purpose of business in India need not lead to an agency PE as assessee was not rendering any service in India nor LTHPL is authorized to deal with outsiders on behalf of assessee Lucent. Further, it was submitted that the co-ordinate 9 & 1239/Mum/2016 Lucent Technologies GRL LLC Bench in the case of Lucent Technologies International Inc. vs. DCIT, Non- resident Circle (28 SOT 98) considered the facts in the case to hold that there is a service PE in that case. It was submitted that mere existence of a PE to a group company does not lead to a finding that the assessee also as a PE in India. It was further submitted that AO’s reliance on a document i.e., subsequent restructured agreement for payment by the group companies does not indicate that any one of them is authorized to enter into contract on behalf of the assessee Lucent and further, agreement was dated 06.09.2008 does not pertain to any of the impugned assessment years. Nothing was brought on record by the Revenue that there is a PE except relying on the so called agreement which was entered on a principle to principle basis.

10 & 1239/Mum/2016 Lucent Technologies GRL LLC stage the turnkey project, such responsibility would rest on the shoulders of the assess. There was no dispute in that the assessee had completed part of its contract, i.e., the supply of the hardware and the software. The installation, commissioning, testing and bringing up to operational state of the hardware and the software supplied by the assessee had been undertaken by the Indian Subsidiary, LTIL. For said purpose, LTIL had also taken the assistance of the employees of the affiliates of the assessee. Thus, the parent company, being the assessee had made personnel available to the LTIL, the subsidiary in form of the employees of the affiliates of the assessee at certain remuneration. Further, a perusal of the agreement between Escotel and the assessee clearly showed that the warranty provided by the assessee-company was in relation to the defects in the hardware. That warranty clause in identical form was also found in the agreement entered into between Escotel and LTIL. Normally, the warranty for a particular product to be supplied by one person is the responsibility of that person alone, but in the instant case, that burden was also shifted to the subsidiary, being LTIL. Though LTIL had certified that it did not keep any spares on behalf of the assessee for the equipments supplied by the assessee under the contract with Escotel, yet the fact that LTIL had also assumed the responsibilities of the warranty in regard to the hardware supplied by the assess, as also the responsibility to replace the same within the period specified in the support contract between Escotel and LTIL clearly showed that the subsidiary, LTIL was also acting on behalf of the assessee. A perusal of article 5(2)(1) of the DTAA between India and the USA clearly shows that it is not only the employees through whom if services are provided, the PE is to said to come into existence, it also includes other personnel. Obviously, the term ‘other personnel’ has to be read with reference to the earlier words, as provided in the said article 5(2)(1). The other personnel specified would be the persons over whom the enterprise would be having a control. In the instant case, undisputedly, employees of the affiliates of the assessee had been employed through LTIL for providing the services of installation, commissioning, testing and bringing up to operational 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.”

11 & 1239/Mum/2016 Lucent Technologies GRL LLC 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 Tripartite agreement between Reliance and LTHPL and assessee Lucent. Eventhough, installation was on Indian company there is no evidence of either deputing personnel of assessee Lucent to India nor there is any evidence in the record for invoking Service PE as in other case. Moreover for invoking Agency PE , facts do not support AO’s contentions. The agreement entered is an independent agreement, entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken any responsibility of the assessee Lucent. On the facts of the case we are of the opinion that there do not exist any PE, more so of agency PE. It is also not the case of the Revenue that the assessee deputed its personnel to India so as to invoke Service PE as per Indo-US DTAA. In view of the above, we hold that there is no PE to the assessee company in India and as there is neither any office in India nor it has any business connection in India nor carried out any business activities in India. Assessee’s company is a standalone legal independent entity. Therefore, assessee’s ground nos. 6 to 12 are upheld, as there is no PE in India, so attribution of profits does not arise."

8. Accordingly, respectfully following the above, both the issues are decided in favour of the assessee.

Order pronounced in the open court on 13.08.2018