DIRECTOR OF INCOME TAX vs. ERICSSON RADIO SYSTEM A.B.

Ie ,r'' 'f IN THE HIGH COURT OF DELHI AT NEW DELHI Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through: Mr. Soli Dastur, Mr. PercY Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates ITA s08/2007 DIRECTOR OF INCOME TAX Through: ITA 507 12007,lr{ 50812007 lT L 5lll2007,ITA 397 12007 JIIDGMENT RESERVED ON:22.7.2011 JI]DGMENTDELIV@ tTA s0712007 Mr Moh"" P;;;"liiT#Ht Mr. Sanjeev Sabharwal, Sr. Standing Counsel (1) (2) e DIRECTOR OF INCOME TAX ..... APPELLANT Through: N/fu. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDtr]NT Through: Mr. Soli Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr. SudeeP tT,\ 50?200?, f TA 508/2007. tTA 5 | | 12007, I'f ^ 397 I 2W7 Page I ol'3 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified

Versus Mr Moh"" P;;*l.Plt8T; JVIr. Sanjeev Sabharwal, Sr. Standing Counsel ERICSSON RADIO SYSTEM A.B.,NEW DELHI. ..RESPONDENT Through: Mr. Soli Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, IVIr. Sudeep Chatterjee and Ms. Meghna Advocates. Sudha Panda. lTA397 of2007 DIRECTOR OF INCOME TAX Through: DIRECTOR OF INCOME TAX Through: Versus M/S METAPATH SOFTWARE INTERNATIONAL LTD. Through: (3) t?- Chatterjee and Ms. Meghna Sudha Panda, Advocates rrA 51112007 Mr. S anj e.r s ;;;f"P"i,1til; ...RESPONDENT Mr. R. Satish Kumar, Advocate with Mr. Parivesh Singh, Advocate. (4) tTA 507/2007, ITA 508/2007,tTA 5 | | 12007, lT A 397 n007 Page 2 of3

$ CORAM: HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MS. JUSTICE REVA KTIETRAPAL A.K.SIKRI. ACTING CHIEF JUSTICE: 1. For orders, see ITA 504 of2007. ACTI G CHIEF JUSTICE [*- n*+-/ (REVA KHETRAPAL) JUDGE DECEMBER 23,201I skb \ ( tTA 50?i2007, ITA 5082007.1TA 5 | | n007, l"l A 397 nwl Page 3 of3

+ I1- IN Tr{E lrrcrr coIJRT Ol?Eirdr AT NEw I}EX-,rnI rrA ;;4/2007' ITA- so'7lzooj ITA sotlzooz'xTA 5Lll2oo7 rTA 397/?007 \ )9 1,.1'c I ol'7. (1) DIRECTOR OF INCONIE TAX Through: Versus EIUCSSON A.B.'NEW D,ELHI' Thlough: IT"A 504/2007 ITA 501/100?. IT'1 507/2'00?t ft'\ 508;200?'lTr\ 5tlt)001' tTr\ 3)rll0it? Mr \40r'"" o;#,1:ii'eilli: Mr. Sanjccrr Sabharrval' . Sr' Standing Counset Mr sori ""-lll--*5l'it]$l ir.rAi*"ff., Ms. Pratibha Singf' iil.';;;,' ch'uc'icc ancl Yl: ti " gt.r" ; s udh n P anciir"\cir" octLtcs e) ITA s07/2007 '""' r\Pxlxill'-lNT S{,.uo'oR o!-'Tfi:#|] rAx Mi ,"Tllil"liltfr;.il^l',1, -ill Stancling Counsci Verstts oRr c s s oN nAD roh;tJ:; I * A' t] " il:w 3"', lt ll;.f '1i -iit t'f':' :' Perdivi,alla-' futt' I\atiblra Sing'h' D ON:22'7'20tll ll OU-izs'lz'zot-l'

)e Mr. SudeeP Chatterjee ancl IvIs' tt.t*" Sudha Pancia' Advor:ates (3) ITA 508/2007 , Drr{Ecror{ oF Tf,3#,1 u1A Mohan.p,**'nl iE5"Tf'Ifi S;""; Sabharwal' Sr' Sta'nding Counsel Versus ERICSSONITADIOSYSTEMA.B.,NEWDELIilx..I{ESI,0NDIINT. Through: ftn'' Soti Dastur' Mr' Percy Perdiwaila' rrrr'ub'' u*"li:*';o t#it'*Xi"* tll:il] Panda, Advocates xTA str 1/2007 (4) DIREC'TOR OF INCOME TAX Through: Mr Moh"" n'"'"*fruh^)J; M;. Sanjcev Sabharwal' Sr' Standing Couusel Versus' ERICSSONRADIoSYSTEIWA.B.,NEWDELHI.".RESx,oN]D[rN'n' Through: ^'"-'il" Soli Dastut'' Mr' Percy Peldiwalla, Ms' Pratibha Singh' Mr. SudeeP Chattcrjce and Ms' Meghna Suctha Panda' Advocates' ITA 504/2007, tTA 507/2007'. lT'\ 508/2110?',1 r',\ 5l l/200?' ITA 3'97n007 Pngc ?. ol 75

2r (s) ITA 397 ot 2007 DNRECTOIT OF INCOME TAX Through: Versus M/S METAPATII SOFTWAI{E ..RESpOIqDEt{'ll ixinnxArroNAI,l,lfl, Hrn s*i,r' i:1ru^.uffh: Advocate' CO[{AM: X{ON'tsI.,E TIIE A.CTING CI{XEF' J{JST'ICTi HoN' IILE vrs]lusiicn REvA KtrrtTxrAPAL l.TlreaSSeSSeeM/s'EricssonRaclioSystemsA.l].isacotnpany incorpolatecr in sweden and is a tax resicle't of swedcn' 'fhe compa*y is a 10g% subsidiary of rerefonakitiebolaget L.M. E'icssor. T'e ^rai. businessoftheassedseecompanyisttresupplyofhardwareatrclsoltware wlrichisusecliqthebusiuessofrencicringtelecommr-rnicatiorrselviccs andforthispurpQse,itundertakesprojectsontur.trlteybasis.In : I'IA 50'l/2007' lTt\ 50?''200?' lTr\ s08/200?'lTA 5t t/r007' ftA 39?'4007 Mr s anj e"' u#;#J,"i.l'tlll l)a!!u I ol'75

AA telecommunication projects, tire activities involved are sr4rply of lr.ar.dware and software, installation and conrmissioning of the two and after sales ser"lice. In the assesslnellt year I9g7 -97 ' the assessee ' company entered into agreements with ten cellular operators collectively callecl "oPetatots" as follows:- " 1. IJuchinston Max Telecont Lintited ' 2. RPG Cellular Set"vices I'imi'ted 3' Bharti CeIIuIar Limited 4. Birla AT & T Cornmunication Lt:d 5. Cellular CortutrtLnication l"flia t td" (RPG Cellecortt Ltd') " 6. J-T' Mobil'e Lindte'd 7. Bharti Televenhtres Lintil'ed " B. Hexacortt '[ndia Lhnited " 9. I{uchinstont MaxTelecont Ltd' . 10. Reliance Telecont Priiate Ltd' : .2.Pursuanttotlreaforesaidcontracts,tlreassesseclrassupplicd variouslrardwareandsoftwaretotheabovemcntionedcellurlar operators cluring the relevarnt assessment yeaf' In regard to terx liability in Inclia, the assessee claimed that it is rro|. liable to tax utrder Llre provlslonsofthelncome-TaxAct,Lg6IancltheDotrble.faxatiorr : ' ')ate 4 .l'?5 tTA 504/2007, ITA 507200?' frA 508/20{}?'lTr\ 5l l/200?' IIA 397/2007 ; 07-04-1995 : 27-06- 19tt 5 : l5-12-1994 : 05-04-1996 . 29-()5-1996 02-07-1996 2i-08-t 996 25-09-1996 29-10-1996 t 3-02-J 997 "

* Avoidance Agreement between Sweclen and Inclia (the "I)TAA")' It is necessal.ytolrighlighttlrattlreassessee'aSstateclabove,isawlrolly owned subsidiary of the L.M. Group of Companies with whom the cellular operators had entered into supply agreements' -fhe Bricsson Telephone corporation India AB is also a foleign colnpally r't'ith a branchin India and is a subsidiary of the palcnt conlpany of the assessee, viz., 'Ielefonakitiebolaget L'M' Ericsson' 'fhere is oue mol'e entrty, namely, Ericssoucommunications l'itnited' whichis an Indian compally and is a wholly owried subsidiary of the parent courpatry' F'or tlrepurposeofbrevity,EricssonRaclioSystemAl}isreferredtoasthe assessee, whoreas Ericsson Telephone corporation India AB is referrecl to as EFC and l}'icsson communications Lirnitecl is lelerred to 'as I]CL andtlrecompanyT'elefonakitiebolagetL.M.Er.icssonisrefcrred|oas LME. 3. 'fhe assessee,,a non-resident company' stlpplics cquipmenl' to the o companies (E'F'C anil RCI') arc in the operators, while th'e other tw businessofinstallationoftheequipnentandgrantirrgna.rlreting l)r!.c 5 ol'75 ITA 504/2007, ITA 507/200?' lTr\ 508/!00?'l'li\ 5l l/2007' I f'\ 39?n00?

suppod to the assessee. Thus, for the fir'st lhlec months' the wr:t'l< o1' installation a'.d marketing support was done by the EFC, ancl for the renainingninemonths,thesalrleworkwasdoucbyllCL'I'he contracts undertalcen by EFC, which were pending on 3Otl' June'' 1996 were assigned to ECL, which was iircorporated in India' 4.ThebasicstructtrreoftlrecompaniesistabtriatedbytlrcAssessing Offiicer as follows:- -Ericsson TelePhone Corporation India AB SnbttdtorY of LME (InstaIIati'on contrcctoY & ntarketing st'tPPort to ERA before JuIY (Insta.ll'ation conlraclor & nm.rlcetittg suPPlrt' after JTLIY 1996) .[ndian ComPanlt 1996 N.R. ContPanS' havi.ng Bran'ch itt 5. Before the contract was signed in lrrdia, a number of emplovees of the assessee company a.nd other associated companies visitcd India for the purpose of network sulvey and to negotiate thc terms of thc contrdct' which was a continuous process sprea<l ove' a long pcriocl of tinrc' lt is rIA 5042007, ITA 50?/200?' ITA 508200?'lTA 5l l/200?' I'Ii\ 397/200? I'ng.c (r ol'75 Ericsson. Radio Sobttdtory ' qf LME (Equipment supplier to ',a'nd Incli,an Custcttuer) Non-Residenti CompanY :

a matter of record that during the visits of those employees' thc branch office of EFC provided offtce, telephone and other facilities to the aforesaid.employees.Tlreemployeesofthebranclrofficertscdtoarttend themeetingsandundertookfollow-upworkwithtlrecusLotners af1er.war.ds. In this regard, there was a market support agreelnent entered into between the assessee and E'FC' 6.Tlresupplyoftheequipmentsignificantlywasacotttinuot-ts process. In accordance with the contract, the equipment was not to be acceptecl till it was finally tested through a test lanown as Acc;cptance Test(A.T.).SuchAcceptanceTestwastobecarriecloutbyljFCiritlre first thr-ee months and by the IlcL in the last nine tnonths of tbc rclsrvant yeal.. The contracts were signed in India and till delivery to the port in : Indiawastlreresporrsibiiityofthesupplier..-[hesrrpplywasonCll) basis and afler supply, the defective parts were to be rcplaced by the ASSESSEE. 7. on the afbresaicl facts, the Assessing officer after corrsidering the provisions of the Incolne-Tax Act, 1961, and in particular siection 9 .: ITA 504/100?, ITA 50?/200''' tTA 50812007'11 A 51 1i200?' lTr\ 39712007 P:r1te ? ol'75

thereof, held that the assessee had a business connsction in India and income of the assessee must be deemed to accrue or arise in India and as such was taxable in Inclia' B. The Assessing officer also considered the question whether the assessee's incorne was taxable in Inclia in view of Article 7 rcacl rryith Article 5 of the Double Taxation Avoidance Agreement betwcen India and Sweden and conclucled as follows:- "L. The assessee has ct permatxent establishntenl inthefornlofa,dependentagen'testabli'shnten'l which is EFC' 2.TheaSSeSSeealso|msa'perm'an,enl establishmentitl'theforntofadepetidentagentPli which is ECI in tlne-Iater part of lhe yea'r i'e' afte.r JulY 1996. 3.IthasPEintheformofabran''7"''hish\ttcts ' providing a fixect ptace of business to the ctssessee' 4. f;" "off i of ECI was a fixed place o"f businesi for the assessee company' . 5. The emptoyees of the assessee conxparry were condng tto ilai and signing contracts ctnd t'vere stayhlgiin India ancl usiig variorLs facilities _ttthi.ch, tii*iy shottts that the o"i"u' had a 'fixed place cl businesi,' " g. The A.O. then proceeded to lenclel detailect fildings ill respect of each of the aforesaid rnatters, to wfiich we shall presently advert bcfore lTA504/200?,tT.'\50?/200?.1T4508/200?'tTr5tl/2007'lTr\397';2007 I'a1tc 8 ol'75

proceeding to deal with the softwale sr{rply contlact eutered between the cellular operatol ald the assessee and Article 13 oJ'the DTAA bet'ween India and Sweden dealing with royalties and lees for technical services" After considering the matter from ail angles, the A'O' concludcd that the assessee had provided the software to the cellulal operators under a license and the income'which arose thelefi'on was to be taxed as rclyalty as per Arlicle 12 of the Indo-Sweclen treaty' sincc' ltowcYcr' the assessee had a pertnanent establishment in India' the satne'was to be taxed as business profits at a flat rate of 30oh as providcd in thc inctian Income-Tax Act. t0.TheA.o.tlrenproceededtogivetlrecomputatiorrasfollorn's:- ' "The total supplies made during the yu?'' -:P'' hardtuatte in US $ j,80,74,540i- ancl software is -Ul'.Jl 1,10,72,'708/-'Ap."'',olofthebalancesheel'fi'l'eclby theassesseesllolvsthatfortlrcllea'rendlng]997,th,2 conxpany ltas earned a gross margin "f 4la: lhis ,oniu'.1'ont th'e anrutal riport for the year Ig?7-t'rhe"re theassesseehasearned-20]42l57thottsa.ndSlled,i'sh Corner gross ntargin on the nel' sale of 42797901 tiouuorT swedish"cor,rur. This is 470k over a.nd aboveth.eassesseehasclainledsellingexpenses, achrtinistrative expenses and R&D expenses in' the gtilrot ba,lance ,iuut. T^e assessee lms subnti.tl:ed that u) Prrc 9 ol'?5 l'lA 504I200t, ITA 50?/2007' lTr\ 508/200?'lTA 5l l/200?' ITA 197/200?

ithasreitnbursedtothelndia'nconxpatxyconxm$SLol1. plus otth'er costs which amouttts Lo 2l% of lhe I'ol'al turnover and therefore ottt of this gross profit of 4-7%o' 21% is alloyved as expenditi.re directly attributabl'e to Indian Ofu''utfon'' .fhu adrttinistrative expenses and R&Dexpen'Sesarecoveredundertlleoverallsealin'g ' of Sectin 4aC of the I'T' Act and therefot"e the -net taxableincomeoftheassesseeiscottlpt'ttedcts,follou,: 1. Total Sales of l'tardu'anne : US '$ 3'80'74'540/- convertirtg into INR @ 36...5": 38074540 * 36'15 : 137'63'94'621'/- Taxable Profit @ 26% -- 35'78'62'601/- Less: ' H.O- exPenses allowed u/s 44C @ 5%: I'78,93,1j0/- Taxable In"ontu :' 33'99'69'47 l/- Tax @ 55%o : 18,69'83'209/- "" "" I Totai'c ons ider aliott for s oftw ar e -- U'S $ I' I 0' 7 2' 7 0 B /' Converted into INR @'36' 15 - 40'02'78'394/- Tax @ i0%o: ns/t2.'00'83'513/- """ """ "' il Tonltax: (I) + (II) - 30,70,66,727/- in n, uu!,',' f::;!;- !: ::",';*''i)1, /il!',",,,'!:; r:' initiakd, s ePar atelY' " i 11. In an appeal flled against the aforesaicl ordcr of the DCI-1'' Ngl- Resident Circle, Ngw Delhi on 28.03.2000, the Corlrnissioner of Income-Tax(Appeals)examirredthematter.Theappellarrtlradtaken l'iltrc |0 ol 75 rTA 50d/2007, ITA 507/200?, ITA 508/2007t1'rA 5l l/200?! ffr\ 39?2U0?

fivegroundsofappeal,apartfi.orntakinguptwoadditiorralgr.ourrds subsequentlY as follows:- (i) Ground.No.i *u, that the learned A.O'. had erred in troldiiig that the income chargeable to tax in .India aecrued or arose to the assessee' This ground was held to be too general in nature by thc CIT(A)' (ii) Ground No.2 dealt withthe asscssee's br-rsiness connection in India and the existence of pcrmanent establishment in India. The CIT(A) decided. the aspect of business connection against the appellant' but the aclditional ground taken up by the assessee oll 2I.07.2000 againsiexistence of PE of the assessee in In<lia, was decided in favour of the assessec' (iii) Ground No.3 mentioned that the asscssce incufrccl, a loss during the year as cerlifiecl by Price Walcr l-lousc Cooper, Sin'eden and, therefot'e, the A'O' etloueously brought to tax the irnpugned incotne oJ' <74,02,47,865/- consisting of business lncome ol' <33,gg,69,47 I 1 - and royalties of <40'02'7 8'39 4 1 -"fhe: CIT(A) ipaftly allowed tlris ground, atrd l-reld that' while no b.rsiness profit can be cotlTputed in tl'tc: . absetrce iof PE of tlre aSSeSSee in Irrdia, tlre assesse<: wasliabletopaytaxonroyaltiesreccivcdbyitfrotrt the oirerators in India' (i,r) In grouncl No'4, the assessee assailed the finding of the A.O. that income fiom licencing of soltware . amounted to receipt of royalty' Without prcjudice to I'l A 504/200?, tTA 507/200;, I'fA 508/200?rlTA 5l l/2007' I'IA 397/2007 t',lrrc I I ol'75

(") this ground, it was mentioned that once it was held tnut "ttt" appellant had PE in India' the royaltics obtained the character of business irrolits' It was also submitted that the A.O. had failecl to appreciate that royalties are taxable at the rate of ZOoh vndcr Arlicle li ofthe DTAA. The CIT(A) clecided this ground ibr treating license fees received by thc assessee as royaltils against. the assessee' I-Iowever' he directecl th; A.O. to verify the rate of tax chargcable on thc receipt of the royalties aud pass a speaking order in this behalf. Ground No.5 sought to challenge the A'O''-s-finding regalcling chargin[ df interest under Section 234A an3 z{qg on th" grorrird that the l.evenlres wcre liable for tax cleduction at soulce. This ground was allowed by the CIT(A). '(vi)Theadditionalgroundregardirrginvalidityofnol,ice isrrr"J by the aisessing ol.r""t unde'_sectio' 142(l)' takeno,,os.I2.2o00,wasdisnrissed.flreCIl.(z\) thus partly ailowed the appeal of thc assesscc' I Iz. The assessee was not satisfied rryith the paltial relief grarrLed to it bytlreCIT(A).Thatpartoftheorderwhichwcntagainsttlreassessee was challenged by it by filing appeal before the ITAT' Lilccwiiie' tl-Ie Iterlenue also challenged other paft of the order of the CIT (A) whereby the relief was grant"d to the assessee' 'fhese appeals and cross-appeals : tTA 504/200?, rTA 507/200?" ITA 508n00?,lTA 5l l/200?' l'l'i397noo? Pagc l2 ol'?5

el alongwith cases of othel assessees namely Nokia and Motorola wefc refer.red to the special Bench. The special Bench has dccided the issues in favour of the assessee resulting in ciismissal of the appeais of the Rev.enue and allowing the appell of the assessee' Challenging that rlrder of the Special Bench, the Revetrue has filecl appeal which is registr:red as ITA 507 12007. ITA 508 12007 arises fiom the order passecl b1r tire Tribunal cJisposing of the closs-objections of the assessee and ITA 5IIj2O07 arises fiorn the order of the Tlibunal disposing of the appeal of tlre l{evenue. Thus ITA 50712007,ITA 508/2007 and IfA 51112007 relate to one assessmentyear i.e. 1997-98. In the next assesstnetlt year' the ITAT followed the aforesaid order ancl challenging that ordel If'A 50412001 is filecl by the Revenue. These first three appeals were : adrnitted on the following questions of law:- ' ITA 50712007 ..l.Wlrethefinlaw,theLd.Delhi.friburralwas justifieclin.holdirrgthattheassessmentwasirrvalid inasnruchasit.vusfiatnedpursuanttoanoticeissugd 'underSectionI42glxi)oftlrelncotne-TaxAct, lg6l,wlrichnoticewasissuedbeyondtlreperiod"o[ limitation?: : tr^ 504/200?, ITA 507/2007, ITA 508/200?,lTA 5l t2007', ITA 397/200? Pagre l3 of75

t)'/ the main issues. rst issue peftains to the validity of noticcs issued 2.Wretherirrlaw,theLd.Delhi.fribrrnalwas justifred in holding that the assessee did not havc a business corurection in India? 3. Whether in law, the Ld' Delhi TUibunal was justifiedinholdingthattheconsidelationforsqrpiy tf softwa'e was not a payment by way of royalty, and hence, was not assessable both under Section 9(1)(vi) of the Double Taxation Avoidance Agreement ''between the govelnment of India aud Sweden?" ; r ITA s08/2007 ..l.Wlretlrerinlaw,theLd.Dellri'fribLrnalwas justifiedirrholdingtlrattheassesseedidnotlravea business connection in India'?" ITA s11/2007 : ..1.Whetlret.inlaw,theLd.Dellri.,lribunalwas jrrstifiedil1holdingthattlreassesseedidnot]ravca permanent iestablishment in India? i 2.Whetherinlaw,theLcl'Deihi'fr:iburalwas justifiedinideletingthelevyofinterestchargcdunder Section 2349 of the lncome'fax Act' 1961?" 13. We rnay first {eal with the two incideltal issues before contiug to Fi : . l):rgc 14 ol'75 lrl s04/2007, rrl 50?/200?' rrl 508/2oozit't 5t t/zool' tt.'t lcz'/2002

ey under section I42 ofthe Incotne-Tax Act. 'fhe 'fi'ibunal has conr:luded that this notice was issued after the encl of the assessllent yeat' i'e' a{ter 3l't March, 1998 and, therefore, it was invalid' Consequently' i't l'reld that the Assessing Officer had no jurisdiction to complete the assessment ancl, ther-efbre, assessment fi'amed by hin on' 28tlt March, 2000 was also invali<l. However, sqbsequent to this decisiol of the 'fribulal' by Finance Act, 2006, the Legislature has aclded proviso in section 142 (1) of the Act. The effect thereof is that an assessment fiamed pulsuant to a notice issued under Section I42 afler the end of the assessment year' ' would also be valid. : Conceding this position, it was accepted by the assessed tb.at the notice issue was not beyond the period of limitalion' Question No.l of ITA 50712007, is thus deciclecl in favour of the Revenue. 14. Second. question, which we take gp for considcration relates to the ; levy of interest charggd under section 2348 of the Act' The Tlibr"rnal has deleted this addition hnd the Revenue is questioning tiris decision of the Tribunal. The quesdion of law No.2 is tiamed on this issuc in LTA ; : l);1ge l5 ol 75 ITA 504/2007, lT.^ 50?/2007' ITA 508/r007,lTA 5l l/2007', lT'\ J97l2007

,* 5II:2OO7. Perusal of the order of the Tribunal would reflect that it has foll0wed its earlier decision of Delhi Bench and Murnbai Bench otr the basis of which it is held by the Tribulal that levy of interest was not justified, inasmuch as the assessee hacl no obligation to pay atly advance tax as tax was deductable at soulce on its iucome that was chargeable to tax in India. This very issue has been cliscusscd in detail by this Cor'rr1 in cIT Vs. Mitsubishi corporation in ITA 49112008' I{elying r-rpon the judgrnent of BombayiFligh court , in DIT Vs. N.G.C. Networlc Asia I LLC. 313 ITR 187, this court reached the conclusion that uo inlcrcst 'can be leviecl. ' 15. The circurnstarices of the prebent case arc virtr-rally similil't" In fact, we tnay lecord that there was hardly any resistaucc by thc Re"'cnue : to the aforesaid positlon. we thus answel this qucstion in favout rrf the assessee and against the Reveuue' : 16. It is now the stage to deal with the basic issues raised in thcse airpeals which ale:- i (1) Whetherithe assessee has business conucction i1 ludia'? rTA s04/200?, lrA 507/2007, ITA 50S200?,ITA 5l t2007' I',rA 39?/2007 Page l6 ol'75

(3) Whether : hardwa.re and software components^ of 1h': "q,rip-"tt can be segregated for the purpose of Section (lXvi) of the Act? 17. The issue as to whether any incotle can be brought to tax in terms of the Act is dealt with in paras 103 to t23 ofthe'fribunal's older' I'he Tribulal h.as come to the conclusion that no part of the income ilccl'ues or arises in India because having regard to the tertlrs of Article t I 'rf the supply contract it is clear that property in the goocls has passed outside India. In this regard; the Tribunal has held that the mere fact that the conlract was signed in Inclia is an irrelevaut circutnstance and the : reliance by the leveliue otl the judgment of the Supreme Court in the case of 20tt' Century.Finance Corporutio.n is rnisplacecl'. The Supreme Court in that case weis concelned with the issue as to where the situs of the taxable event of a contract to transf'el a right to use goods rvas . located. It was in that context that the Sllp1eme Court hcld that the situs (2) I'fA 504/200?, l1'A 50?/2007. ITA 508/200?'tTA 5t l/200?' lTt\3971201i'l whether. the assessee has permaneut establishment irt India? iW" "tuy clarify that if the assessee has business connection in India, then this question may not evetr need to be consideled). tlrgr: l7 ol'75

zL of the taxable event in sirch a deemecl sale was the place whcre the contr.act for the. transfer of the right to use thc goocls was nrade' Accorcling to the Tribunal having regard io the plovisions of Sect'jon 19 ; and20 of the Sale of Goods Act, the property in the goods passes'when the parties intend it to pass, a1d the iltention of the parlies was rnanifested'in Article t3 of the supply contract' The'fribunal also helcl that the mere fact than an Acceptance Test u''as carried out in In<Jia w.as ar. irrelevarrt circumstance and in this regard reliecl on its earlier decisions as well as in the juclgment of the Anclhra Praclesli IIiglr Cor-rrt' tnAclditional CITVs,. Skocta Export Fraha,172 I'fIt 358' Accor'cling to the Tribunal, the mele fact that an acceptance test had to be per''[ormed did not in any Way m?an that the title had not passed from the assessee to the Cellular operator putside in India' 18. The Tr-ibunal poted that it was ttot t-ttlcotntnon that in exccufion of such large projects tlie various compollents of a turnkcy project natnely planrringanddesigrrirrg,supplyofequiprrrcnt,civilworksand i'stallation, testing and commissioning of the equipment rnay bc hanclled i : rr^ 504/200?, tTA 50?200?, ITA 508/200?'l'Il 5l l/20c?' l'lA 3',?/2007 I'age l8 of75

9 byaconsotliutrrofcotnpanies.Separateagreementswourld into to carry out eachi of the aforesaid obligations and each bc entet'ed contractor rnay be an overall lesponsibility. Two separate independent contracts wel.e entered into: one between the assessee and the celiuiar operator for the supply of the goods and the other between the installalion contractor a1cl the cellglar operator and the Tlibgnal for the reasons givel ig para 1 18 of its orcler founcl, on a construction of the lclcvant provision:;. of the two agreentents, that the contracts coulcl not $e treated as turnkey 01' a workscotltl.act.TheTribunalalsodidnotaccepttlreargumerrttlratby virtue of the overall agleelnent the income that al'ose to the aSSeSSee rvvas chargeable to tax in Inclia. As regards the ovelall agteement' the Tribunal held that th,e overall agreement was exccute'l as a tnatter of colnmercial prudellce as the cellular operator needs to be instillecl witli confidence that the pioject wouid ultimately tahe off and, thet'elore' he would insist on a sirigle point responsibility. 'fhc Tribunal also noteci i that this was a .ontniot plactice ancl Instruction No' 1829 issuecl by the , woulcl be responsible for its obligatio's u'der its cont'act althouglr [here ITA 504/200?, ITA 507200?, ITA 508/2007,114 5l l/200?' ITA 3',7l2007 Pagc l9 trl'75

L8 central Board of Direct Taxes which was in force on the first day of the assessment year also takes cognizance of the commclcial necessit'y for ' having such overall responsibility. The Tribunal further found thirt no payrnent accrued. eith'er to the assessee or the installation contt'actor under the overall agreement, but the overall agreement tnerely eut;ured supervision and guaranteecl the performance of all thc contracts itr a co- ordinaled lnanner. The Tlibunal furlher noted' that the installation contractors a1d the assessee wer-e sepat'ate independelt entities ancl there was l1o evidence brought on record. to disclose that any olle is depre:ndent on the other, either fina'cially or in a'y other' lnallner. 'fhe 'fribu'al :.. fi*ther held that the finding of the Commissiouer of Incotne-'l.ax (A) flrat the various entities rryere formed for the purpose qlf busi'ess atld were l; doilg business indepbndently as pel theil instrurnents of incorporation was not disputect by the Revenue. The 'fi'ibunal founcl that both IiFC as well as ECI wele separately assessed to tax in Inclia. 'Ihc Tribr"rtla'l thus i cafire to the conclusibn that there was no br-rsiness conneetion r'vith the assessee i1 India havi'g regarC to the natule of the arl'allgexnerlt l'[at the ITA 504/200?, ITA 507/2007, ITA 508/2007'lT'\ 5l l/200?' ITA 397/2C07 l\r1;c 20 ul'75

99 assessee had with either IIFC or g'Ct. ttntth.er, as no operatiotls were formed by the urr"rr"L in India no income could be charged to terx i1 I India. The 'Iribunal, tirerefore, ultimately concluded that no part of the i income accrued to theiassessee in India an<l that as the assessee clid not ^.lio ,"n ,"or"i' n'f: id bg have a business'conn'ection'i1 India no part of the incomc cou regalded as deerned to accrue in India aiso; and that income fi'clnr the -i supply of equipment i accrues outside India, wherc the equiptnent ts : manufactured outside India and the oroperty therein passes outsidc lnciia alcl the place of execuliol of the contract is not relevaut' In this regard reliance was placecl by the Tribunal on the judgment of the Srtprene Coutl tnlslailcuwuinm.Hurinta lteavy Indttstries Ltcl' Vs' DIT'28t'i Il'R 408 where the courl has helcl that the fact thal the contract was signecl : in India is of no mat{r'ial c.onsequence since all activitics in conltercttott with the off shore supply were carried o' outside lndia. 19. It would thus be proper to first deal with the issue of btr:iiness connecuon. lTr\ 5042007, I1 A 507/20U?' l'I'A 5C8/2007'ITA 5l l/2007' ITA 397n007 l'ilg,r:ll ol'75

Qo RE: BIJSINESS CONNECTION: ZO. Mr. Mohan Parash aran,learned ASG openecl the argut'e't o^ this aspect by submitting that it was. all integratecl busincss alTangelner'rt [ot' supply of GSM system fo1 which three agfeelnents werc etlterecl into viz., the Supply Agreetnent, the Installatiou Agreeul"ent ancl the Overall Agreement with JT MOBILES, which together form an Intcgrated Business Arrangement that is govemed by the Overall Agreemclt' 'fhe saicl'Integratecl Business At'rangement is for the setting up of a GS'M svstem and the sarn"' coulcl not have been set qr without the .verall supervision, direction and decision making power exercised by the ; assessee. It was the subrnission of Mr. Plasaran that a plain reading'of the terms and conditibns of the three contracts, all cntbred into on the : same day and at the Satne piace in India, v\2., Bangalorc, indicates that, they are all interlinked, inter-twined ancl inseparable' I-Ic pointed out : that the assessee and its associated sister concerns had enterccl into .contracts with the Indian buyers fo1 the setting up of a GtiM systern in India. For the afore$aid ptllpose, the haldwale and soflware was to be tTA 50d/200?, lrA 507/2007, ITA 508/U007,1T't 5l 11200?, lrA 39?2007 I'nge 22 ol'75

; : : ; : supplied/licensed by [he assessee, the 'installation through ; concelnoftheassesseewastobeoverseerrbythcassessee a sister ancl the i /as Llporl thc assessee. overail respousibility of the three contracts also u : I-Ie drew our attention to the salient features of thc tirlee Agreenlents which according to him conclusively show that they are, in effect' oue .: iltegrated business arrangement. He specifically referred to the following features of these Agreements: : SuPPlv Agreement " Preamblei: Agreement for suppiy of hardware atlcl software [icense' * Article 5i S"op" of the contlact' 'l'he said claust: uses the phrase "turn key basis"' *ArticlelS:'AcceptanceTestandAccepteulct: certificatb issued by the Installation Contractor will bind on the assessee' ,, Article 2b: Provides for the license to use softwar': fol the purposes of setting up of a systctn' )karticle2.1:Assignmentoftlrecontractmaybedotrc whereby:tlrelrardwal.elnaybeassignedtoanyoneb'y tn. n aian supplier, but the software may be'assigned ' ollly after due permission of the assessec' - A;icle3l: Piovides for termination of thc supply contract.l q../ l)age 23 ol'75 l'r'A 504/2007, ITA 50?/200?, lrA 508/2007,1:r'\ 51 1i,007' rfA 3972007

\)/- Installation Ag{eement * Prearnblei Agleement supplied and software rrA 504/2007, lr^ 507/200?, lrl s08/2oor,li,t st tlzoor' ttA 397/200? for installation of hardware for which license has alrcadY been granfed. Artici"e 15: Accepta'ce Test made by the installatio' contractol, includes the integrity of the whole system and certificate binds the assessee' * Article 1i: The installation contractor warranties to rectify dqfects in both hardwafe and software (which are provided bY the assessee)' * Artic\e2l: Provides for terrnination of the contlact' * ArttcIe}g: Assignment of the conttact may be dotre at anytir4e at the option of the Installation contractot' to any su$sidiarY company of LMll' : Overall Agreement l. * Pr.eamble: Clearly indicatcs that the patltes afc) setting up a system and'uot just supply of goods or in'stallation seirarateiY . Clause 2: Clearly outlines that the overiall responsibility for the supply agleement and tlx: installatign agreelnent rests with the assessec' Clause 5 j -learly shows that the ter'rination of b.th the contriacts is simultaneous aud t|at whcre orrly the installation contract is telminated, tire pt'crogative is that of the assessee to find the replacetlrcnt for thc installatibn contractor. ,F Clause 6: Pr-ovicles that the ovelall Agreemcnt has precedence over the other two agreemeuts and itt case bf uny ccinflict in interpretation with thc other two, will plevail. l'n1ie 24 o[ 75 I

\) 21. Mr. Prasaran subrnittecl that in the light of the above, the Assessing officer as well as cIT (A) were entirely justified in corning to the conclusion that ithe contracts forrned an Integrated Busi.ness Arrangernent on the qarl of the assessee to plovide the Indian btryers with a GSM system. i'h" urr"rsing officer tlacle the following pertinent finclings with respect to the integrated nature of the contract:- :k Overall responsibility was on the assessee for supply, erection ancl al1er sales setvices as eviderrcecl by the Responsibility Matrix between the asscssee colnpaily and JT MOBILES (as well as the other customers): nsi'bili een Ericsson ancl .IT tTA 50d/2007, ITA 50?/2007, lr^ s08/2007,1T4 sl l/200?' lT 397/2007 Manasdment of Store Site paching in the store Detiverj' of documentation according to Annex ltr. Deliverfd on CD-RONI onlY as birilt tlocumentation, MSCreSb t ntst Deliverbd as hard coPies onlY correction of remarks on as

hf built clocumentation Digitalization of rnaPs (MSI format) + + Development of norninal cellpan i - Developinent tlormal covll3ge Prepa ration of teqgglgy-P]ga Drive itest (when found necessary) for checking -- Suitability of chosen sites, pneferablY in conjunction with site survey Developi accePtance Plan Frovisiorn of equiPment and rnaterial Perforrriance and reliabilitY in accorclahce to agreettr to specificatiqns ' =- i r< Even if the Installation Contract is terminatccl, tlie Srrpply ; Contract iis not terminated and the assessee is resporrsible for makiirg ur alternative arfangetnent. I".Iowevcr, if the : , Supply Qontract is terminated, the Installation Contract also stands teirninated as evidenced by clausc 5'5 of thc overall Agreernent, which reads thus: ' "5:5 In the ettent that the SnPPIY Cintractor terminates ltis contract, by ndtice in writing to JT MOBILES' the ';;'"!:::,:;"f ';*::';:"*:,!::;;,';;':::' j; tTr\ 504/200?' lTr\ 507/2007, l1'A 508/1007'ri'\ 5l !/200?' ITA 397/2007 lri.ge 2(r ol 75

; I i 'l ; t^( , MO,BILES. in the event thctt tlrc Irtsisllation Contractor ternilnates ' ltis contract bv notice in writing to JT mOBrunS, the Supply Contrsctor shsll locite a party acceptable to JT MOBILES forl talcirtg ttp the worlc under tlte Insiallatiort Contract on the ssnte lernrs antl conditions snd witltowt a'xy extru exp'.ense ancl fT MOBILES sltall sign the Insisltation Contract witlt that party'" :' The Overall Agreement was "not a matter of cotnfort, .: but an overall guarantee provided by the supplier right : fi'om ,h9 supply ugto the testing ancl proper functionirig of the systern". In fact, the assessee company lthereby took responsibility of the work of' i installatioir cagied out by the Indian company. The Acceptance Test was, however, to be carriccl out by i the Indiair company and the said test was to br: binding on the assessee. J'here was thus an intitratr: anci close relationship between the assessce ald its ; associate poropuny EFC and subsequ,cntly between the assessee zind the Indian company i.e' ECL' The assbssee had cornplete contlol managen',ent, affairs and ftinctioning of over the its associate 5l l/200?' lTrt 397/200? l'ilge 2.t ol'75 t]'A 504/2007, ITA 507/200?, ITA 508/2007,114 -t--*.--- I ': :^i ji ..i f#&$fi

\L companies. Neither EFC nol ECL can opcrate as independdnt agents on an arllls length basis' 22. In the light of above, Mr. Prasaran cluestioned the findings of the : Incorne Tax Appellale Tribgnal regardipg tfre interprctatiol o1' the : Supply Agreement, In'stallation Agreetnent and the Overall Agreement enter-ed into betw""r. [h" assessee, its associate companies and lrrdian customers. FIis submission in this behalf was that the scope of the agreement has been decided ancl interpreted by the ITAT on the ba:iis of the preambles to thel Supply Contract and the Installation Contract, without giving acleqlrate weight to the prearnble of the Ovcrall Agreement, which indubitably shows that there was only onc integlatecl i agreement whereunddr: "The Suppty Contractor and llte Insla'i'lation ; Contractor have agrQed to work on a coordina.ted basi.s t'ut.d.er h'vo i separate contracts, bTinS one behueqn JT MOISILES artd the. Sqtply Contractor for Hardigre and Softwa.re Sttppfu an.d the other beh'veen JT i MOBILES and the lhstallation Contractor for the Installatiort c,f the systent" so as to supply the system and install and commission the system. Palre 28 ol'?5 ITA 504/200?, ITA 507rr007r ITA 508/2007.1T| 5l l/200?' lTr\ 397/2007

\r 23. Accorcling to hiin, another el'rof in the order of the 'fribupal was i that while ilterpretirig the scope of the contracts, cven thc other I provisions of the Ovqrall Agleement were not givcn adequate weight especially Ar-ticle 6 oflthe Overall Agleetneut, which reads as follo"rrs:- This Agrientent shall Prevail notwithsthntli.ng anYthing c o n.t airte d th.er ein' " : 24. I-Iis subrnissioiriwas that this clause clearly shows that thc Overall Agreernent between JT MOBILES (the cellular opcrator) and rhc fiupply Contractor- (the asseisee) and the EFC (the Installation Co'trilctor) i ,,concerning some ud.iitionul terms and conclitions clue to the Sr-rpply and : i . Installation of a Mofile Telephone Systern" was to prevail o'ver the i Supply Contract andith" Installation Contract, which, i1 itself gges to i show that it was integl'atecl business ar:l'angemeut between the parties' i 25. Mr. Prasaran lfurther argued that the Income 'fax Apprellate Tribunal could not have helcl that the Supplier, i'e', the asscssee was not liable fol fiulty indtallation in the teeth of the declaration in the Preamble to the ovbrali Agreement read with clause 2 of the saicl over the Con.tracts, to the contra'rY Pr$c 2.q of75 ITA 504/2007, tTA 5072007' lT 508/200?,lTA 5ll/2007', ITA3972007 I

us "Atl.d. whereas the Sttpplt Contractor and thel: Installation Con.tractor ha've agreecl to acti,in a co-ordinated m.anner so as to st'tpply the,,system and install and comrnission the Sys,tem. Nolu therefore, it is hereblt a'greecl by and bethveen the , Parties ltereto as foll,,ows L i, Interpretation: ." 2. i,, Exectttion; "The Supply Contractor 'i slmll have overall responsibili\t to 'i €tlsut'e that fu'e Systent is supplied in 'i o""ordance wilh the Supply Contracl' ', and htstalled in accordance with the i,, Instailation Contract and it cot1u'tl'tissioned as per Arutex 18 (Tim'e ',, Sch'edule). " : 26. I-Ie also stressed that the Income-Tax Appellate Tribunal i clToneously held thatithe responsibility of installing the systetl wtls not i upoll the assessee, and in comparing the resl:onsibility of tlle assessee under the overall Agqeement to that of the Polish colnpany in the case of I CITvs. Hinclusttt, S'lripynrcl Lttl., I0g ITR I5B (AP), whet'e it in'rrs held : that the services offeried with the contract of sale were mercly incide'tal' ITA 504/200?, ITA 5072007, ITA 50S/2oOl,tfrr st taool' t'IA 397/?007 i. l'rge 30 ol'75 _,**t___-

V' to the contract by way of guarantee for the efficient working o[ the : products of sale. In tlie instant case,'by 1o stretch it ca1 be saicl that the i services. offered by thg Supply Contractol were nerely incidental to the i sale of hardware and the li.cense to use software. On the contrary, sttch services were integrJl to the plopef installation of the entire GSM system. The assesr"" *u, uot merely selling machinery and softwa're but had contlactecl to prcjvide the full system which rcquired supervision ovel. the Ilstallatiol Qontractor and oth.er services ncccssary to set up i and maintain the GSM System. Accordingly, thc ratio of the jr-rdgrnent .of the Supreme Courl in llinclwstan Sltipyartl Ltd-. (supra) is cl'carly ; inapplicable. The cohsequential finding that no incomc accrued. to the' assessee either from ithe overall Ag'eement or fiom the I'stilllatio' Agreement or fi'orn tlle Marketing ancl Business Promotiou Agreetlent : and thus it cannot beisaid that there was "intirnate cottnection bel.weeu : the parties" is also erroneous i 27. His next proptlsition, on this contracts incom.e had acclued and aspect, was that uudel the ;lbove ariseu to the assessee in India and Pa6e 1l ol'75 tr^ 504/2007, lrA 507/2007, I'rA 508/2007,1'liA 5l l/2007' 11' h 397 l2o0'l I

therefore it was taxadle in India. In this behalf Mr. Prasaran rnade i following submissions : - i (a) Uncler Section 5 (2) (b) the iucotne of a non- resident id incluclible in that incorne subject to tax u'cler ,..iion 4 if the daid incorne accrues ot'arises : or is deemed to accrue or arise in Inclia' (b) Income ip said to accrue or alise in India to an assessee :ir *,. assessee had a light to receive the i money tliat can be traced to India. (c) Whether or not the right to receive th" rnoney has arisen ini India is depenilent on the facts of each case. Relevant factors in this regard will include inter aliri the place where the contract is enterecl into, thi place where the conttact has 'to bc performed, whele a given right can be exercised : ' and whali sorl of rights are granted in India' (d)In the prdsent case, it is unclisputed that:- . All the vendeees are based in India . The GSM systetns are being set up India. o fhe software is licensed for usc iu lndia : . :'Ihe hardware is being supplied for isetting up of a sYstetn in Inctia i ITA 504/2007, tTA 50?/200?, l'r^ 508/2007'lTA 5l l/2007' ITA 3972007 Palre 32 ol'75

st " ifhe acceptance test to confirm the luccessflil installation is doue in India. o [he responsibilitY to fnstallation in India ensure successful rests with thc ASSESSEE. (e)The asseslsee's obligations thelefore cannot bc said to end onbe the title of the goods has passed to the Inclian blVer In addition, valuable rights are .'. glanted tV the assessee which can only be I exercised]i' Inclia and the relationship bctween the assessee and its Indian customers is more than just that of mere seller and buyer of goods simpliciter' (0 ln the iilternative, incotne fi'orn the contracts arnount to a source of the incotne that constitr-rtes a "business connection" fol' the purposcs of Scction 9 (lxi) of the Income Tax Act, 1961 and thereforc incotne is deerned to acctue or arise in India' : (g)The business connection tnust be real and iltimatc and incoine should arise as a result of the same within tire territory of India' Further, such : cormectidn must be continuous and not just a onc off. tr^ 504/200?. ITA 507/2007, tTA 508/200?.lTA 5l l/200?' tTA 397'2007 *l Pagc i"3 of75

St- ' (h)Further, the transfer of a license to use an asset in India, with all agreement to shat'e profits thereof, itself can alnount to the existence. of a business connection as has been held by the I-Iigh court of Bornbay in CITYs. Metro Goldwyn Mayer, T lTIt 176. 28. Mr. Soli Dastur, learned S"nio, Counsel appcaring for the assessee refuted the aforesaid submissions of Mr.'Prasaran, heavily relying upon the contention that in a well reasoned decision lendered by the Tribulal the factual aspects were rightly cuiled out ftom the agreements and the Tribunal was justified in its conclusion that tlie assessee hacl no busingss connection in India and in ally case no illtlome had accruecl or could'be deemed to accrue or hacl arisen in India which was taxable in this Country. I-Ie submitted that the assessee was a. non- resiclent a1d, therefore, could be subjectecl to tax only of that itrconre i wlrich was covered by Section 5 (2) of the Act. Mr. Dastur argued that the income fi'orn the,supply of ecluipment accl'ucs outside India lvhere the equiplrent is maqufactured outside India and the property tberein : ; rTA 50,r/2007, ITA 507/2007, ITA 508/2007,1T4 5l l/200?' ITA 3972007 t'agc l4 ol'75

t> passes outside India and the relevant. I of execution of the coutract iti uot 29. In this regard reliance was placecl by him on the judgment of the Supreme Court in Ishikawaima llarinm heav! Industries Ltd'Ys' 'DXT, 288 ITR 408 where the Couft has held that the fact that the contract was signed in India is of,no rnaterial consequence since all activities in conlection with the off shore supply were carried on outside Inclia- Ttris juclgment has been followed by the Authority of Advance I{ulirrgs in Ilyosurtg Corporation,3l4 ITR 343, where the fact situation was cven less frvourabe than the assessee's case. 30. FIe also submitted that the decision in Ishikuwuiinut's case completely covers th.iirr.r" as to whether any part of the prolit rlrising ; fi.om the supply of the equipment by the assessee is chargeable to tax. He further subrnitted fhat i1 the instant case the tide to the system as well as r.isk therein lpassed to the cellular opcrator ert thc pirrt of : establishment in Sweben and in fact this position was. not seriously disputed by the Reveirue at the time of argumcnts' IIe reliecl upol-I tTA 50,1/2007, I'rA 50?/2007, ITA 508/2007'11'A 5l l/X00?. lTr\ 39?tr007 Prge 35 ol'75 : place

Section 19 of the Salei of Goods Act which tnakes it clear that prol:erly : in goods passes when the pafties intend it to pass and in the prescnl. case, according to hirn, the intention of the parties was tranifested in Ar:ticle 13 of the Supply Contract ancl the provisions of Article 15 relating to the , Acceptance Test cor,rld not militate against such intention. 3I. Itefuting the contention of Mr. Prasaran that merely because the acceptance test of the GSM system was carriecl out in India by IICI/EFC, the income rnust be regarded arising in India, Mr'. Datur submitted that the fact that the acceptance test was perforrncd in India by the installation contractor is not relevant for determining where thc Litlc in the equipment passes; aud consequentiy where income accrucs. l'he terrns of the contracti rnake it ciear that the acceptance test is trot a i rnaterial event for the passing of the title and risk in the equipureut supplied. 'fhe acceptance test is an act which is performcd for the benefit : of the cellular operatdr ancl although the assessee woulcl be bourrd by such test perfolmed by the installation contraotor, the sarne is not an act or1 behalf of the assessee. Accordins to Mr. L)astur. thc ovcrall ': rr^ s04/2007, rrA 50?/200?, rrl so8/2onl.tt i sr r.,rool, trr\ J97D007 ,l l'agc J(, ol'?5

a' * agreenent eltered intq between the parties also docs not in any lllafl1er result in the accrual of income in India. The overall agreernent does not 'result in any incoine accluing in India as no incotle ariscs to. the assessce i1 tenns of the overalliagreement. The overall agreetnent rnerely casts a lesponsibility on the I assessee. to ensure the functioning of a dr-rly installed system even though different obligations are to be undertal<en by different parties. : 32. Refering to the provisions of Section 9(l)(i) of thc A.ct, he sr,rbrnitted that it provideb that income accn-ring 01' arising whether' directly or indirectly through or fiom any business ooltnection in India is deerned to accn-re or alise in India. Clatise (a) Iixplanation- 1 ftrrther provides that in the case of a business of which all thc opct'ations are not : carriecl out in Inclia. the incorne of the business that is dceurcd lo ziccrue .: or arise in Ltdia in telms of clause 1i) snan be only sttch part of thc f' incone as is reasonablv attributable to opelations carried out in India. lt : is subrnitted that the aSsessee has no business connection in India and in any event has not earnecl any income in India through or fi'orn any : ITA 504/2007, l'IA 507/2007, ll'A 508/2007'lTA 5l l/2007' lTr\ 3972007 Pag,c l','ol'75

business connection. The celluldi opelators, who are independent contracting parties, can. llever be regarded as the assessee's bttsiuess connection. 'fhe law is well settlecl that there musi be sornething tnore than a tnere transaction of sale and purchase between principarl and : principal to spell out a business connection such as lnanagemettt co'ntrol or financial control ol by way of sharing of profits for a br-rsiness connection to 'come into existence. In suppotl, he rcferred 1.o the clecision in the case o-f, CITYs. I{indluston Sltipyarcl Ltcl. I09 ITR 158, CIT Ys. GuA Oil Great Britain Ltd. I0S ITI{ 874 and Cilcr-rlar hlo.23 dated 23'd July, 1979. 33. I'{is further subrnission was that the installation contractor also oamot be regarded as,a business connection through which thc assessec i has earned any incorne in India, as the incoile of the assessce arisc:; as a ; consequence of the pupply contlacts enteled into with the c.ellular : operator. There is noicontract between the assesscc and thc insta.llation i contractor and, thereftjre no profit arises therefi'orn. Thc mere fact that : the installntion contractor is a iubsidiary of thc assessee's holding : f TA 504200?, ITA 507/200?, rTA 508/2007, rTA 5 | | t20n7, l-l A 391 l2o}'1 ['ai!: 38 ol'75

9r cotnpany would not, by itself, give rise to a business connection of the assessee as held tn Gulf Oil Greut Britsin ll.r/. (supra). 34. FIis alternate submission was that even assuming the assessee is regardecl as having a business connection in Inclia, eithcr in the form of the installation contractor or in the form of thc ccllular operators, nevertheless, by virtue of clause (a) of Explanation-l to Scction 9 (1) (i) l1o part of the incorne arising to the assessee fiom the supply of equipment can be d"eemed to accrue or arise in India as the miltcrial operations in connection with such suipply viz, thc manufacture and the transfer of property of the goods supplied, werc corlpleted or-rtsidc India. : ; 35. Mr. Dastur went to the extent of algr-ring that cvcn if one treats the contracts as a corirlrosite contrac.t, as allegecl by thc Revenuc, the cousideration attlibutabic to the work pertbrrnect in Indiar, narnely, the : rnarketing activity and the installation activity is alrcady assesscd to tax in India in the asse.ssments made bn EFC and ECI and as no aruthority has disputed that the'installation contractor and tlre marketing a.gcnt ale : remunetated on an arm's length basis the charge to tax, iI'any, irr l.ndia fTA 504/2007. tTA 507/2007, ITA S08/2007.rfA 5l t/2007. t't'A3r7t2007 t'agc 39 of 7-5

{g wollld stand exhausted. In support, he relied LUlon the judgrnent of this Couft in DtrTYs. Galileo Intenrntional Ltd. 224 CTR 251. 36. In order to decide the issue at hand, let us recapitulatc solne of the salient features. The assessee is a foreign Cornpany. Its activities involved supply of hardware and sollware as well as installatiotr and comrnissioning of the, two and also after sale services. It enterecl into agreernents with valious Cellular Operators and entercd into three contracts with thern narnely (1) Overall Agreemenl, (2) the Supply of : Agreement and (3 ) thei Installeition Agreernent. i 37. In the present "hr", we are concernecl with the income canrecl by the assessee as a resuld of supply of haldware ancl softwarc licence uncler the Supply Agreenien!. If this Supply Agreement is taken as stanclalone : Agreernent, the facts i on record show that such sqrplies under this : agreelnent were made overseas. . The properly in goods had passed on to the buyer under the Supply Contract outside India wherc the equip.ment was rnanufaclured. As per the judgment of Suprcme Court in i/. Isltikaruajirna's (supra), such agreerrent would not be taxable in lrrdia. tTA 50d/2007, tTA 507/2007. ITA 508/2007,tTr\ 5t l/2007. tl ..\ 3972007 Pagc 4() ol"J5 ----T*

rt In Ishilcawajinm's, the Supreme Courl held that no patt of profit arising fiorn the supply of equiprnent outside Inclia would be cfargeable to tax , in Inclia. Mr. Dastur is right in his analysis of the pl'eserlr case on the basis of the ratio of Ishikawajinta'sinastnuch as:- (i) In both the cases the property in the equipment passed outside India and in the assessee's case evell the lisk passed outside India; (ii) In the case of Ishikawajima's even though it was to perform onshore serviees inclucling thc crection atrd commissioning of the equiprnent supplied by it, neveftheless,:the Supleme Court held. that no part of the profit on the offshore supply of the cquiprnent was taxable in India as a consequence of the pcrformancc of such activities in India. In the assessee's casc the assessee does not perfolm any servicc in India in comection with the installation of the equipmcnt or otherwise; (iii) the perfpnnance of the acceptance test iir India was not corisidered a relevant circumstance whilst <leternining iwhether any part of the 1:rofit on the offshore supply was chargeable to 1ax in India in thc case of Ishikawajinla, so also in the asscssce's case. (iv) although admittedly a permanent cstablishment existed in the case of Ishikawajima, nevertheless, thc Court held that no part of the profit arising fi'om thc supply of the equipment t was chargeable to tax in India as the pemranent estabiishment had no rolc to tr^ 504/200?, I'tA 50?/2007, tTA s0g/2007,tTr\ 5r t/200?, ITA 397D002 l)asc.l I ol-7-5 -r-" - --*'- i I

$o play in the transaction sought to be taxed as it took place abloacti whilst in the case of the assessee, it has been found as a fact by both the appellate authorities that no pelmanent establishinent existed; (v) the mele signing of tire contract pulsuant to which the supply was rnade in India, in both cases does not . lesult in giving rise to atax liability in Inclia; l (vi) the existence of the overall responsibility clause was held to be irrelevant in Ishkawajirna's case and likewise the overall agreelnent executecl in thc assessee's case shonlcl not rnake any diff-el'ence to thc taxability of the ecpripment suppliecl; (vii)giving the nomenclature of a turnkel, projcct or works contract is not relevant in determining whether' any profit arising fi'om the supply of. ecluipnrcnt pursuant to such codtrac'': was chargeable to t-ax in India; (viii) the Supreme Court reliecl Lrpoll Instn-rction No. 1829 'to come to the conclusion that the existence o[ . an overall responsibility clause was nol rnater.ial in detennining the tax liability arising fi'om the ollshore supply of eQuipment arrd as the said iristrurction continues to:be in force fol the assessment year relevant to the present appeals, the existcncc of arn overall agreeinent should make no clifJ:erencc to the taxability of the equipment supplied by the urssessee. flA 504/2007, tTA 507/2007, nA 508/2007,rIA 5r t/200?. tT.t.397tzoo7 l)ag.e 'lil ol 75 ---_'l---l

6\ 38. We rnay add thbt Section 19 of the Sale of Goods Act makes it clear that property in goods passes when the parlics intcnd it to passr and in the present case, the intention of the parties is manifested in Arti.r:le 13 of the sLlpply contract ancl the plovisions of Article 15 in no maruler ' militate against such intention. Further, there is nothing in the concluct of the parlies whioh would suggest that the express provisions of Article : 13 have been given a go-by. : 39. No doubt, the contract in question was signcd in India. I-Iowever, that may not be a relevanl. circumstance to determine the taxabitily of : such an income in view of the judgment of Andhra Pradesh Fligh Clourt in Skoda Export (supra). : 40. We may point out that the leaned Adclitional Solicitor Gencral : was conscious of tir! aforesaid iegal position ancl, thereforr:, the ! limitation'of Revenuels case if tire sal11e was to bc clcterrninecl on the i exanrination of the Supply Contract per se and de lrcrs the Installation ; Agreetnent and Ovelall Agreement. It is for this reason that his line of argnment pi'oceeded oir the basis that the rliree agreemetlts arc to be i : ITA 504/2007, I'1A 507/2007, rr^ 508/2007.rr,\ 5t l/2007, I'l'A 197/2007 Pagc 43 'rl-75 --l

1,, taken to form an 'Integrated business arrangcment' between the parties ; which.was governed by the Overall Agreernent. As noticecl above, this submission pl'oceecledj on the basis that the assessee had entered iuto contraots with.cellular, operators in India for setting up of GSM system in Inclia, the hardware aud softu,are for which was supplied by the assessee, and the installation thereof was aiso over-sccn by thc assessce who *T to ensure that it was carriecl out to the satisfaction of kLdian buyer in accoldance with the terms of the contract. Various clauses of : Overall Agreement asiwell as .Installation Agreetnent have bcen relied ; uporl as already noticea above. Article 15 of the Installation Agreernent ; cleals with acceptancei test rnade by the Installation contractor which "inclucles the integrity of whole system ancl certificatc birrds 1he assessee". Article 17 plovides warranties to lectily the dcfects in both hardware and softwarQ provided by the assessee. On this basis it u,as argued that the Assbssing Officer rightly conclucled that overall I lesponsibility was on ithe assessee.for supply, scrvices and the urr"r!"" hacl complete control erection and_ afler sale orrer thc managerrrent, ITA 504/2007, rTA 507/200?, rT,\ 508/200?,lTA 5l In007, tTA 397/2007 I'a!'e 44 ol'75

te functions and. the assobiates. The question that falls for considerErtion is as to whether this accgptance test, which was performed in India, rarould ; be relevaut for deter-rnining as to urhether incoile accrued in Indier in terms of Section 5 (2Xb) of the Act. : 'i 4I. We, find that tlie tenns of contract make it clear that accepl.ance I test is not a rnateriai event for passing of the title and risk in the ; equipment supplied. it is because of the reason that cven if such test ir found out that the system dicl not confonn to flre contr:active parameters, : as per article 2I.I of the Supply Contract, the only consequeuce would be that the Cellular: Operator would be entitled to call Lrpon thc assessee to cure the defect by pepailing ol replacing the clefectivc pzrrt. If thele was delay caused due to the acceptance test not being compliecl with, Article 19 of the Supply Contract ploviclecl for darnages. 'fhtrs" the taxable event took plale outside India with the passing of the properry fi'our seller to buyer uir.l or."ptance test was not determinativc of this factor. The positiou irnight have been different if rtr" buyel hacl the right to reject the equifment on the failule of the acccptance test carried r.A s04/2007, ITA 507/2007, r r,r sornooz,'t,, i | | t2007. tr' 397 nool l'rgc 45 .rl'75

6\l out in India. In Skoda Export (supra), the Andhra Pradcsh Fliglr Court : dealt this issue in the following marulel':- "We rnay also mention that learned stancling cottnsel for the Department challenged the fincling of the "fliibural that the sale of machinery was completed outside India; According to him, thc sale was cornpleted only-in India, inasmuch as the assessee was entitled to inspect and satisfy itsclf about the quality and standard of the rnachineiy supplied. We do not see any substance. in this contention. The various clauses in the agreement referred to above rnake it cleal that the sale of machinery was F. O. 8., European port, and the tirne of fulfilment of delivery was prescribed as the date of the bills of lading. The payment rvas also to be made I outside India. The agreement furlher inakes it clear that the insurance risk during tlie course of the journey.was that of the assessee and it paid forithe same : even the fi'eight charges fiorn the Europ'ean polt to the place of destination were paid by the assessee. Thus, judged -tiom any angle, the sale of machinery, which are "goods" within ! the mearling of the Sale of Goods Act, was completely outside India. A mere provision in the agreenren! that the assessee is entitled to' satisfy itself about the quality and stanclard of the rnachinery in India cannot, in the circumstances of thiis case,idetract fiom the fundarnental position that the sale took place outside India. In such a situation, i one has to apply the test of predominance and decide where thc sale took place ? Op a combined reading of the clauses of .: f TA 504/2007, ITA 507 12007, tTA 50812007,tTA 5t t/2007, tTA 3972007 Page 46 of 75

b{ the agreegrent, we have no cloubt that the sale of machinery did take place outside Inclia." i 42. We tr.ay also usefuily referred to the jr-rdgment of the Fligli (Jourt in Malmvir Commei'cisl. Company . fbllowing principle wds enunciated: Vs. CIT, 86 ITI{ 147 wherein "Even though the property in the goods tllay perss to the buyer when the documents are handed ovei:, the buyerimay yet retain the right to cxamine anc repudiate;the goocls but this right genelally which a buyer hag in 'c.i.f. contract does not by itself indicate that the property in the goods has not passecl td hirn. This supposecl incongluity was sought toi be explained per curiam in I(wei 'Iek Clrao v. British Tladers and Shippers Ltd. (1954) 2 K.B. 459. that if property passecl when thc docurnenis are transferred that properly is subject to the condition that the goods should re-vest in the seller if qn an exarnination by the buycr he finds them not to be in accordance with the contract. It is not necessary to considel this aspcct because in any case tlre asceftainment of the obligations under the contrhct will determine to what extent the transfer of, property is subject to a condition or if the property passes conditionally rvhethcr thc ownership left in the seller is thc revclsionary interest in the property in the cvent of thc conditions subsequent operating to rcstore it to hirn. In any case where the perfoflnatlce of somc condition iis irlposed upon the buycr but is not made a conclition of the transfer of the property, ': rTA 50,t/2007, tT/\ 507/20U?, lrrr soslroor,t r,r ht t/2007, tTA 39?/2007 l)age d7 ol'75 -t*

AL the propqtty once passed is not t'evested in thc seller by the buyer's subsequent default." ; 43. "I'hus, Overall Agreernent does not result the income accn.ring, in :, India. The execution iof an overall agreernent is prompted by purely cornmercial considerations as the India Cellular Operator would be i desirous of having a single entity that he could liajse with, a I'act vihich ; even thc Board hasl noted in its Instruction No.1829 dated 21't Septernber, i989. Although Instluction number IB2g stands withrlra.rvn by virtue of Circulai No.7/2008 dated,.Z2"'t Octobel, 2009, such withclrawal can have rio retrospective effect and the principte laid clou,n : iu lnstruction No. 1829 rnust continue to govern the assessrnent .[or the relevant vear. 44. The albresaid analysis will bring forth thc lcgal position that the place of negotiation, i th" place of signing of ergrecmcnt, ol .flornral acceptanoe thereof or overall responsibility of the assessec are irrclevant circumstances. Since the transaction relates to the sale of goocls, the relevant factor and detenninative factor woulcl be as to whci'e the i ploperly in the goods passes. In the present case, the finding is that : : lT 504/2007, ITA 507/2007, lTr\ 508/2007,1TA 5l l/2007, l'fA 397200i ['lge 4!l cf 75 -**---_-'l

b1 propefty passed on thi high seas. Concededly, in thc present carsr:, the goods were manufactured outside India and even the sale has takcn place outside India. Once that fact is establishecl, even in those cases u,here it is one cornposite co#act (though it is not found to be so in the present l case) supply has to be segregated fi'om the installation and the only then woul<l question of apportionment arise having regard to thc exprr:ssed language of Section g (t) (i) of the Act, which makes thc income la;<able in India to the extent it arises in India. 45. The judgment of the Supreme Court in Perfbrming l?i,gttts llo'ciety Ltrl. Ys. CIT 106 ITR 11 has no relevance fol clctelmining where the profits ou the supply of ecluiprnent er.ccl'Lres when title to thc goods passes outside India.. [n the case before thc Suprerle Court the acl.ivity which gave rise to the income, narnely, the activity of broadcasting took : place in Inclia, ancl it was in these circurnstances the Court held that thc royalty earned by the hssessee therein acirued in India cvell though the agl'eeltlent pursuant tojwhich such royalty was earncd was execurted in : England. Merely becdr,rse the actirrities, namely, the supply activity ancl ; rfA 504/2007, tTA 507/2007, I'r/\ 508/2007,tTA tl t/2007, tT 3972007 Italrc 49 of 75

bs the installation activity are to be canied out by two separate Conpanies ; who ale part of the same Group cannot result in the transaction being treated as one cornposite transaction. 'Ihis is more so when bot.h the i entities perform their,own indepeirdent obiigations, receive appropriate : separate remunerationiancl, as found by the 'fribunal, are not finanr:ially or technically dependenl on each other. 46. Further, all of them al'e assessed in respect of the incorne tha.t has ' accrued to them and even the Revenue has" in the coursc of its arguments, accepted that it is not their case that only one asscssment has to be rnade treating the transaction as one works contract. 47. Section 9 (1) (i),of the Act as it stood behre the amenctnent to it ; by the Finance Act, 2010 provides that incorne accruing or arising, whether clirectly or indirectly, through or fiom any business conne,rtion : in India is deemecl to hcclue or alise in India. lhe Department hars not stated that the assessee has any business connection in India, inasr.nuch I as the celluiar operatops are independent contractee perrties and ar:tion ; cetnnot be held to ir. assessee's business corrnectiou. Iir such ; l'l A 50,1/2007, ITA 507/2007, ITA 508/2007,tTA 5l I/2007, tTA 3972007 Pngc 50 ol'75

67 circutnstance, the casd would be covered by Explanation-l to Section 9 (1) (i) of the Act. Clause (a) of Explanation-l lays clown that in thc, case of business if all the opelations are not calried out India, the incorne of i business that is deemed to accrue'or arise in India wor-rld be only such : part of the incorne as is leasonably atiributable to operations carried ont in Inclia. In view of ihe aforesaid d"iscussion. it is clear that r.urclc,r the i Supply Contract, thei assessec has not carnecl any inconc in tnclia thlough or fi'orn any busin"r, .or*.ction. : 48. Insofar as Instalilation Conlract is concerned., that is between the installation contracteeiand the ceilular opelators. .lhcre is no contract. , between the assessee ancl tlie instaliation contractor and no profit arises therefi'otn insofur as assessee is concerned. We are in agreement with the submissions of iMr. Dastul that merely because the installation contractot' is a subsidiary of the assessee hotding compauy woulcl n.ot, by itself, give rise to a,business connection. In GulfOil (supra) this very issue was dealt with, r:ef'erring to CBDT Circular No.23 of 1969 in the following rnanner:- f TA 504/2007, rTA 507/200?, t'r sos/rout,tt A 5 nt20o7. t"t^ 397 DOO-| Page -i I ol'75 I

"IJnder itern (ii) a6ove, the Board has clarified that where a noll-t'esident parent company seils goods to its Indian subsidiary, the income fi'om the transaetion will not be deemed to accrLre or arise in India under section 9, provided three conditions are satisfiecl : (i) the contract to sell are made outsiclc.India which on the findihg of the Tribunal has been founcl in the instant case in favour of the non-residenl company; (ii) the salejs are made on a principal-to-pr-incipai basis ana aq at'm's length - un ur1r""f or. which Mr. Joshi wanted us to consider the matter in the light of the facts ancl circnmstances of the case; and (iii) the subsidiary does not act as an agent of the parent - ag'ain all aspect which will have to be considered in view of the facts and circurlstances obtained in the instant case. f'here is no doubt that thc Inclian subsidiary is a hundred pel cent. subsidiary of the non-resident, but the Tribunal has found as a fact that all the contracts regarding the have been maclc in U.K. principally on the basis that the indents which were placed. by the India subsidiary with the noir- resident colnpany wel'e accepted by the non-resiclent company in p.K." FERMANtrNT ESTABLIS]FXMENT (I'E) : Jo ld that tire assessee did not have any br-rsines's view of this, it is not llecessary to go inlo the 49. We, therefore, connection in India. ; .'no : In f TA 504n007, ll A 507/200?, ITA 508/200?,nh 5 | | tzooi, tT /\ 397 lZOo7 l'age 52 of75 ,,c. i '7 --.l"* * . i

-l/ issud whether the assessee had any Permanent llstablishment in InrJia or' not cluring the relevant period in India or not. : WIIETXIEIT TI{E INCOME F'R.bM T'HE SUI'PLY CON'TBACT cAN BE TI{EATED AS 'R.oYA]LltY' {JNDER sECTxoN 9l(tXvi) OF'T}IE ACT: : : 50. Section 9 (1) (i; of the Act which deais with rhe tnxability of , 'royalty income' readd as nnder:- i "Section I .IIYCOME DEEMED TO ,AECI(UE OR ARISE IN INDIA. (1) The following incomes shall be deemed to accrue or;arise in India :- (i) All inoome accruing or arising, whether dircctly or indirqctly, through or fiorn any business connectiotr in India, ot through or frorn alty property in India, or through or ftom any asset or sollrce ofrincome in India, or through the transfer of a capit4l assct situate in India" 51. 'l'he submissioniof Mr. PrasaLan, learnccl ASG was thart soliware ; part of the equipmentir.rpptv would attract royalty as copy right of the I said soflware progl'aq1me still vests with the assessee. 'fherefbre, payrnents made for thq licence to use the software pt'ogralnlnc give rise Pagc i3 ol'75 I i I

1> to'royalty' fot the pirrposes of both the Incomc-'fax Act as well as DTAA enterecl into between Sweclen and India. lteferring. to Explanation-Il (v) to Section ( (1) (vi) of the Act as well as Article 13, para-3 of DTAA, it was argued. that for the purposes of Income-'l"ax i lau', r'oyalty is essentially a payment leceivecl as cousidet'ation for the : I use or right to use a particular integral property right, whether partially or entirely. ; 52. We fincl that the Tribunal has held that there was no parynlsttl i rou'ards any royaltv rind this conclusion is based on the follovdng reasoning:- (i) Payment rhade by the cellular opelator cannot be I characterized as royalty either uuder the Incorle : Tax Act oriunder the DTAA. ; (ii) The operaior has not been given any of the seven rights undpl S.14 (u) (i) to (vii) of thc Copyriglrt Act, 1957',and, therefore what is transferred is not a copyright but actually a copyriglrted article Itage 5{ af75

13 (iii) The cellulai operator cannot colrlnercially exploit the. softwaie and therefole a copylight is not transferred.i (i") Furth.er, thg par-ties to the agreement hhve not agreed ,rpolt a separate price for the sollweue and therefole if is not open for the income tax authorities 1to split the same alcl cousicler part of the payrneqt for software to be royalty (v) The bill of pntry fol irnporting of goods shows that : the plice Fut been separately mcntioncd for . software a1icl that this was only for the purposes of customs. Ther-e is no evidence to show that the ; assessee was a party to the fixation of value for the cttstotns dutY PurPoses I The soflwdre provided under the contract and therefcit'e no loyalty can be said to bc is goods paid for (vi) it. :53. Mr. Prasaran, couutet'ed the afolesaid reasoning arguing that i Clause 20 of the Sqrply Contract uses the term 'licencc' ancl thc srlme te11r is usecl in the contixt of software throughout the three AgTeements, i indicatilg that it is 1ot a1 outright sale of goods, or a full transftr of rt^ 504/2007, l'I'A 50?/200?, I1'A 508/200?,lTA 5l l/2007' lT 39?/2007 Pag.c 55 ol'75 I ; t---

1t rights fiorn the assesseq to the Indian cornpany. IIe also submittetl that the software is a computer pt'ogramrne, which is treated differently .h'om a book, not ouly in the Copyright Act, lg57 but also the Income Tax Aci : itself. His submission was that Section 52(I) (aa) of thc Copylight. Act ; olly deems that certairj acts will not to atnount to ir-rfi'ingement in the : light of various concer+s, where otherwise sttch acts would amorttlt to infi'ingement under Section 51 of the Copyriglit Act. The provision I cannot by itself be used to hold that no right exists in the first lrlace, ; since' the scope of the right has to be understood only fionr the provisions of Section-1,+ of the Copylight Act, Ig57. I{e also arg,uecl that the ITAT has irnisinterpreted the provisions of the D'I'AA, ' specifically Arlicle l3,ipara 3 of the DTAA (Articlc 12, para 3 of the Model Convention) which defines royalties to tnean "paytr.cnts of arly I kind received as u .onSid.ration tbr the use'of, or the right to t-tse, atry ; copyright of literary, aftistic or scientific wotk". I'he ITAT, it was submitted, has not appreciated that the royalty is for the use or r:iglrt to ; Llse any copylight. Accolcting to him, sincc title of the soJLvare fTA s04/2007, rr^ s0712007, llit 508/2007,1T4 5l l/2007, rf[ 397noo1 Pntlc i{t of75

i , -.Js I i continuecl to vest withlthe assessee as provided in clattse 20.2 o[ ttre i Supply Agreement and the assessee was f,ree to grant non-exclusive : licenses to other parliesj it follow that there was tlo full timc transfer of cofyright but it was only a case of right to use the sol1ware, and thns payment for use of so,ftware is to be treated as royeLlty. I'Ie fi.rrther argned that refer"rt"" ,o,OECD Commeniaqy was not appositc as if could not be used to interpret ihe scope of the relevatlt provisions of D'|AA. ; 54. It is clifficult to abcept the aforesaicl submissions in thc facts o1-the j present case. We have hh'eady held above that the assessec did nol. have any business connecdoir in India. We have also held that the suppiy oI i equipment in question Was in the nature of supply of goods. 'fhercJbre, this issue is to be exarninect keeping in view these finclings. Motr:c,ver, i another finding of faqt is recorded by the Tribunal that the Cellular Operator did not acquiie any of the copyrights refcrred to in Section 14 i (b) of tlre'Copyright Ait,I957. i 55. Once we proceefl on the basis of aforesaid factual lindingr;, it is clifficult to hold that paiyment m.ade to the assessce was iu thc nature of ; ITA 504/2007, I'Ir\ 507/2007' ITA 508/2007.1'l A 5 | | l t0O7' 11' i 3r7 12007 Palre 57 of75

)I I royalty either under tl,ie Incorne-Tax Act ol undel the D'I'AA. We have to keep in rnind *hutiwas sold by the assessee to the In<lian customers ; was a GSM whichiconsisted both of the hardwale as well as the i software, therefore, ,1" Tribunal is right in holding that it was not pennissible for the Revenue to assess the sarne under two cUfl-erent i articles. The software ithat was loaded on the hardware dicl not havr3 any I independent existenco. The software supply is an integral part c,f the i GSM rnobile telephorie system and is usecl by the cellular operator for I providing thc cellular.lservices to its customers. 'fhere coulcl not br: any : independent use of sr,lrch software. The soflware is embocliccl in the ; systetn and the l'evenue accepts that it could not be used indepenclentiy. This software rnerely fbcilitates the functioning of thc equipment ancl is an integral part theleof. On these facts, it would be usefril to rel'er to the ; .itrdgnrent of the Suprprne Court tn TATA, Consultancy Senticcl; Vs. Stste of Andltra Pradgsh, 271 ITR 401, wherein the Apex Cor-rrt held that software whieh i$ incorporated on a mcclia woulcl be goocls ancl, r rA s04/200?, rr,r 507/2007, ,t,r ,orrruor,,rni,,tz00.,,rr'J97noo7 l'age 58 of 75 I

I I I ' sales -)) therefore. liable to tax. Following disoussion in this behalf is required to be noted:- "In our r4iew, the tenn "goods" as ised in Article 366(12\ qf the Constitution of India and as defined under the said Act ale verv wicle and include all types of movable properlies, whether those propertiei b. tangible or intangible. We are in cornpletelagreement with the observations made by tlris Couit in Associsted Cenrcnt Companies [,td. (supla). A software progranlme lnay consist of variolrs cpmmands which enable the computer to perfonn a designated task. The copyright in that plogranqle ltlay remain with tire oliginator of'the plograrnrhe. But the moment copies are macle and marketedl it becornes goocls, which are sllsceptiblc to sales t'ax. Even inteliectuerl property, oncc it is put on to a rnedia, whether it bc in tire form of books or jcanrras (In case of painting) or computer discs or icassettes, and rnarketed would. become "goods". lWe see no diffelence between a sale of a software iprogramnle on a CD/floppy disc fi'om a sale of mi-rsic on a cassette/CD or a sale of a film on a video cassette/CD. In all .such cases, the intellectuhl property has becn incorporatecl on a media fo1' purposes of transfbr. Sale is not just of the rnedia which by itself has very little value. T he software'and the media cannot be split up. What the buyerllrurehases and pays for is not the clisc or the CD. 4\s in the case of paintinlgs or books or' tnusic or films the buyer is purchasing the intellectupl properly and not the rncclia i.c. thc ITA 504/2007, f TA 507/2007, ITA 508/2007, tTA 5 | | 12001, tT A 397 nO07 Palrc 59 of 75

)B sale of computer soflware is clearly a sale oI "goods" within the neaning of the tertl as defined in the said Act. The term "all materials, articles and comdrodities" includes both tangible and ).r,r.r'Ira intangiblefincorpoleal propelLy which is capable ot abstractiori, cottsutnption and use and which can be transmitted, transferlecl, delivered, stoLed, possessed jetc. The software programlnes have all these attritiutes." paper or cirssette or disc or CD. 'Ihus a transaction XXXXXXXXXX "Iu Adveut ;Systems Ltd. r,. Unisys Colpn, 925 F. 2d 670 13'd Cir. 19?1), reliecl on by Mr. Sorabjee, thc coltrt was concerned li'ith interpletation of uniform civil code which "applied to transactious in goocls". The goods therein we.re ciefined as i'all things (inclucling specially mantfactulccl goods) which ale movcable at the time of the iclentification for sale". it $ras held : I "Ccimpu'tbl programs at'e the plodrict of an . intellectilal process, but oltce implanted in a inecliumi are widely distlibutecl to cotnpltter owners. iAn analogy can be dlawn tc a .cotnpacl disc redording of an orchestral rendition. fhe . music isiploduced by the artistry of musioians ancl ' in itself iis not a "good," bttt whetl tlzurs.lened to a laser-r'ealdable disc becornes a readily tnerchatltzrble cornmodity. Similarly, wheu a plofessor cleliver-s a lecture, it is not a good, but, wheu tt'anscribecl as a book, it becomes a good. That a computer program may be copylightable as inlellectiral property does uot altet' the lact that once in ihe fonn of a floppy disc ol othcr nrcclium, the proglam is tangible, moveable ancl available in the marlietplace. T'he fact that some prograns rnay i i 50J/2007, ITA 507/2007, ITA 508/2007,tT4 5t l/2007, t rr\ 197,?007 l)rge 60 al'75 '--- r -'-'--*-

)t be tailor0cl fol specific pulposes need not altel their status ab "goods" because the Code clcfinition inclncle s ; " sp eci al ly tnanufactut'ecl go o ds. " 56. A fortiorari. when the assessee supplies the software which is incorporated on a CD, lt ttu, supplied tangibie propcrly and the payrnent i rnade by the cellular bperator for acquiring such property cannot be I regarded as a payrnent ily way of royalty. 57. It is also to be lTome in mind that the supply contract cantrot be i separated into two vi4. harclware and'software. We woulcl like to refbr i the judgment of Suprerne Court in CXTYs. Sundwiger EMFG Co'., 266 i ITR 110 whelein it was held: I I "A plain Jnd c,.rrnulative reading of the terms and conditionq of the coutract enterecl into between thc principal !o principal i.e., foreign company and Midhani i.ie., preamble of the contract, Part-I zrnd II of the confiact zind also the separate agrectttcnt, as referred td above, would cleally show that it rvas one and tlie same transaction. One canuot bc read in isolatioir of the other. The services rendered by the exper-ts and the payrnents made towards the same was ipart and parcel of the sale consideration and the sqirne cannot be severed and treated as a business incotne of the non-residcnt cotnpany lor the servicbs rendeled bv them in erection of the ITA 50,1/2007, ITA 50?12007, ITA 508/2007,1Tr\ 5l l/2007, lTA397noo7 Page (r I ol 75

o flo rnachinerv in Midhani unit at I-Ivdbrabad. Therefore, the contention of the Itcvenue that as the amoirnts reirnbulsed -by Midhani undel a separate j contract for the technical services rendered iby " non-resident cornpany, it tnust be deemed that there was a "business collnection", and it attriacts the provisions of Section 9(1Xvii) of the Incorhe Tax Act camot be accepted and the ,l r. judgments relied upon by the Revenue are the cases where there was a separate agreelnent for the purpose of technical services to be rendered by a foreign cbmpauy, which is not connectecl f,or thc fuifillmerit of the , main contract cntered into principal to principal. This is not one slrch case arnd thus the icontention of the Revenue cannot be accepted rin the circumstances ancl nature of the telms of the contract of this case." 58. No doubt, . in an annexure to the Supply Contract the lnrnp slrm i price is bifurcated in two cornponents, viz., thc considcration fcrr the ; supply of the equipmeht ancl for the supply of tlie software. I-lowever', it , was argllecl by the-lebrnecl counsel for the assessce that lhis se.parate : specification of the h#dware/software supply ,i/as llccessary bccause of the differential custom$ duty payable. 59. Be as it may, in orcler to qualify as royalty payment, within tlie _i rneaniirg of Section 9(l) (vi) and particularly clausc (v) of Explanation- rTA 504/2007, ITA s07/2007. rTA 5082007.tTA 5l l/2007. I'lA J97l2007 I'agc rr2 ol'7-i

DI II thereto, it is ,."""rrury to establish that thele is transfer of all or any i lights (including the granting of any license) in respect of copy riglrt of I I a literary, artistic or siientific work. Section 2 (o) of the Copyright Act I rnakes it clear that q cornputer pl'pgratnlne is to be regarclecl as a { i 'literary work'. Thr"rq, in orcler to treat the consideration paid by the ! cellular operator as foyalty, it is to be establishecl that thc celh-rlar i operator, by rnaking such payment, obtains all or any of the copyright ; rights of such literaryl work. In the prcsence case, this has not been establishecl. It is not even the case of the l{evenue that any right i contemplatecl under Sbction 14 of the Copyright Act,l957 stood vestecl i in this ceilular operatbr as a conseqlrence of Article 20 of the Supply Contract. Distinction has, to be rnacle between the acquisitiorr of er "copylight right" and a "copylighted article". I 60. Mr. Dastur is iight in this subrlission which is bascd on the i colnuentary on the QECD Model Convention. Such a distinction has ! been accepted in a repent ruling of the Authority for Advance .Rr-rling i (AAR) in Dsssault Syqtents lil( 229 C^IR 125. We also {incl force in the i i tr^ s04/2007! rrn ,orrroor, ran rorrroor,,rnlaruzoot, ri,r rlzlzoo 7 pa,re 6-t ol'75

$>z subtnission of Mr. Ddstur that even assuming the payrncnt made iry the cellular operator is r..gurd.d as a payment by way of loyalty as clefincd i in Explanation 2 belqw Section 9 (1) (vi), nevertheless, it can never be o regard.ecl as royalty *ithin the rneaning of the said term in article 13, para 3 of the DTAA. i This is so because the definition in the D'L\A is narrower than the definition in the Act. Article 13(3) brings within the arnbit of the definitioir of royalty a payment macle for the use oJ: or: the ,I right to .use a copyright of a literary wolk. 'Ihclcfore, rvhat is I contetnplated is u lruylrn.r.t that is dependent upon usel of thc coprlzriglrt i and not a lurnp sum p4yrnent as is the position in the plcsent case. i 6t. We thus hold t$at payrnent receivecl by the assessee was torvards i the title and GSM system of which soflware was an inseparable pilrts incapable of indepencl;ent use and it wers a contract for stqrply of goocls. i Therefore, uo paft of fhe payment therefore can be classified as payment towards loyalty. f TA s04/r007, fTA 507/200?, t] A s08/2007,tTA 5t U7007, l"f A 397 t2007 Pagc 64 ol'75

E> EFFECT OF AMENDMENT TO SECTXON 9 OF T'FIE FINI\I\CE ACT.201.0: 61. We have to detel'mine as to whether atlendtnent tlade to Section 9 i of the Finance Act, 2,010 whereby Explanation to sub-Section (2) has been inserted has the bffect of turning aronnd the rcsult. Vicle Finance : Act, 2010 the follow{ng amendment was madc to sr-rb-Section (:Z) of Section 9:- "Explanatioir- For the reinoval of dottbts, it is hereby declared that for the purposes of this section, income of a non-redident shall be deemed to accrLlc ol' alise in india under clause (v) or clause (vi) ol clausc (vii) of sub sectiirn, (1) and shall be included in the total income of tlie non-resident, whether or not,- : (i) the non- resident has a resiclence or plarce of business or busiuess connection in India; or (ii)the nirn-resident has rendcred scrviccs in ' i India.'j I , ' 62. We may place ion r..orc[ tkrat initially the F'inance r\ct, 2007 inserled an Explanatiolr at the end of Section 9 to provide that "for the : rerloval of doubts, it i is hereby declarecl that for the purposes o1' this i sectio;r, where incornelis deemed to accrue to arise in India under clauses t'r,\ 504/2007, ITA 507/2007, t1i\ s08/2007,tTA'5t l/2007, tT 397/2007 Pnge 65 ol'75

B' (v), (vi), and (vii) of {ub-Section (1) ,sr,rch income shall be includr:d in the total incorne of thel non-resident, whether or'not the non-rosidcnt has i a resiclence or place of business or business connection in India." This .Explanation was inselted ostensibly to get over that part of the judgrncnt of tlre Supreme courtiin the case of Ishilcuvtcr.iimu (stpra) where the ' Sulrleme courl had observecl that for Section 9(1) (vii) to be applictrl:le it is necessary that tlie iervices should not only bc utilizccl in India but i should also be renderJcl In India. As this Exirlanatiou ctid not ac,hieve i the pulpose it was interrded to serve, as was pointed ou.t tl1, the I(arnataka lligh Courl in its judgment titlecl "Iintlal Thermal .Fower : Conqtany Limited Yi,. Deputy Comrnissioner of trncome-Tax (I'fA 30211200.5 and otheri connected matters clecided on 16.3.200n the I Legislatul'e once againiamended the Explanation below Section 9 by the Finance Act,2010 witli retrospective effcct Ii'om 1" Junc, I976. 63. Ilased on the aforesaid amendrnent. the submission of l.he Revenue is that this arnendrnent has been introduced by the Legi:slilture I to undo the effect of {sltikuvujima (supra) and rnakes the Legislative I f TA s04/2007, I'rA s07/2007, trA 508/2007,1rA 3 | | tzoo1, t't A 391 t2ob1 Paltc 0(r ol'7.5 '..; ,

; i Ii'/ 0i) I i I intendment clear by pioviding "'seurce rule" that is, incotle which has : arisen in India as taxable under Section 9 of the Act. It was arguecl that I I even the plain wording of Section 9 was clear, namely, il'the incoure has its source in In<lih, it would be taxable in Inclia. I-Iowevcr, sirrce Ishikawajriza (supra) had not interpreted the provision as containing the "solu'ce rule" in orde'r to rectify this situation creatccl by thc albresaid : judgrnent, the Palliainent introcluced the aforesaicl Iixplanalion to clarify i that irrespective of wirpre the ser'vices were actr-rally rendcred, so'long as they were utilized in ilndia,'incoile obtained frbrn such services by a i non-resident would beitreated as income accrning or arising in India. ; 64. To buttress thisisubrnission, the iearned counsel for the Rovcnue i relied Llpon the Mernoi'andum explaining the following provisions in the Finance Bill,2010:- "Vide Financie Act, 1976, a source rule was plovicled in Section 9 through insertion of clauses (v), (vi) and (vii) in sub-spction (1) fol incorne by way of interest, royalty or fqes for technical services respectively. It was providecl, inter alia, that in case of payrnents as mentioned qnder these clauses, incomc would be deemed to aicrue or arise in India to the non-r'esident , f 'rA s04/2002, rr^ s0z/200?, rtn rorrrnor,rtnl, I tnooi, t-r. 3e'tzooj l'age 67 ol'?5

E6 undel the circumstances specified therein. 'I'he intention of introducing the source rule was to bring to tax interest, royalty and fees fol technical serviccs, by creating a legal fiction in section 9, even in cases where servi'ces are provided outside India zrs long as they are utilized in India. The soulce rnle, thercfore, rnearls that tire situs of the rendering of scrvices is not relevant. It ;is the situs of the prayer and the situs of the utilizatidn of selvices which will cletcnninc the taxability ofisuch services in India. ; this was the settled uosition of law tiil 2007. I-Iowever, rlre Sr.rprerne Courl in thc case of Ishikawajirnh-Harirna Heavy Industries Ltd. Vs. DIT (2007) [288 1ITR 408], held that despite the deeming fiction in sgction 9, for any such income to be taxable in India, there must be sufficient territorial nexlls betwebn such income and the territory of India. It fufther held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. I This interpretation was not in accordance with the legislative inlgnt that the situs of lenderlng scrvice in India is not lelevant as 'long as the serviccs arc utilized in ilndia. Therefore, to ronlovc doubts ' regarding th" sol,tl'ce rule, atl Iixplanation was insefted below sub-Section (2) of Section 9 with letrospective effect fiorn 1" June, Ig76 vicle Iiinance Act, 2007. lfhe Explanation sought to clarify that where incon{e is cleerned to accllre or arise in India -nnder clauseb (v), (vi) and (vii) of sub-scction (1) of Section 9, srich incorne shall be included in the total incone of thp non-resident, regardless of whethcr thc non-residentlhas a lesidence or placc of business or i lT,\ 504/2007! l'tA 507/2007, f'fn 508200?,tTA5lf/2007, tTA 39?/200j pfl[e 6$ ol 75

B? business cpnnection in lndia. I'-lowevcr', the Iiarnalaka lJigh Conrt, in a reccnt jr.rclgmcnt in thc cerse of Jindal -fhermal Power Company Ltd. Vs. DCIT (TDS), has held that the l3xplanation, in its plesent forrn, does not do away with the lequirement of renclelingtof selvices in India 1'or any income to lre deemed to 4ccrue or arise to a non*resident nncler Section f . iIt has been helcl tliat on a plain leacling of the Explanation, the critelia of rencleling services in India and the utilization of the service in India laid down by thg Suplene court in its juclginent in the case of Ishikawajima Harima Heavy Industries Ltd. '(supra) remhins untouched ancl unaffectecl by the llxplanation.: In old.er to remove any doubt about the legislative intent of thei aforesaid source lule, it is pr"oposed to substitute tlre existing Explanation with a uew Explanatiorl lto specifically state that the incomc of a non-residerili shall be deemed to accllre or arisc in India under ciause (v) or clause (vi) or clause (vii) of sub section (t1) of Section 9 and shall be inclucled his total incornej whether or not, (a) the non-resident has a residencel or place of business ol' bnsiness connection in lnctia; or (b) the non-rbsident has rendered services in Inclia. Tliis amendment is proposecl to takc effect retrospectively fi'onr 1't June, 1976 ancl will, accordingly, iapply in relation to the assesslnent year I977-78 and jsubsequent yeal's." ITA 504/200?, ITA 507/2007, ITA 508/2007,lTAr5l l/2007, l1 A 39?/2007 Pngc 69 ol'75

8s 65. It was argued that a plain construction of the Iixplanation shows I that income leceived l2y a non-resident .ti'om interest, royahy, or I'ees for i technical services will be deemed to accruc or arise in India ul I accordance with Section 9 (1) (i) irrespective of thc place of business, residence or presence'of business connection in India. Mot'eover" in the specific context of roj,'alty and fee for technical selvice, thc seconcl half i of the Explanation ma[<es it clear that scrvices fbr which royalty or' fue is being paid need not be rendered within the territory of India in orcler to ; be deerned as incorneaccruing or alising in India. As per the lciurred counsel for the Revenue the scope of the saicl provisions is macle clear i when one exalnines t[e lelevant Notes on Clauses that accompaniect the Bill in its passage in Parliament: I "Clause 4 ofithe Bill seeks to amend section 9 of the Incotle-Tax Act relating to income decmcd to accrue or arise in India. The existing iprorrisions containecl in the Uxplanation occuming after sub-section (2) of the aforesaid scction provide flrat; for the removal of doubts, for the purposes of the said section, wheLe incomc is decrned to accrue or brise in India under'clauses (v), (vi) and . (vii) of sub-section (1), such income shall be included : I'r,\ 504/200?, I'fA 5o7l2oo7, ITA 508/2007,1T4 5llt2007,l"l'A397n}O't Pagc 7(l ol'75

rt i in the total incorne of the non-resident, whether or not, the non-resident has a residence or place of business or: business conriection in India. i . It is proposed to substitute the said Explanation so as to provide tliat the incorne of a non-resident shall be deemed to aqcrne or arise in India under clause (v) or . clause (vi) or;clause (vii) of subsection (1) and shall bc included in ithe total incorne of the non-rcsident, whether or not,- the non-resident has a resid.ence ol place of business or business coruiection in India; or : the non-residgnt has lendered services in India. I'his amenduient will take effect, retlospectively, fiom 1" June, I976 and will, accordingly, apply in relation to the assesslllent year 1977 -78 and subsequent years." i 66. On'the othel hand, argument of the learnecl counscl fclr: the I assessee is that this amendment does not irnpact thc present case. [t rvas argued that the Iixplanation as initially inserted in the ycar 2007 sought to clarily as to when income received by way of intelest, royalty or fees for technical servir"r,i "u,r be rcgardecl as dccmccl .rai , i 'I'he subsequept arnendrnent rnade in the Finance Act, 2010 enacts a further clarification sr r/2007, In\ 397/2007 hrdia. to accrue or arise in Explanation b1, d1s (by effectively aclding llA 504/2007, l'lA 507f2007, ITr\ 508/2007,1Tr\ Pagc 7 | ol'75

i ; t' ; I ; I I Ja clanse (ii) in the Explanation) in so hl a.s the taxability o1' fee,s for teclrnical services are iconcerned., The Supreme Courrt in Isttikuvt,ujinm (supra) has held that if the transfer of property in goods as well as the : payment were both rlade outside India, the transaction of sr4rply rvas : not chargeable to taxlin India inspite of the Jact that the contra.cl. rvas ; signed in India. The Court has fuither helcl that under the DTAA even if the ncln-resident has 'a pelmanent establishment in India, thc irrr:ome : accruing fiom the supply woulcl ndt tre chargeable to tax iu h'rdia if the pelmanent establishrnent is not invoh,ecl in that activity. In thc plesenl I case the finding of thg 'ftibunal is that both the transfcr of thc ploperty i in goods as well as risk has passed outside India and,'therefole, having legard to the provisions of the Act, the consideratiorr reccivable for the i supply of such equipnient is not chargeable to tax in India. Accorcling i to the assessee, the judgrnent of the Supleme Courr in the cerse of ; Isltikuwajinm tnsofari as it deals with the taxability of the olt;hore supplies is in no lnarr1rer affected by the arnenclment macle to sectjon 9 -i by the Finance Act,2Q10 as it only impacts the issue as to when iu<;orne 5l r/2007, tTA 39?/2007 lTr\ 504/2007, ITA 507/1007, ITA 508/2007,1T4 Pagr: 72 ol'75

1) by way of fee for technical seruices can be cleemecl to acclne or arise in Inclia. As it is nobocly's case that the responclent has lencleled tec.hnical services which are cleemed to accrue or arise in Inclia when it supplies i the equiptnent ot' thelsoftware,'the inseltion of the Explanatiorr. Lrelow : section 9 and the adclition of clause (ii) in the said )Sxplanation by the i Fiiratrce Act, 2010 h4s no relevance insofar as the appeals beforo this Cotut are concerned. 67. In our necessaly to (v.;,(vi), and payrnent in rnischief of application. (vii) of gub question i is I olllllroni on ri I I I eo into this I : clause of the facts of this .ur", it may not cven be issue foi' the reasoll that in rcspect of cliluscs Section (1) of Section 9, once it is helci that not royaity which woulcl corne within the clause (,ri), the lixplanation will havr: lto 68. the Therefore, it pulpose of this is'not necessary to go into antendrnent was to undo the question as to rvhether tlre elfect of Ishiku,eiinut (sqrra) by provicling "source rule'l as taxable uncler Section 9 ol'the Act. i In the present case, on0e it relates to supply of goods and further itr any rrn 504200?,rrr\ s07/200r,,rraorrroor,'t.,ala ty2onj,r-r.i397tzoo7 l,flgc.r:ror.?5

lr a 9?2 case, where both ttie tlansfer of the ploperty in goods or lisk passed I outside Inclia, the cqnclusion is that no taxable evcnt took place in .Inclia. The questiori of applicability of the Explanation woulcl arise ,' only when payrnent i$ to be treated as "royalty" within the rneaning of ; clause (vi) or "fee forj teclmical services" as provicicd in clause (vii) of the Act. 69. The result of the aforesaid discussion would iead to the ilnswer to questions fiamed in favour of the assessee ancl against the rr:l'enue and would lesult in the disrnissal of the appeals of thc Itevenue. ITA No. 397 /2007 70. This appeal was, aclmitted on the follorving questions of law:- "1. Wliether Ld. ITA'| in the facts and circumstarlces of the case erred in holding that such softlvare supplies were 'sale' and hence business income and not Royalty in terms of Indo- UI( Treaty? 2. Wiethel Ld. ITA'I- was corrcct in law in f . I I . . f ,f y I

yrrr / l \ I , confirrning decision of the Ld. CIT (A) bV limiting incorne frc)m hardware sales 'aL8%? lT,\ 50,f /200?, f 'f'A 507/2007, t'I A 508/2007, tT,{ 5 | | I 2001, l'f i 391 t2007 lhgtc 7tl ol'75

73 o ! 72. In view of our {ecision in iTA 50412007, whereby appealr; of the I l'everllle .have been disrnissed, the cluestions of iaw stand anslvercd against the revenue inithis appeal. 'fhis appeal is erlso clismissecl. Wq' ( t "t'-- 'lg= ACTII\G C]LTNEF .IUST'ICIE t.I I '- i!""" ' ' t '" I'' '"i I , (IREVA I(IXET'XRAI.An ) JUDGII DECEIV{I3ER 23.201,]. sl<[: ' 3. Wllether Lcl. ITAT errecl in holding that Assessec iis not iiable fol inlerest uncler Scction 234A andi234B of the Income Tax Act, 196l'?" 7I. It was agreecl that the result of the aforesaid qucstions r,vould I clepencl upoll the ouicome of the ITA 50412007 ancl other connected mattels. I f A 504/2007, f TA s07/2007, tTA 5082007, l1i\' 5 | | tzltti, tT A 397 t2001 Pagc 7-i ol'75 I -- ' I