Monday, March 23, 2009

Applicability of Sec 194C in case of "Sale of Goods"

ITAT, MUMBAI BENCHES ‘A’: MUMBAI

Novartis HealthCare Pvt. Ltd.

v.

ITO
ITA Nos. 310 to 312/Mum/2006

February 25, 2009

RELEVANT EXTRACTS:

There is no dispute about the nature of transactions entered into by the. assessee with the manufacturers who have their independent establishments for the manufacture of medicines. The assessee is continuously placing orders with such manufacturers for manufacturing of medicines strictly according to its own specifications. The manufacturers cannot deviate from the specifications given. If any lot is found lacking the desired specifications, the assessee has nail right to reject such lot. Further there is no dispute with the goods manufactured by these panics are subject to the control and supervision of the assessee from time to time and from stage to stage. These products carry the trademark of the assessee and the manufacturers are not entitled to use the assessee's trademark for any purpose other than the manufacture of medicines ordered by the assessee. There is further no quarrel on the fact that all the input costs for manufacturing of the medicines are incurred by such manufacturers who purchase the raw material at their own, incur the labour costs and other overheads, pay excise duty and sales tax when the goods are manufactured and sold to the assessee. It is only after the manufacture of medicines that the assessee is billed with the total costs incurred by the manufacturers along with their profit mark up.

Under these circumstances we have to decide whether the work done by the manufacturers can be said to be sale of goods to the assessee or carrying out any work in pursuance of contract. Circular No.681 dated 8.3.1994 was issued by the Board to throw light on the applicability of section 194C to service contracts. Para 7 of the Circular states that the service contracts would be covered by the provisions of this section since service means doing any work as explained above. Clause (vi) of para 7, which is relevant for our purpose, reads as under:-
“(vi) The provisions of this section will not cover contracts for sale of goods -
(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) (b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outsider the purview of this section.
(c) (c) In State of Himachal Pradesh vs. Associated Hostels of India Ltd. 119721 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed and in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials in conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case."

On going through the above portion of the Circular it is abundantly clear that the contracts for the sale of goods will not be covered within the ambit of section 194C but the contracts granted for processing of goods supplied by the Government or any other specified person where the ownership of such goods remains at all times with the Government or such person, will also fall within the scope of this section. The same position will prevail in respect of the contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified persons and the fabrication work is done by the contractor. Thus where the goods are supplied by the Government or any other specific person for doing of a particular job on such goods it will be considered as covered within the meaning of "work". Clause (b), which is significant for our purpose, makes the position more clear when it states that where the contractor undertakes to supply any article or thing fabricated according to the' specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such other person only after such article or thing is delivered the contract will be a contract for sale and hence outside the scope of this section. Adverting to the facts of the instant case we find that the assessee placed orders with the manufacturers for manufacturing the medicines strictly according to its specifications but the property in such goods passed to the assessee only after these were delivered to it When the manufacturers were making the purchases at their own and incurring other input costs, the product so manufactured was their own till it was delivered to the assessee. Suppose during the course of manufacture some wrong raw material is used or due to any other reason the finished product does not come up to the specifications of the assessee, such was the loss of the manufacturer. It is only when the medicine is manufactured according to the assessee's specifications and delivered to it that the property in goods can be said to have passed to the assessee. Here is a case in which the assessee had simply placed the orders for the manufacture of medicines according to its own specification and all other relevant decisions for the manufacturing have been left to the wisdom of the manufacturer. The assessee is only interested in the output coming up to its standard and how that output is achieved is the job of the manufacturer. The checks provided by the assessee cannot alter the real character of the transaction. Simply because the assessee monitors the manufacturing from time to time to ensure that the medicines manufactured by the parties are as per it§ specifications, that will not put the assessee into the shoes of manufacturer more so when the establishments are of the third parties and they have their own labour force with all the infrastructure. Not only die cost of raw material has to be incurred by the manufacturers but even the excise duty is also paid by them directly. Further when such manufactures make the sale of such goods to the assessee the sales tax is also paid by them. It is not as if the manufacturers had done some process or added the value to the material supplied by the assessee. On the contrary it is a case where the manufacturer has produced the goods at its own, though subject to the assessee's specifications, supervision and control and later on sold such goods to the assessee. The property in goods passes over to the assessee only when such goods were manufactured and delivered to it.


Tax paid in USA--Treated as "Advance Tax" per DTA with US

Advance Tax was paid outside India through its branches in USA and claims it as advance tax paid in India. CIT allows the same to be set off against the tax liability in India, and considered the same as “advance tax” for the purpose of Indian Tax Laws, though the term “advance tax” was not used in the DTA with USA. The fact that it was paid in the current financial year and the same would have been treated as advance tax in India. So there was no interest chargeable u/s 234B

Need to review, if AMT (Alternate Minimum Tax) would have been paid in US, would credit of the same be available in India.

THE DEPUTY COMMISSIONER OF INCOME TAX
C C I, HYDERABAD
Vs
M/s SATYAM COMPUTER SERVICES LTD
SECUNDERABAD

These appeals by Revenue are directed against the orders dated 31st October 2006 of the learned Commissioner of Income-tax (Appeals)-I, Hyderabad for the assessment years 1998-99 & 2005-06.

2. As common grounds are raised in these appeals by the revenue, they are taken up together and disposed of by a common order for the sake of convenience. The common grounds taken are reproduced below:

1. On the facts and circumstances of the case, the learned CIT(A) has erred in;

i) Not considering the provisions of section 209 of the Income Tax Act, which lay the procedure for computation of quantum of advance tax payable by an assessee and thereby erroneously held that payment of advance tax in foreign country would have the nature of advance tax?

ii) Not considering the amendment made in section 234B with effect from and thereby against the legislation intention, he directed the benefit to be given prior to
1.4.2007 also, especially for the A.Y. 2005-06.

iii) Not taking the fact into consideration that payment of tax in a contracting state as per DTAA cannot take the shape of advance tax because, for Advance Tax the assessee is supposed to estimate the total income and prepaid taxes thereon to arrive at the installment of Advance tax whereas the TDS in a foreign country is only on the contract receipt pertaining to that specific event.

iv) Ignoring the fact that payment of tax in foreign country is only on the basis of the income earned on a project in that country and without taking into consideration some total income of the assessee in that relevant previous year.

2. Any other ground or grounds that may be urged at the time of hearing.

3. Brief facts of the case are that an amount of Rs.68,13,233/- and Rs.82,53,37,845/- for the Asst. Year 1998-99 and 2005-06 respectively was paid by the assessee in USA which was claimed as advance tax in India under Double Taxation Avoidance Agreement (DTAA). The A.O. treated this amount as advance in the order passed under sec. 143(3) of the Income-tax Act (for short the Act). As the A.O. was of the opinion that the said amount is not advance tax but self-assessment tax for which notices under sec. 154 wee issued and an order u/s. 154 was passed treating the same amount as self-assessment tax. Consequently demand payable including interest was modified. The A.O. was also of the view that in the DTAA there is no clause to treat such payment as advance tax, for which the aforesaid amount was to be treated as self-assessment tax only. He therefore treated the tax paid in USA by the assessee as self-assessment tax and not as advance tax. On appeal, the C.I.T.(Appeals) holding that the amounts paid by the assessee in USA in the financial year relevant to the assessment year 1998-99 is in the nature of advance tax and has to be treated as such, allowed the appeal of the assessee. Aggrieved the revenue is in appeal.

4. We have heard the rival submission and perused the material on record. It is undisputed that the DTAA is silent on the point as to whether to treat the tax paid in USA as advance tax or self-assessment tax. It is also undisputed facts that the entire tax payment made in USA was made within the financial years relevant to the assessment years 1998-99 and 2005-06 and had this been paid in India, the same would have been treated as advance-tax. Moreover the assessee has not delayed the payment of taxes even though the same were paid in USA. When there is no default in payment of taxes there is no question of charging of interest under sec. 234B of the Act. The Explanation introduced by Finance Act 2006 with effect from 1.4.2007 is as under:
" Explanation 1.—In this section, "assessed tax" means the tax on the total income determined under sub-section (1) of section 143 and where a regular assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of,—

(i) any tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income;

(ii) any relief of tax allowed under section 90 on account of tax paid in a country outside India;

(iii) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section;

(iv) any deduction, from the Indian income-tax payable, allowed under section 91, on account of tax paid in a country outside India; and

(v) any tax credit allowed to be set off in accordance with the provisions of section 115JAA."

Since the above explanation (1) only provides meaning, to be understood that such meaning was available even prior to 01.04.2007 as held in the case of Dilip N. Shroff Vs. Joint C.I.T. (2007) 291 ITR 519 (SC) =, it was held by the Hon'ble Supreme Court as under:

"The object of an Explanation to a statutory provision is: (a) to explain the meaning and intendment of the Act itself; (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide additional support to the dominant object of the Act in order to make it meaningful and purposeful; (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof, but where some gap is let which is relevant for the purpose of Explanation, in order to suppress the mischief and advance the object of the Act, it can help or assist the court in interpreting the true purport or intendment of the enactment; (e) it cannot however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming a hindrance in the interpretation of the same."

Hence, the aforesaid explanation is applicable to the case of the assessee. In view of the above, we hold that the amounts paid by the assessee in USA in the financial years relevant to assessment years 1998-99 and 2005-06 are in the nature of advance-tax and has to be treated as advance-tax. Hence, we uphold the orders of the C.I.T.(A) and dismiss the appeals of the Revenue.

(Pronounced in the Court on 25.04.08.)

Professional Charges on Sub of Euro Issue--No Tax Withholding

Amount paid to a non-resident for rendering professional services in relation to subscription of Euro Issues. No Tax withholding u/s 195, as it is regarded as "Business Income".

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'L' BENCH
ITA No. 4383/Mum/2002
A Y : 1999-2000
THE Dy DIRECTOR OF INCOME TAX
(INTERNATIONAL TAXATION)-2(1)
BHAVAN
MUMBAI 400020
Vs
M/s RELIANCE INDUSTRIES LIMITED


This appeal arises from the proceedings initiated under section 201(1) read with section 201(1A) of the Income-tax Act, 1961 ('the Act'). The only issue arising from this appeal is whether there was failure to deduct tax at source under section 195 of the Act for which the assessee could be deemed to be in default under section 201(1) of the Act and consequently the demand could be raised against the assessee along with interest u/s. 201(1A) of the Act.

2. Briefly stated, the facts are these. M/s. Reliance Industries Ltd. (RIL) brought out three Euro Issues of USD 150 million, USD 140 million & USD 300 million in May 1992, October 1993 & February 1994 respectively. For bringing out these Euro issues, RIL employed the services of some non-resident Lead Managers viz. Morgan Stanley, a US based Company for assisting it in all aspects of consultancy for preparing documents connected with bringing out the issue, dealing with various regulatory authorities in India and abroad, Due Diligence Certificate (DDC), arranging roadshows and all other such connected matters inclusive of managing and under-writing the issue. For these services the assessee made certain payments without deducting tax at source u/s. 195. The Assessing Officer initiated the proceedings u/s. 201(1) and 201(1A) of the Act since he was the view that the non-resident, M/s. Morgan Stanley, was liable to pay tax in India in respect of the payments made by the assessee. In his order it was held that services rendered by M/s. Morgan Stanley amounted to fees for technical services within the ambit of section 9(1)(vii) of the Act. It was further held that such payments amounted to fees for included services as per Article 12 of the DTAA between India and USA and consequently, the provisions of section 195 were attracted. Since there was failure to deduct tax at source, the Assessing Officer created a demand of Rs.5,68,23,814/- under section 201(1) of the Act. He has also charged interest u/s. 201(1A) of the Act.

3. The matter was carried in appeal before the CIT(A) who confirmed the view of the Assessing Officer that such payment amounted to fees for technical services within the meaning of section 9(1)(vii) of the Act. However, it was further held that such payments could not be treated as fees for included services within the meaning of Article 12 of the Indo-US Treaty and consequently the provisions of Article 7 were attracted. Since the non-resident has no PE in India, it was further held that the fees received by the non-resident could not be taxed in India. In support of this conclusion, reliance was placed on the decision of the Tribunal in the case of Raymond Ltd Vs DCIT, which is now reported in 86 ITD 791 (Mum). The appeal of the assessee was, therefore, allowed. Aggrieved by the same, the revenue is in appeal before the Tribunal.

4. After hearing both the parties we find that the issue is squarely covered by the decision of the Tribunal in the case of Raymond Ltd. (supra) in favour of the assessee wherein on similar facts, it has been held that payment for such services do not fall within the ambit of Article 12 of the Indo-US Treaty. Similar view has also been taken by the Tribunal in the case of Wockhardt Life Sciences Ltd. Vs. DCIT (ITA No. 3625/Mum/2000 dated 8.6.2005). No decision has been brought to our notice taking a different view. Therefore, following the decision of the Tribunal in the case of Raymond Ltd. (supra), it is held that payment by the assessee cannot be considered as fees for included services under Article 12(4) of the Treaty. Consequently, it has to be treated as business profits under Article 7 of the Treaty. Since, admittedly, there was no PE in India, the said sum could not be taxed in India. Accordingly, we do not find any infirmity in the order of the CIT(A). The order of the CIT(A) is, therefore, upheld.

5. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on 20.01.2009.


Regards,
Praveen Boda

Tuesday, March 17, 2009

Payment for Software--Not Royalty Income


Lucent Technologies International Inc VS DCT--New Delhi

Transfer of right to use of software loaded on the hardware - Fact that the assessee had not transferred the right to the Indian Cellular operator to duplicate or adapt or use the same in public, it was a mere transfer of a copyrighted article and not the copyright - income is not royalty either under the domestic law or the DTAA - CIT(A) order disallowed and the Assessee's argument upheld

Out of these seven appeals, six appeals i.e., three by the assessee and three by the Revenue are cross-appeals which are directed against three separate orders passed by the learned CIT(A)-XXIX, New Delhi on 20-3-2001, 27-8-2003 and 25-1-2006 for assessment years 1997-98, 1998-99 and 2000-01 respectively whereas the remaining appeal of the Revenue being ITA No. 4624/Delhi/2005 is directed against the order of the learned CIT(A) dated 15-9-2005 for assessment year 1999-2000. As the main issues involved in these appeals are common, the same have been heard together and are being disposed of by this single consolidated order.

2. The main common issue relating to the existence of permanent establishment of the assessee-company in India is raised by the Revenue in ground No. 1 of its appeal for assessment year 1997-98 and in the solitary ground raised in appeals for assessment years 1998-99, 1999-2000 and 2000-01.

3. The material facts relevant to this issue are that the assessee Lucent Technologies International Inc. (LTII) is a company incorporated in the USA. It is a tax resident of USA. It is a leading supplier of hardware and software used for GSM cellular radio telephone system. The assessee had supplied telecommunications hardware and software to its customers in India. The Assessing Officer after reading the contract entered into by the assessee with its customers, came to the conclusion that the assessee had sent its employees to India to conduct network survey and undertake negotiations and carried out market activity and on the ground that the company which was to do the installation and the after sale service and which originally was under the name of AT&T India Pvt. Ltd., re-named Lucent Technologies India Ltd. (LTIL), held that the profits on the supply of hardware and software is taxable as per the provisions of the Income-tax Act, profit on the hardware is taxable as per article 7 read with article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA and the software and documentation is taxable under the head ‘Royalty’ as per article 12 of DTAA between India and USA. The Assessing Officer had held that the assessee herein i.e., LTII had a fixed office of business in India in the form of office of its Indian subsidiary, being LTIL and the employees of the assessee company were coming to India and were staying here for a long time and the visits were not casual, but were spread over a long time and these employees were utilizing the office furniture and telephone facilities of the Indian company and were provided perquisites like car, use of staff facilities by the Indian company and held that the office of AT&T (India) Pvt. Ltd. subsequently re-named LTIL was the fixed place of business of the assessee herein. The Assessing Officer further held that the contract had been signed by the assessee company in India and the terms were also negotiated in India. The network survey was carried out in India and a complete interface was provided in the form of project coordinators, managers etc. and these activities were not possible unless the assessee did not have a fixed place of business in India. Further, the Assessing Officer had held that the assessee company herein had provided training courses in India to its customers and the perusal of the contract clearly indicated that the hardware is supplied through the Permanent Establishment (PE) in India. Consequently, to his conclusion, the Assessing Officer had held that the Indian company, M/s. LTIL was a dependent agent and consequently, the PE of the assessee company, in regard to software supplied. The Assessing Officer had held that the payment for the same was fees for included services which is described in the treaty between USA and India. Consequently, the Assessing Officer had taken the value as per the contract and brought the same to tax by estimating the profits therefrom at 40 per cent.

4. Aggrieved by the orders of the Assessing Officer, the assessee filed first appeals to the learned CIT(A) and after considering the submissions made on behalf of the assessee in the light of material available on record, the learned CIT(A) held for the reasons given in paragraph Nos. 10.7 to 10.9 of his impugned order that the assessee did not have a PE in India. Aggrieved by the same, the Revenue has raised this issue in the present appeals filed before the Tribunal.

5. At the time of hearing, it was submitted by the Ld. DR that the Indian subsidiary LTIL was the PE of LTII, the assessee herein. He drew our attention to the contracts entered into between the assessee and M/s. Escotel Mobile Communications Ltd. which was at pages 69-137 of the paper book as also the contract entered into between Escotel Mobile Communications Ltd. and M/s. AT&T (India) Pvt. Ltd. which was at pages 139-186 of the paper book. It was also placed before us the copy of the technical explanation of the convention and protocol between the USA and the Republic of India signed on 12-9-1989 issued by the Treasury Department of USA. He further placed before us the Notification No. GSR 990(E), dated 20-12-1990 in regard to the DTAA between USA and India. He also drew attention to the article 3 of the said notification wherein as per sub-clause (2), it had been clarified that the terms not defined in the convention were to have meanings which it has under the laws of the State concerning the taxes to which the convention applies. It was also his submission that though on a similar issue the Special Bench of this Tribunal in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) had held that there was no PE therein, in a subsequent Mutual Agreement Procedure (MAP) after the decision of the Special Bench of the Tribunal, Motorola Inc. had conceded that it had a PE in India and Motorola Inc. had agreed to be subjected to tax law in regard to transactions in India. He further drew our attention to article 5(2) which was an inclusive definition of the PE. He relied upon clauses (k) & (l) of the said sub-clause (2) of article 5 of the DTAA . It was the submission that as per sub-clause (1) of article 5(2), if any service is rendered by the non-resident assessee company to an associated enterprise for even one day there will be a PE. It was also his submission that no formal permission to use the subsidiaries’ premises was required and even a casual use would lead to the existence of a PE. He further drew our attention to page 71 of the assessee’s paper book which is the copy of the agreement between the assessee and M/s. Escotel wherein the assessee has been categorized as the contractor and as per the said agreement the assessee was to supply the GSM network in accordance with the functional specifications and the product and design specification set out. The assessee was to complete the GSM network project on a turnkey basis. He further drew attention to page 77 of the paper book wherein clause (1) under the head “Definitions and interpretations” it has been specifically mentioned that AT&T India Pvt. Ltd., a wholly owned subsidiary of the contractor (assessee) was to supply all hardware and software services under the terms of the separate contract entered into between the Escotel and AT&T (India) Pvt. Ltd. dated on or about the date of the contract entered into between the assessee and M/s. Escotel. He further drew attention to page 82 of the paper book under the heading “Contractor’s general responsibilities” in article 3 wherein the assessee herein had agreed to prepare designs as also manufacture, supply and deliver all hardware, software and related services in accordance with the contract to enable installation, testing, commissioning and achievement of provisional acceptance and final acceptance of the system or sub-system (as the case may be) by AT&T (India) Pvt. Ltd. with the exception of installation, testing and commissioning of receiver station, control equipment, GSM antennas and feeder cables etc. The contractor being the assessee herein shall inspect the installation and supervise the testing andcommissioning of the various equipments by Escotel. In para 3.4 of the said contract the 8.1 software version release for mobile switch centre etc. was to support certain features required for GSM standard. As per clause 3.5, assessee was to install the said software along with the call monitoring system for Escotel. As per clause 5, the assessee was to appoint the project manager responsible for ensuring that the assessee complies with the project management processes and the identity of the project manager was subject to Escotel’s prior written approval. As per clause 6, within one calendar month of the date of the contract the assessee and M/s. AT&T India was to submit the schedule of works to Escotel for its approval. As per clause 12, the assessee was to perform certain structural testing programmes, sufficient to the satisfaction of Escotel that the hardware, software, sub-system, system to meet the requirement of the contract and achieve provisional acceptance and final acceptance. He drew our attention to clause 17 of the said contract which required the assessee to keep available of necessary spare parts for the system, repair any defective hardware modify, enhance or otherwise update the software during the operational life of the hardware and software as per the support contract. As per clause 19 during the operational life of the hardware and software, the assessee was to provide training to Escotel personnel in accordance with the provisions of support contract. He further drew our attention to clause 37 of the said contract which was the address for correspondence and the said address given was that of the “Contracts Manager, AT&T (India) Pvt. Ltd.” in India. He further drew our attention to page 123 of the paper book under clause 46 wherein Escotel reserved itself the right to have any of the assessee’s support personnel replaced for various reasons specified therein. He further showed us the chart in regard to division of responsibilities between the assessee and its Indian subsidiaries in the contract with M/s. Escotel. It was also his submission that as per article 5(2)(1)(i) of the DTAA between USA and India, if any of the employees or other personnel of LTII, the assessee was involved in furnishing of any services for a period of or periods aggregating more than 90 days within 12-month period for the Indian subsidiary LTIL, even then there was a service PE. It was his submission that the personnel of LTII did function under the control and did provide services to LTIL being a subsidiary and consequently there was a PE.

6. In reply, the learned counsel for the assessee submitted that as per article 5(2)(1) of the DTAA between USA and India, it was required that employees of the assessee company should have provided the services to the subsidiary in India. He drew our attention to page 260 of the paper book which is a copy of the list of expatriates during the year 1996-97 which run into 17 names. He drew our attention to pages 270-283 of the paper book which is a copy of the return of one Shri Topolski Francis, one of the expatriates as also pages 284-295 which is a copy of the return of Mr. Lowri Charles. It was his submission that the expatriates who had worked with LTIL were not the employees of LTII. It was his submissionthat these expatriates were employees of various other companies in which the assessee, LTII, had certain interest. It was thus his submission that it was the employees of the affiliates of the assessee who had provided the services to LTIL and consequently it could not be said that LTIL was a service PE of the assessee here. He further drew our attention to the various clauses of the agreement between the assessee and Escotel as also the agreement between LTIL, AT&T (India) Pvt. Ltd. and Escotel. It was his submission that as per the contract between the assessee and Escotel, the assessee was to prepare the designs, solutions, manufacture, supply and deliver all hardware, software and related services in accordance with the provisions of the contract and the contract between Escotel & LTIL was for the installation, testing, commission and achieving provisional acceptance and final acceptance. He drew our attention to clause 3 of both the agreements which provided for the said different responsibilities. It was his submission that all other clauses in the contracts were basically mirror images. It was his submission that it was only to protect the interest of Escotel that Escotel had required that both the assessee and LTIL, enter into identical contracts with Escotel except for the specific acts required by each of the persons. It was his submission that the contract had not been signed in India and for this he drew our attention to affidavit of Shri Kenneth G. Jackson on pages 187-190. Shri Kenneth G. Jackson has categorically admitted that he was the corporate counsel employed by Lucent Technologies Asia/Pacific Ltd. and he acted as a legal counsel for the various subsidiaries and affiliates of the assessee in the Asia/Pacific region including India. He has categorically declared that the agreements between the assessee and Escotel were signed on two dates, the one on behalf of Escotel in India on 18-5-1996 and on behalf of assessee subsequently at Singapore. It was his submission that the negotiations before the contract did not establish a PE in India in regard to the contract. He further drew our attention to page 201 of the paper book which is the certificate issued by LTIL specifying that they did not hold any spares on behalf for the equipments supplied by the assessee under the contract with Escotel. He also drew our attention to pages 202-234 of the paper book which is a copy of the support service agreement between Escotel and AT&T (India) Pvt. Ltd. (LTIL). It was his submission that as per the support service agreement, the Indian subsidiary was to provide all the support service and repairs and replacements of the turnkey project. It was thus his submission that the assessee has not undertaken in other obligations with Escotel other than supply of hardware and software. It was also his submission that the decision of the Special Bench of the Tribunal in the case of Motorola Inc. (supra) would squarely cover the facts of the assessee’s case and just because Motorola has entered into a mutual agreement procedure it did not make the decision of the Special Bench of the Tribunal, otiose. It was also his submission that the equipments supplied by the assessee was through sale and the sale had taken place outside India and all other services were rendered by the Indiansubsidiary as per the terms of the contract between Escotel and the Indian subsidiary LTIL. It was his further submission that the interpretations provided by the US Treasury though specified the requirement of a lesser nexus for the creation of a PE, in the assessee’s case there was no nexus at all and therefore, it could not be said that there was a PE of the assessee in the form of LTIL in India.

7. We have considered the rival submissions. At the outset, what is noticed from the two agreements, being the one between the Escotel and the assessee and the other between Escotel & AT&T (India) Pvt. Ltd., now knows as LTIL shows that the contract is for two different purposes. The agreement between Escotel and the assessee herein is for the supply of the hardware and software. The agreement between Escotel and LTIL is for commissioning, installation and operations. However, both the agreements provided for the turnkey functioning of the project of the GSM network. In short, what is noticed is that by entering into the contract by Escotel with both the assessee and its LTIL, Escotel has made both the assessee and LTIL responsible for the turnkey completion of the GSM project, individually and severally. Thus, if either one breaks its terms of conditions of contract with Escotel, the other would be responsible for its completion. In short, a consortium or partnership has been created between the assessee and its Indian subsidiary LTIL. With this situation, the next question that comes up is, can either the assessee or its subsidiary LTIL complete the contract with Escotel on a turnkey basis without the assistance of the other. Obviously, the assessee is to supply the hardware and the software and LTIL is to do the installation, testing, commissioning and bringing up to operation of the turnkey project. If the assessee herein does not provide the hardware and the software, it would be the duty of the LTIL to provide the requisite hardware and the software in the completion of the turnkey project. Similarly, if LTIL does not comply with its duties of commissioning, installation, testing, and bringing up to operation, the turnkey project, such responsibility would rest on the shoulder of the assessee. Here, what is noticed is that there is no dispute that the assessee herein has completed its part of its contract i.e., the supply of the hardware and the software. It is also specifically noted here that the installation, commissioning, testing and bringing up to operational status of the hardware and the software supplied by the assessee herein has been undertaken by the Indian subsidiary, LTIL. For this purpose, LTIL has also undisputedly taken the assistance of the expatriates, here the employees of the affiliates of the assessee herein. Thus, what is noticed here is that the parent company being the assessee herein has made personnel in form of the employees of the affiliates of the assessee available to the LTIL, the subsidiary, for remuneration. Further, a perusal of the agreement between Escotel and the assessee clearly shows that the warrantees provided by the assessee company is in relation to the defects in the hardware. This is noticed in clause 16 of the agreement. As per this clause, in the hardware, if any defect is noticed, the same has to be replaced or repaired within the time scale detailed in the support contract. This warrantee clause in identically form is also found in clause 16 of the agreement contract between Escotel and LTIL. Thus, what is noticed is that normally the warrantee for a particular product which is to be supplied by one person, is the responsibility of that person alone, but in the present case it is noticed that this burden is also shifted to the subsidiary being LTIL. Though, LTIL has certified that does not keep any spares on behalf of the assessee for the equipments supplied by the assessee under the contract with Escotel still the fact that LTIL has also assumed the responsibilities of the warrantee in regard to the hardware supplied by the assessee as also the responsibility to replace the same within the period specified in the support contract between Escotel and LTIL clearly shows that the subsidiary LTIL is also acting on behalf of the assessee. A perusal of article 5(2)(1) clearly shows that it is not only the employees through whom if services are provided the PE is to set to come into existence. It also includes other personnel. Obviously, the term other personnel has to be read with reference to the earlier words as provided in the said article 5(2)(1). The other personnel specified here would be persons over whom the enterprise would be having a control. In the present case undisputedly employees of the affiliates of the assessee had been employed through LTIL the services of installation, commissioning, testing and bringing up to operation of the hardware and the software sold by the assessee to Escotel through its contract in regard to GSM project to be completed on a turnkey basis. These employees of the affiliates over whom the assessee has a control would fall within the term other personnel and consequently, it would have to be held that a PE did exist as per the inclusive term as provided in article 5(2)(1) of the DTAA between USA and India. A copy of the returns of the expatriates which have been placed in the paper book also clearly show that they have been in India for more than 90 days within the 12 month period from April, 1996 to March, 1997. Consequently, the terms of article 5(2)(1)(i) of the DTAA between USA and India are fulfilled. Consequently, it would have to be held that LTIL in fact was a service PE of the assessee. Consequently, the findings of the CIT(A) on this issue stand reversed.

8. The next common issue raised in ground No. 2 of the assessee’s appeal for assessment years 1997-98 and 1998-99 and ground No. 1 of its appeal for assessment year 2000-01 relates to the treatment given by the Assessing Officer as well as by the learned CIT(A) to the payments received by the assessee company under license agreement of allowing use of computer software as ‘royalty’ as against the claim of the assessee company that the same constituted its business profits.

9. The amounts received by the assessee company under the license agreements in allowing use of computer software was claimed to be its business profit. In this regard, the stand of the assessee as taken before the Assessing Officer was that there was no transfer of copyright in the software to the Indian operator and what was transferred or sold was merely a copyrighted article. It was pointed out in this context that the Indian operator had no right to sub-lease or sub-license the software and the copyright thus remained with the assessee. The Assessing Officer did not accept this stand of the assessee. According to him, the software constituted intellectual property right and not goods or equipment. He held that the amount received by the assessee for transfer of such rights thus was in the nature of royalty income and the same was chargeable to tax in the hands of the assessee company as such. When the matter was carried before the learned CIT(A), he discussed the facts and submissions of the assessee in relation to this issue in paragraph 11.1 of his impugned order before recording his conclusions in paragraph 11.2. The relevant portion of the learned CIT(A)’s order in this context is reproduced below:—

“11.1 This brings us to the issue whether the licensing of software led to the receipt of royalties or receipt of commercial income. In general terms, the case of the ld. Assessing Officer was that software constituted intellectual property right (IPR) or not goods or equipment. The appellant did not pass the title in the software but the Indian operator was given a limited right to use the software. On the other hand, the case of the appellant was that it did not transfer copyright in the software to the Indian operator. What it sold was a copyrighted article. The Indian operator had no right to sub-lease or sub-license the software. All the arguments of the rival parties are not reproduced here for the sake of brevity. However, it is pointed out that the provisions of the DTAA are more favourable to the appellant and, therefore, the discussion is restricted to these provisions only. These provisions have been discussed in OECD commentary and IRS of USA has also issued guidelines on what constitutes copyright and what constitutes copyrighted article. These guidelines are most beneficial to the appellant. Insofar as Indian cases are concerned, there is only one decision of Andhra Pradesh High Court in which levy of sales tax on branded software was upheld. The Hon’ble High Court went only to the extent of saying that branded software, sold off the shelf, is liable to sales tax and the relevant provisions in the UPGST were not ultra vires the constitution. However, it also held that that will not apply to customized software or the software not sold off the shelf.

11.2 I have carefully considered the facts of the case and rival submissions. The words Copyrighted article are oxymoron words, being copyright and article at the same time. Such words should be viewed with great circumspection. The appellant has also adopted dual standards in interpreting the agreements, sometime saying that the legal liabilities should flow strictly from the agreement terms, and not arguing that the words in the agreements should be read down. I am of the view that on the facts and in the circumstances the license of software amounted to transfer of copyright and not merely transfer of copyrighted article. The case of the appellant is caught within the mischief of Article 12 of the DTAA and is not saved under OECD commentary or IRS guidelines. For this purpose, let us first describe the facts briefly. The appellant entered into agreement of sale of hardware and software to the operator in terms of the supply contract with a view to set up GSM. Three types of software, namely, prepaid software, BTS software and MSC software, of the value of US$ 71,24,680, were licensed. In view of these distinction and also due to difference in nature of the two properties, it is quite clear that the supply agreement was, in fact, two agreements for transfer of the respective properties. It is not necessary that there should be two separate agreements for arriving at this conclusion. Consequently hardware was sold and the software was licensed as per two separate agreements in the light of aforesaid discussion. The purpose of the GSM was to enable the operator to provide mobile telephony services to its customers. This fact was very well known to the appellant. On obtaining the license, the contractor loaded the software on the equipment and trained its contractor’s personnel to use the hardware and the software. But the story does not end here and setting up the GSM for the sake of setting it up would mean nothing to the operator. At this stage the customer, who wants to use mobile telephone services, enters the scene with a handset. A part of the software, depending upon his requirements, is loaded on to his handset for giving him connectivity. And with this loading of the software, the GSM comes alive. It is this software which permits the customer to get connectivity with GSM and consequently with any other telephone users, mobile or stationary. No such connectivity is feasible without loading a part of the software on the handset of the customer. Once the connectivity is allowed, the customer can enter the GSM, and use its software for doing his business, namely get connected to another person outside the GSM. The process involves the use of software of the GSM by the customers. Therefore, the ld. Assessing Officer was right when he mentioned that with every call, the customer of Indian operator used the GSM and its software. It cannot be pleaded that the appellant was not aware of the importance of this connectivity. Even if such a plea would have been taken, then that plea would have been wrong for the simple reason that the preamble to the Supply Contract states that the appellant wishes to provide supply of GSM Mobile Telephone System and Application Software. It was in this context that the software was licensed and not sold as goods. All these were not unintended errors in the contract or choice of wrong words. It is also not a case where the connectivity is provided by the operator by breach of contract or by stealth. The connectivity to customers and their use of GSM was of essence of the contract. In this scenario, we may now examine the example given in IRS guidelines and the facts of the case.

Example 10

‘A’ transfers a disk containing software to ‘B’ and grants right to it to load the software into its 50 workstations for use of A and its employees on the basis of one-time per-user fee. If additional workstations are introduced subsequently, the software may be loaded into those machines for additional one-time per-user fees. B is prohibited from selling the disc or any copy or reverse engineering the software. The term of license is stated to be perpetual.

Analysis

The right to copy software on 50 workstations without the right to distribute it to the public is not the transfer of copyright but it is transfer of copyrighted article.
Paraphrasing the appellant’s case
‘A’ licenses software, contained in a medium, to ‘IO’ and permits ‘IO’ to get the software loaded into its equipment by ‘IO’. Equipment is also installed by ‘IO’. ‘A’ trains the personnel of ‘IO’ in case of equipment and software. ‘IO’ is permitted to transfer a part of the software on the handsets of IO’s customers so that he uses the IO’s GSM for telephone.

Analysis

The terms of license permit public display or use of license to and by IO’s customers. In fact, they use the software of ‘A’ while using the GSM. It is not a sale of copyrighted article, but transfer of the copyright.
There is sea of a difference in the fact of Example 10 and the facts of appellant. The facts are not at all in pari materia. The whole complexion changes when we examine the intent and purpose of the setting up of the GSM, which both parties knew and which has been set forth in the preamble. The software was not to be used exclusively by the operator. It was to be loaded not merely on the workstation of the operator for internal use. It was to be publicly used by the customers of the operator. They could use it through the connectivity supplied to them without intervention of appellant or its employees. I am also of the view that, designed specifically to undertake complex operation on the basis of logic sequence of commands, there is no difficulty in holding software to be a scientific work. In any case, the discussion in the OECD commentary and the IRS guidelines has taken place because software is otherwise is copyright. If it was not so, all this discussion would have been unnecessary. The OECD and IRS guidelines are the most liberal interpretation in favour of the appellant. Here, I am not accepting it to be the final word, but as the appellant’s case fails even under these interpretations, it is not necessary to go into other arguments advanced by ld. Assessing Officer and the ld. counsels. Thus, the case of the appellant is covered under article 12 of the DTAA and, therefore, he is liable to pay tax on the royalties received from the operators.”

10. The learned CIT(A) thus held that there was a transfer of copyright by the assessee company in relation to the software and the amount received on account of such transfer was royalty as per the relevant Article of DTAA which was chargeable to tax in India.

11. At the time of hearing before us, the learned counsel for the assessee at the outset has submitted that this issue involved in the case of the assessee is squarely covered by the decision of Special Bench of ITAT in the case of Motorola Inc. (supra). He has taken us through the relevant portion of the order passed by the Special Bench in this case and has pointed out that the issue has been examined by the Tribunal from all the relevant angles. He has contended that on such examination, the Tribunal has held that there was merely a transfer of the copyrighted article and no transfer of copyright and the amount received for such transfer was not royalty either under the domestic law or even under the relevant DTAA. He has also filed a chart giving a comparison in the relevant facts as involved in the case of the assessee with that of the case of Motorola Inc. (supra).

12. The learned DR, on the other hand, has invited our attention to section 14 of the Copyright Act, 1957 giving definition of Copyright Act with regard to the software. He has contended that a perusal of this definition clearly indicates that in case of computer programmes, selling or giving on hire of software for sale or hire any copying of computer programme regardless of whether such copy has been sold or given on hire on earlier occasions constitutes a grant of or right to use copyright. He hascontended that the said definition also makes it clear that copy of legally obtained software on an electronic medium which may either be a computer or a network constitutes grants or exercise of a copyright. According to him, if a person obtains a copy of the software and he uses thus for his personal or commercial use for copying it on an electronic medium, it constitutes exercise of a copyright. He has submitted that paragraph 3(2) of the Indo-US DTAA makes it mandatory to adopt the definition of the word “copyright” as given in the law of the state applying the provisions of the treaty and therefore, the definition as given in domestic Copyright Act, 1957 shall be applicable in the present case. He has contended that even though the Special Bench of the Tribunal in the case of Motorola Inc. (supra) has placed reliance on the OECD Commentary and internal revenue regulations of USA dealing with classification of transactions involving computer programmes, the same cannot be applied at all in view of the provisions of paragraph 3(2) of the DTAA. He has contended that the license granted for use of a software on network by the assessee company thus has to be analyzed in the light of the relevant DTAA as well as Indian Copyright Act, 1957. He has submitted that neither the Indian Copyright Act, 1957 nor any circular issued by the CBDT makes any distinction between copyright right and copyrighted article and such distinction made in US regulations cannot be extended to the Indian territory as within the territory of sovereign, the loss promulgated by the Indian sovereign was applied. He has contended that similarly, the OECD Commentary making a distinction between a Copyright Act and copyrighted article cannot be used to interpret Indian Copyright Act in a different fashion than what the words used therein suggest. He has contended that the distinction between the copyright and copyrighted article created artificially and not recognized by the Indian Copyright Act or Indian Income-tax Act is liable to be ignored and cannot be applied to decide the issue involved in the present case.

13. The learned DR has also submitted that even the facts involved in the present case are different from that in the case of Motorola Inc. (supra) decided by the Special Bench of the Tribunal inasmuch as in the case of Motorola Inc., the software was to be used in respect of various handsets whereas in the present case, the software is to be installed on the network system supplied by the assessee-company. The learned DR has also contended that in the case of Tata Consultancy Services v. State of AP [2004] 271 ITR 401 (SC) decided by the Hon’ble Supreme Court and referred to by the Special Bench of the Tribunal in the case of Motorola Inc., the decision was rendered by the Hon’ble Supreme Court on the basis of Andhra Pradesh Sales-tax Act and not on the basis of provisions of the Income-tax Act. Relying on the decision of Hon’ble Karnataka High Court in the case of AEG Aktiengesllschaft v. CIT [2004] 267 ITR 209, he has contended that the definition given in other Act such as Sales-tax Actcannot be extended to Income-tax Act especially when express definition is already given in the Income-tax Act.

14. We have considered the rival submissions and also perused the relevant material on record. We have also carefully gone through the various judicial pronouncements cited by the learned representatives of both the sides as well as relied upon by the learned CIT(A) in his impugned order. The main issue which is required to be considered and decided by us in the present context is whether the payment received by the assessee under the license agreement for allowing use of the software is in the nature of royalty income or it constitutes the business profit of the assessee. The issue as to whether the same is in the nature of royalty is required to be decided in the light of Article 12 of the relevant Double Taxation Avoidance Agreement (DTAA in short).

15. There is no dispute that the amount in question has been sought to be treated as royalty income by the Revenue authorities on the basis that there was a transfer of some rights in respect of the copyright. It is, therefore, relevant to ascertain as to whether there was transfer of any rights including the granting of a license in respect of copyright by the assessee in the present case under the license agreements. In this regard, the stand taken by the assessee before the authorities below as well as before us is that there was no transfer of any rights in respect of copyright by the assessee and it was a case where there was merely a transfer of the copyrighted article. The crux of the issue thus is whether the payment received by the assessee under the license agreement is for a copyright or copyrighted article and as held by the Special Bench of ITAT in the case of Motorola Inc. (supra), if it is for a copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA. On the other hand, if the payment is actually for a copyrighted article, then it only represents the purchase price of the article and the same, therefore, cannot be considered as royalty either under the Income-tax Act or under the DTAA.

16. A perusal of the decision rendered by the Special Bench of ITAT in the case of Motorola Inc. (supra) cited by the learned counsel for the assessee shows that an identical issue was involved before the Special Bench in that case and while addressing the same, it was considered by the Tribunal from all the relevant angles. First of all, a reference was to the definition of “copyright” as given in section 14 of the Copyright Act, 1957 wherein it was defined as the exclusive right to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof viz. :—
“(a) in the case of a literary, dramatic or musical work, not being a computer programme,
(i) to reproduce the work in any material form including the storing of it in any medium by electronic means;
(ii) to issue copies of the work to the public not being copies already in circulation;
(iii) to perform the work in public, or communicate it to the public;
(iv) to make any cinematograph film or sound recording in respect of the work;
(v) to make any translation of the work;
(vi) to make any adaptation of the work;
(vii) to do, in relation to a translation or an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (vi);
(b) in the case of a computer programme,—
(i) to do any of the acts specified in clause (a);
(ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme :
Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental;
(c) in the case of an artistic work,—
(i) to reproduce the work in any material form including depiction in three-dimensions of a two-dimensional work or in two-dimensions of a three-dimensional work;
(ii) to communicate the work to the public;
(iii) to issue copies of the work to the public not being copies already in circulation;
(iv) to include the work in any cinematograph film;
(v) to make any adaptation of the work;
(vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses
(i) to (iv);
(d) in the case of cinematograph film,—
(i) to make a copy of the film, including a photograph of any image forming part thereof;
(ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions;
(iii) to communicate the film to the public;
(e) in the case of a sound recording,—
(i) to make any other sound recording embodying it;
(ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording, regardless of whether such copy has been sold or given on hire on earlier occasions;
(iii) to communicate the sound recording to the public.
Explanation - For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.”

17. It was noted by the Tribunal from the aforesaid definition that the right mentioned in sub-clause (2) of clause (b) of section 14 is available only to the owner of the computer programme. According to the Tribunal, it, therefore, followed that if the licensees do not have any of such rights as mentioned in clauses (a) & (b) of section 14, it would mean that they do not have any right in the copyright and in such a case, the payment made to them could not be characterized as royalty either under the Income-tax Act or under the DTAA.

18. The Special Bench of the Tribunal then proceeded to examine from the relevant license agreement as to whether any of the licensees was allowed to exercise any such rights mentioned in the relevant provisions with reference to the software provided by the assessee. On such examination, it was noted by the Tribunal from the relevant clause of the agreement that the licensee was granted a non-exclusive restricted license to use the software but only for its own operation and not otherwise. The licensee thus was permitted to use the software for the purpose of its own operation and there was a clear bar on the software being used by the licensee in the public domain or for the purpose of commercial exploitations. The grant of a non-exclusive restricted license to use the software again meant that the supplier of the software could supply similar software to any number of persons to which the licensee could have no objection. As held by the Tribunal, the words “restricted” and “not otherwise” used in the relevant license agreement thus were sufficient to show that the licensee had a very limited right so far as the use of software was concerned and the licensee thus had not been given any of the seven rights mentioned in clause (a) of section 14 or the additional rights mentioned in sub-clause (2) of clause (b) of that section which related to a computer program. The Special Bench of the Tribunal thus held that what the licensee/user of the software had acquired under the license agreement was not a copyright but was a copyrighted article.

19. The Tribunal then took note of the stringent restrictions imposed on the licensee under the license agreement so far as use of the software was concerned and found that the licensee had been denied the right of making the copies of the software or parts thereof except for archival back-up purposes. This meant that the licensee could not make copies of the software for commercial purposes which condition was contrary to section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. Referring to section 52(1)(aa) of the Copyright Act, it was also held by the Tribunal that merely because the licensee had been permitted to take copies just for back up purposes, it could not be said that he had acquired a copyright in the software. The Tribunal also took note of the restrictions placed on the licensee not to license or sell the software which was running counter to section 14(b)(ii) of the Copyright Act which permits a copyright holder to sell or let out on commercial rental the computer program. It was held by the Tribunal that even from this angle, it could not be said that the licensee had acquired a copyright in the software.

20. The Special Bench of the Tribunal in the case of Motorola Inc. (supra) thus held on a conjoint reading of the terms of the license and the provisions of Copyright Act, 1957 that the licensees were not allowed to exploit the computer software commercially which was the essence of the copyright. What the licensee had acquired under the license agreement was only the copyrighted software which was an article by itself and not any copyright therein. The Tribunal also referred to the third edition of Aiyengar’s Copyright Act wherein it was observed that the transfer of the ownership of a physical thing in which copyright exists gives the purchaser the right to do with it in physical form whatever he pleases except the right to make copies and issue them to the public. Relying on the said observation, the contention raised on behalf of the revenue that if a person owns a copyright article, then he automatically has a right over the copyright also was found to be not acceptable by the Tribunal. It was observed by the Tribunal in this context that even though one cannot have the copyright right without a copyrighted article, it does not follow that one having the copyrighted article has also the copyright in it.

21. The Tribunal then referred to paragraph 14 of the Commentary on OECD Model Convention (dated 28-1-2003) which reads as under:—
“14. Commentary on Article 12.—Paper Book V - In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the programme for example, where the transferee is granted limited rights to reproduce the programme. This would be the common situation in transactions for the acquisition of a programme copy. The rights transferred in these cases are specific to the nature of computer programmes. They allow the user to copy the programme, for example onto the user’s computer hard drive or for archival purposes. In this context it is important to note that the protection afforded in relation to computer programmes under copyright law may differ from country to country. In some countries the act of copying the programme onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer programme. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the programme onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilizing the programme. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the programme by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with article 7.”
According to the Tribunal, the Commentary on OECD Model Convention although was of persuasive value only, the same threw considerable light on the character of the transactions and the treatment to be given to the payments for tax purposes.

22. The Tribunal also referred to the proposed amendments to regulations of the International Regulation Service (IRS) in the US and found that a difference between a copyright right and the copyrighted article was clearly made out therein. It was also mentioned therein that if the transferee acquires a copy of the computer programme but does not acquire any of the rights specified in certain sections of the US Regulations, the regulation classified the transaction as the transfer of the copyrighted article and not the transfer of a copyright right. The rights identified in the US Regulations in this context as taken note of by the Tribunal in paragraph 168 of its order were as under:—
“(i) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending.
(ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme.
(iii) The right to make a public performance of the computer programme.
(iv) The right to publicly display the computer programme.”

23. The Tribunal also referred to the Commentary of ‘Charl P.du TOIT’ on this issue wherein it was opined that articles such as books and records are copyrighted articles and if they are sold, the user does not obtain the right to use any significant rights in the underlying copyrights itself which is what should determine the characterization of the revenue as sale proceeds rather than royalties. The Tribunal thus held that the payment by the transferee was not for any copyright in the software but the same was only for the software as such as the copyrighted article and the payment for such transfer, therefore, could not be considered as royalty within the meaning of Explanation (2) below section 9(1)(vi) of the Income-tax Act or the relevant article of the DTAA.
24. At the time of hearing before us, the learned DR has made an attempt to submit that the facts involved in the present case are different from the facts involved in the case of Motorola Inc. (supra) decided by the Special Bench. The learned counsel for the assessee, however, has pointed out that the material facts relevant to this issue as involved in the present case are similar to that of the case of Motorola Inc. (supra). In this regard, he has prepared and furnished a comparative chart, a perusal of which shows that not only the material facts but even the contentions raised on behalf of both the sides in the case of Ericsson (supra) are similar to that of the present case.

25. Even a perusal of the license agreement entered into by the assessee-company with the Indian operators in the present case reveals that the sum and substance of the material clauses relevant in this context of the said agreement are similar to that of the agreement analyzed and relied upon by the Special Bench in the case of Motorola Inc. (supra) to come to the conclusion that the payment made for transfer of right to use the software was not for any copyright in the software but only for the software as such as a copyrighted article and the same, therefore, could not be considered as royalty either under the domestic law or under the relevant article of the DTAA.

26. The learned DR has raised various contentions at the time of hearing before us seeking us to interpret the provisions of section 14 of the Copyright Act, 1957 dealing with copyright with regard to software differently than what was done by the Special Bench of the Tribunal in the case of Motorola Inc. (supra). However, keeping in view that the decision rendered in the case of Motorola Inc. (supra) by the Larger Bench is binding on us, we cannot entertain such contentions raised by the learned DR. Moreover, as pointed out by the learned counsel for the assessee, all such contentions as attempted to be raised by the learned DR before us were also raised on behalf of the revenue before the Special Bench in the case of Motorola Inc. (supra) and only after dealing with the same extensively, a decision has been rendered by the Special Bench by passing a well-discussed and well-reasoned order. In our opinion, the decision rendered by the Special Bench of ITAT in the case of Motorola Inc. (supra) on the similar issue thus is directly applicable in the present case and respectfully following the said decision which is binding on us, we hold that the amount received by the assessee under the licence agreement for allowing use of the software was not royalty either under the Income-tax Act or under the relevant DTAA and the same constituted the business profit of the assessee-company as claimed by it. We, therefore, set aside the impugned orders of the learned CIT(A) on this issue and allow ground No. 1 of the assessee’s appeal for assessment years 1998-99 and 2000-01 and ground No. 2 of its appeal for assessment year 1997-98.

27. As regards ground No. 2 raised by the revenue in its appeal for assessment year 1997-98, it is observed that the issue raised therein is squarely covered by the decision of Hon’ble Supreme Court in the case of Sedco Forex International Drill Inc. v. CIT [2005] 279 ITR 310 wherein it was held that the entire amount received by the non-resident assessee in India being liable for deduction of tax at source, there was no liability to pay any advance tax and therefore, there was no question of levy of interest under section 234B. Respectfully following the said decision of the Hon’ble Apex Court, we uphold the impugned order of the learned CIT(A) cancelling the interest levied by the Assessing Officer under section 234B and dismiss ground No. 2 of the revenue’s appeal.

28. Ground No. 1 raised by the assessee-company in its appeal for assessment year 1997-98 as well as for assessment year 1998-99 challenging the validity of the assessment on the basis that the notice issued under section 142(1) was barred by limitation has not been pressed by the learned counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.

29. Ground No. 3 raised by the assessee-company in its appeals for assessment years 1997-98 and 1998-99 raising an alternative plea about the mistake in quantification of royalty income has become infructuous as a result of our decision rendered on merits of the issue holding that the software receipts were chargeable to tax as business profits and not royalty.

30. As regards ground No. 4 of the assessee’s appeal for assessment years 1997-98 and 1998-99 and ground No. 2 of the assessee’s appeal for assessment year 2000-01, the learned counsel for the assessee has submitted that the assessee is seeking only a consequential relief in respect of the issue raised therein relating to levy of interest under section 234A. Accordingly, the Assessing Officer is directed to allow consequential relief to the assessee on this issue.

31. In the result, all the appeals of the assessee as well as that of the revenue are partly allowed as indicated above.


Regards,
Praveen Boda




Wednesday, March 11, 2009

"Lease" is similar to "Sale" of goods--80HHC Benefit available

COMMISSIONER OF INCOME TAX-IV, TAMIL NADU

Vs

B SURESH



The question which arises for determination in this batch of Civil Appeal(s) is whether the foreign exchange earned by transferring the right of exploitation of the films outside India by way of lease is admissible for deduction under Section 80HHC of the Income Tax Act 1961. According to the Department, movies/films are not goods. They are not merchandise. Hence Section 80HHC is not invokable. Further, according to the Department, there is a difference between "sale" and "lease" hence, the subject transaction will not fall under Section 80HHC.

Facts in Civil Appeal No.3300/2007:

During the relevant Assessment Year 1993-94, the assessee, B. Suresh, transferred feature film rights for exploitation outside India and earned income in foreign exchange. The assessee claimed deduction under Section 80HHC in respect of the said receipts. The Assessment Officer (AO) held that the assessee was not entitled to deduction under section 80HHC, inter alia, on the ground that the export was not of merchandise or goods as contemplated under Section 80HHC, but was merely an export of "rights" in the film. This decision of the AO was over-ruled by CIT(A).

When the matter came before the Tribunal at the instance of the Department, there was already a judgment of the Bombay High Court in the case of Abdulgafar A. Nadiadwala Vs. Asst. Commr. of Income Tax & Ors., reported in 267 ITR 488 Bom. Following the said decision, in the present case, the Tribunal held that the assessee was entitled to deduction under Section 80HHC, hence, this Civil Appeal by the Department.

Contentions:

On behalf of the Revenue, Shri V. Shekhar, learned senior counsel, submitted that the assessee in this case was not engaged in the export of goods and merchandise; that the films recorded on beta-cam tapes did not qualify either as 'goods' or 'merchandise'. In this connection, it was urged that beta-cam tape (cassette) was only a medium of transfer; that, there was no "sale" of the film in beta-cam format and that the assessee had only transferred the right to use for a period of five years and since the title remained with the assessee, the impugned transaction fell outside Section 80HHC. According to the learned counsel, since the films transferred on beta-cam tapes were given on lease with a right to telecast given to Star TV under the Lease Agreement dated 29th March, 1995 for a period of five years, there was no element of sale so as to attract Section 80HHC. It was further urged that movies are neither "goods" nor "merchandise". In this connection, learned counsel placed reliance on Dictionaries. Shri Harish N. Salve and Shri S.Ganesh, learned senior counsel appearing on behalf of the assessee, submitted that on a bare reading of Section 80HHC(1), one finds that the deduction/concession is given in cases where an assessee derives profits from the activity of exports and earns foreign exchange. It is pointed out that the said Section is concerned with the Business Profits under the 1961 Act. It is submitted that the word "goods" or "merchandise" must be read as understood in common parlance. Our attention was also invited to the dictionary meaning of the word "merchandise". On the basis of the said meaning, it was submitted that any article of commerce and trade could fall under the meaning of the word "merchandise". It was submitted that one has to read the words "goods" and "merchandise" in the broad sense, keeping in mind the object of the Parliament in enacting Section 80HHC. According to the learned counsel, the said Section is an incentive provision. Its object is to promote earnings in foreign exchange arising from exports, which includes sale of goods and merchandise. If one keeps the object in mind, according to the learned counsel, movies/films which are made would certainly come within the ambit and meaning of the word "merchandise" as an article of trade and commerce. It is also urged that with globalisation and also with advancement in technology, the words "goods" and "merchandise" have to be read in widest possible terms.

Our attention is also invited to the scheme of Section 80HHC in support of the above contentions to point out that the word "sale" would also include "lease" as indicated in Rule 9A(7) which states that for the purposes of Rule 9A, the "sale" of the rights of exhibition of feature films would include the "lease" of such rights. Similarly, under Rule 9B(6), it has been, inter alia, provided that "sale" of rights of exhibition of a feature film would include the "lease" of such rights. It is also submitted on behalf of the assessee that Section 80HHF goes far beyond the physical exports referred to in Section 80HHC(1). Section 80HHF recognises even software transfers "by any means". Further under clause (5) of Section 80HHF, the Parliament has clearly indicated that if an assessee has taken the benefit of Section 80HHC, he would not be entitled to claim the same benefit under Section 80HHF, which provision, according to the learned counsel, shows that benefit of deduction under Section 80HHC could be claimed for foreign exchange earned by sale of feature films or rights therein.

Findings:

Two questions arise for determination, namely, whether foreign exchange earned by transfer of feature film rights for exploitation outside India, in the form of lease, is entitled to the benefit of Section 80HHC deduction. The same is denied by the Department on the ground that there is no "sale". The other question is whether such "rights" are goods/merchandise.

The basic requirement of Section 80HHC is earning in foreign exchange and retention of profits for export business. Profits are embedded in the "income" earned. Earning of income depends on sale of goods and services. Today the difference between the two is getting blurred with globalization and cross-border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. In the case of B. Suresh, the assessee had bought rights of various decoders and had recorded movies on beta-cam tapes which were transferred as telecasting rights to Star T.V. for five years (it has a limited life). Hence such "rights" would certainly fall in the category of articles of trade and commerce, hence, merchandise.

On the question as to whether transfer of the said rights by way of lease would attract Section 80HHC, we find merit in the contention that under Rule 9A and Rule 9B, the word "lease" is included in the meaning of the word "sale". Lastly, we find no infirmity in the judgment of the Bombay High Court in the case of Abdulgafar A. Nadiadwala.

For the above reasons, the Civil Appeals filed by the Department are dismissed with no order as to cost.

Tuesday, March 3, 2009

No tax withholding on payments made to MTNL/BSNL for providing internet facility.

PACIFIC INTERNET (INDIA) PVT LTD

Vs

INCOME TAX OFFICER
TDS, Ward 1(4), Mumbai


No tax withholding on payments made to MTNL/BSNL for providing internet facility.

CASE LAW:

1.These appeals filed by the assessee are directed against the order of the ld. CIT(A), Mumbai dated 14-12-2005 for the assessment years 2003-04 to 2005-06.

2. These appeals are arising out of the order passed by the Assessing Officer under section 201(1) and 201(1A) of the Income-tax Act.

3. The assessee has taken the following effective grounds which are common in all the appeals;

“1. The ld. CIT(A)XXX, Mumbai erred in holding that the payments made by the appellant for Bandwidth & Network Cost are fees for professional or technical services within the meaning of section 194J of Income-tax Act, 1961.

2. The ld. CIT(A)XXX, Mumbai erred in confirming the action of the Assessing Officer treating as the assessee in default and in levying interest under section 201(1A) of Income-tax Act, 1961.”

3.1 Briefly stated facts are as under: The assessee-company is engaged in the business of providing internet access services to corporate clients and consumers. There was survey action under section 133A of the Act against the assessee-company on 29-10-2004 and it was found that the assessee had made huge payments for availing services of MTNL and VSNL for using bandwidth and network operating. The Assessing Officer was of the opinion that in respect of the payments made to MTNL/VSNL for availing bandwidth services and port charges, the assessee should have deducted tax at source (TDS) as required under section 194J of the Income-tax Act. The Assessing Officer, therefore, treated the assessee as in default within the meaning of section 201(1) and passed the order, raising the demand against the assessee for failure to deduct the tax in respect of the payments made to VSNL/MTNL and also levied the interest as per the provisions of section 201(1A) of the Income-tax Act.

3.2 The assessee challenged the order passed by the Assessing Officer treating the assessee in default within the meaning of sub-section (1) of section 201 before the CIT(A), but did not find favour. In the opinion of the ld. CIT(A) for providing internet access services to its clients, the assessee-company has to obtain bandwidth and network operating facility from VSNL/MTNL and availing the said facilities amounts to technical services within the meaning of section 194J read with Explanation 2 to clause (vii) of section 9(1) of the Act. The ld. CIT(A) observed that the facility of bandwidth and net workgiven to the appellant is very much a result of applied and industrial science, which is associated with the word ‘technical’. Moreover, bandwidth and network operating facilities are under the command and control of the service providers. The ld. CIT(A) also distinguished the decision of the Hon’ble High Court of Madras in the case of Skycell Communications Ltd. v. CIT [2001] 251 ITR 53 = (2003-TIOL-240-HC-MAD-IT). In his further opinion, the facilities of the bandwidth and network operating facilities cannot to be said to be a standard facility. The operative observations are found in paras 6 and 6.1 of the order of the ld. CIT(A) which are as under :

“6. I have carefully considered the submissions made on behalf of the appellant and gone through the details and documents filed and also perused the order of the Assessing Officer. Admittedly, the appellant is in internet industry, carrying on the activity of internet service provider to corporate clients and consumers. For providing internet access services to its clients, the appellant has to obtain bandwidth and net work operating facility from VSNL, MTNL and other parties for which a payment in lieu of consideration of the services availed by the appellant are made which is termed as bandwidth cost and net work operating cost. The provision of section 194J refers to the payment of (a) fee for professional services or (b) fee for technical services. The services being obtained by the appellant from VSNL, MTNL and other parties, of course, cannot be categorized as ‘professional services’, the services rendered by way of allowing the appellant to have facility through bandwidth and net work operation is certainly a technical service as contemplated in Explanation II to clause (vii) of section 9(1) of the Income-tax Act, 1961. The facility of bandwidth and net work given to the appellant is very much a result of applied and industrial science, which is admitted by the appellant also in its aforesaid submissions, as the popular meaning associated with the word ‘technical’. It is also an admitted fact that for availing the facility through bandwidth and net work operation, payments have been made as consideration to the service providers viz., MTNL, VSNL and other parties. It is also an admitted fact that the appellant has no control of its own, on these facilities. The bandwidth and net work operating facilities are under the command and control of the service providers. By providing facility to the appellant through bandwidth and net work operating terminals of VSNL & MTNL, it has been allowed to operate the internet service providing facility to its clients. Therefore, a provision of section 194J is applicable.

6.1 The contention of the appellant that the payment made for availing facility of bandwidth and net work operation are not technical services as held by the Hon’ble High Court on Madras in Skycell Communications Ltd., is also not found to be having any merit as this decision is not applicable to the facts of the appellant’s case. The Assessing Officer in his report has also differentiated the facts of the case of M/s. Skycell Communications Ltd. to the appellant’s case. The decision in that case was delivered to the petitioners who were engaged in the business of providing cellular mobile facility to subscribers, having been authorized to do so under the licences granted by the Department of Telecommunication, Government of India. The Hon’ble High Court in that context has held that collection of fee for use of ‘standard facility’ provided to all those willing to pay for it does not amount to fee having been received for technical services.

Whereas, in the case of appellant the payment made for availing facility of bandwidth and net work, operating terminal cannot be said to be a standard facility. Moreover, it is also not disputed that on the basis of CBDT’s circular ‘access charges’ ‘port charges’ and interconnectivity charges paid are held to be payments in the nature of fees for technical services within the meaning of section 194J of Income-tax Act, 1961. Admittedly, the appellant through its submissions has further referred to the circular issued by CBEC dated 8-8-2002 which clarifies the definitions of these technical words. In this circular at clause (i) para 1, it clarifies that interconnecting link charges are charges relating to interconnectivity provided between basic/cellular telephone providers and the BSNL/MTNL exchanges. This enables the private basic telephone operators or the mobile service providers to access BSNL telephone lines and vice versa. Further in para 6, interconnectivity linked charges is defined as charges for providing ‘leased circuits’ and with effect from 16-7-2001, this service is stated to have been brought under the coverage of service tax. In clause (iii) of para, ‘port charges’ is defined as something link entry charges for allowing access into the BSNL net work. The facility enjoyed by the appellant by way of bandwidth and net work operation is also similar to the service of interconnectivity or leased circuits or port charges as clarified above. This being held to be covered for service tax, the payments made for availing the service of bandwidth and net work operating are very much in the nature of technical services. When the access charges, port charges and interconnectivity charges as admitted by the appellant itself are covered under section 194J, the bandwidth and net work operating facility is bound to be covered under section 194J.”

The ld. CIT(A) finally approved the view taken by the Assessing Officer, but gave some relief in respect of working of the interest under section 201(1A) of the Act.

4. We have heard the rival submissions of the parties. We have also carefully considered the facts which are available before us. We have also considered the different precedents relieved upon by the ld. counsel of the assessee. The arguments of the ld. counsel of the assessee is that as the assessee is providing internet services to its clients. The assessee needs bandwidth and net work operating infrastructure without which the assessee cannot run its business. At the same time, availing bandwidth and net work operating facilities from MTNL/VSNL etc., cannot be said to be availing technical services as contemplated under section 194J read with Explanation 2 to clause (vii) of section 9(1) of the Act. The ld. counsel of the assessee placed heavy reliance on the following precedents :

(i) CIT v. Estel Communications (P.) Ltd. [2008] 217 CTR (Delhi) 102.

(ii) Wipro Ltd. v. ITO [2003] 86 ITD 407 (Bang.).

(iii) HFCL Infotel Ltd. v. ITO [2006] 99 TTJ (Chd.) 440.

(iv) Skycell Communications Ltd.’s case (supra).

4.1 Per contra, the ld. DR vehemently submitted that the decision of the Hon’ble High Court of Madras in the case of Skycell Communications Ltd. (supra) is not applicable on the facts of the present case. It is argued that availing the bandwidth net work operating facility is nothing but in the name of availing technical services from VSNL/MTNL and other concerns. He, therefore, submitted that in view of the provisions of section 194J, the assessee should have deducted the tax in respect of the payment made to VSNL/MTNL and other extra for availing bandwidth net work operating facility per the statutory provisions. The ld. DR further placed reliance on the orders of the authorities below.

5. As far as the facts are concerned, there is no dispute that the assessee-company is engaged in the business of providing internet access services to its corporate clients and consumers. For providing the sales service, the assessee needs bandwidth net work operating infrastructure. The controversy is whether the services are facilities availed by the assessee from VSNL/MTNL and other concerns towards bandwidth and net work operating infrastructure can be said to be ‘technical services’ within the meaning of section 194J read with Explanation 2 to clause (vii) of section 9(1). Section 194J prior to amendment by the Finance Act, 2006 reads as under :

“194J. Fees for professional or technical services.—(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein :

Provided that no deduction shall be made under this section—

(A) from any sums as aforesaid credited or paid before the 1st day of July, 1995; or

(B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed—

(i) twenty thousand rupees, in the case of fees for professional services referred to in clause (a), or

(ii) twenty thousand rupees, in the case of fees for technical services referred to in clause (b).

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(2) Where the Assessing Officer is satisfied that the total income of any person in receipt of the sum referred to in sub-section (1) justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by that person in this behalf, give to him such certificate as may be appropriate.

(3) Where any such certificate is given, the person responsible for paying the sum referred to in sub-section (1) shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.”

6. The meaning to term ‘technical services’ has been adopted in section 194J as defined in Explanation 2 to clause (vii) of section 9(1) which reads as under :

“Explanation.—For the purposes of this section,—

(a) ‘professional services’ means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

(b) ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(c) where any sum referred to in sub-section (1) is credited to any account, whether called ‘Suspense account’ or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.”

7. As per provisions of section 194J of the Act (i) there should be payment in the nature of fees and (ii) said should be for availing the technical services. Again expression ‘technical service’ has not been defined in section 194J but meaning given to the said expression has been adopted from Explanation 2 to clause (vii) of section 9(1).

8. The term ‘technical service’ has come for the consideration before the Hon’ble Delhi High Court in the case of Estel Communications (P.) Ltd. (supra). In the said case, the assessee was providing internet bandwidth for providing access to its subscribers. The main server, based on which the internet services were provided were located in USA. In that case, the Assessing Officer was of the opinion that the assessee should have deducted the tax at source as the payment was made for availing the technical services. Negativing the contention of the department, the Hon’ble High Court has held as under :

“Insofar as this is concerned, the Tribunal considered the agreement that had been entered into by the assessee with Teleglobe and came to the conclusion that there was no privity of contract between the customers of the assessee and Teleglobe. In fact, the assessee was merely paying for an internet bandwidth to Teleglobe and then selling it to its customers. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by Teleglobe to the assessee. It was a simple case of purchase of internet bandwidth by the assessee from Teleglobe.”

9. In the case of Wipro Ltd. (supra), the issue was in respect of delay in deducting the tax at source of payment made to foreign companies as required under section 195 of the Act. In the said case also the assessee had availed the services of foreign companies like AT&T, Worldcom, British Telecom, Singtel etc. for downlink to transmit the data to its foreign customers located outside India by availing the technical services by those foreign companies. Most of the services were provided through customer based circuits (CBC) for transmitting the software data. Though the CBC is one service, it is commercially divided into two portions, India portion and International portion. The services with regard to India portion are provided by VSNL and STPI. In the said case, VSNL has standard infrastructure to handle the transmission through satellite as well as the fibre cables. At the end of India portion, a transmission of data is taken over by international service (ISB) and then it was down linked to the assessee’s customers located outside India and the entire transmission process was done through satellite by locating the transponder space.

10. The issue before the Tribunal was whether the payment made to foreign companies are covered within the scope of section 9(1) of clause (vii) of the Act. It was held that the amount paid by the assessee in the said case cannot be considered as fee for technical services within the meaning of clause (vii) of section 9(1) of the Act.

11. Identical view has been taken by the Chandigarh Bench of the Tribunal in the case of HFCL Infotel Ltd. (supra). We will refer here the observations of the Hon’ble Madras High Court in the case of Skycell Communication Ltd. (supra);

“The use of the internet and the worldwide web is increasing by leaps and bounds, and there are hundreds of thousands, if not millions of subscribers to that facility. The internet is very much a product of technology and without the sophisticated equipment installed by the internet service providers and the use of the telephone fixed or mobile through which the connection is established, the service cannot be provided. However, on that score, every subscriber of the internet service provider cannot be regarded as having entered into a contract for availing of technical services from the provider of the internet service, and such subscriber regarded as being obliged to deduct tax at source on the payment made to the internet service provider.

At the time the Income-tax Act was enacted in the year 1961, as also at the time when Explanation 2 to section 9(1)(vii) was introduced by the Finance (No. 2) Act, with effect from 1-4-1977, the product of technology had not been in such wide use as they are today. Any construction of the provisions of the Act must be in the background of the realities of day-to-day life in which the products of technology play an important role in making life smoother and more convenient. Section 194J, as also Explanation 2 in section 9(1)(vii) of the Act were not intended to cover the charges paid by the average householder or consumer for utilising the products of modern technology, such as, use of the telephone fixed or mobile, the cable TV, the internet, the automobile, the railway, the aeroplane, consumption of electrical energy, etc. Such facilities which when used by individuals are not capable of being regarded as technical service cannot become so when used by firms and companies. The facility remains, the same whoever the subscriber maybe - individual, firm or company.

‘The Technical service’ referred in section 9(1)(vii) contemplates rendering of a ‘service’ to the payer of the fee. Mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been reached for technical services.”

11.1 In this case, the assessee has availed the bandwidth services and other infrastructure for providing the internet access to its customers. These are standard facilities availed by the assessee. Moreover, in our opinion the assessee’s case is covered by the decision of the Hon’ble Delhi High Court in the case of Estel Communications (P.) Ltd. (supra). We, therefore, hold that the payment made by the assessee-company to VSNL, MTNL and other concerns for availing the services of the bandwidth net work infrastructure cannot be said to be technical services within the meaning of section 194J of the Act read with Explanation 2 to clause (vii) of section 9(1) of the Act. We, therefore, allow the appeals filed by the assessee and cancel the order passed by the Assessing Officer under section 201(1) and 201(1A) of the Act.

12. In the result, the appeals filed by the assessee are allowed.

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