Consideration for supply of software which is not embedded in equipment is taxable as “royalty” - ITAT Mumbai

Reliance Infocom Ltd. (now known as Reliance Communications Ltd.) & others. vs. DDIT(IT). ITA No. 730/Mum/09, Date of Decision 06/09/2013, ITAT-Mumbai

Facts : Briefly stated, Reliance Infocomm Ltd., now known as Reliance Communications Ltd. wanted to establish wireless telecommunications network in India. As a part of that it has entered into a Wireless Network General Terms and Conditions contract and Wireless Software contract dated 3 1.07.2002 with Lucent Technologies Hindustan Pvt. Ltd. (LTHPL), an Indian company of M/s. Lucent group, USA. Wireless software Assignment and Assumption agreement dated 05.08.2002 with LTHPL and Lucent Technologies GRL LLC (LTGL) USA towards supply of software required for telecom network. When Reliance placed first supply orders for software for an amount of US$1 1,06,56,855, it made applications under section 195(2) before DDIT-2(1) Mumbai requesting payment for purchase of software without deduction of tax at source. It was Reliance’s contention that it was for purchase of software and LTGL has no PE in India and as per DTAA between India and USA, the amount paid is not taxable in India. AO after examining the details of agreements held that the assessee was getting only license to use the software and is in the nature of royalty, taxable at 20% in India under the provisions of Income tax Act 1961. Not only in the case of Lucent, Reliance also similarly placed orders with various other suppliers of telecom software in other countries and sought no deduction certificates on similar contentions. AO passed similar orders in all the cases where Reliance was to remit the monies over a period of time. After deducting tax as directed by the AO, Reliance however preferred appeals before the Ld.CIT(A) as per the then existing provisions of section 248 of the IT Act. The learned CIT(A), vide his orders, held that the amounts paid cannot be considered as royalty as Reliance purchased ‘goods’ which is a copyrighted article and so, since the seller do not have PE in India the amount is not taxable. Accordingly, he gave relief to Reliance. The Revenue is aggrieved on these orders. The lead order of the AO and CIT(A) pertains to ITA No. 837/Mum/2007 in which the AO’ order under section 195(2) dated 12.03.2003 was considered by the CIT(A) in his appeal No. CITA XXXI/DDIT (IT) 2(1)/IT – 448/02-03/06-07 dated 26.10.2006. It was admitted that the facts are more or less similar to the above appeal and main arguments were rendered in this appeal.

Held :- In view of the agreement and various judicial pronouncements the hon’ble tribunal has held that there is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. In the case, where the software is an integral part of the supply of equipment, the consideration for that is not assessable as “royalty”.

 

However, in a case where the software is sold separately, the consideration for it is assessable as “royalty”. On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident and the supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was “for the use of or the right to use copyright” and constituted “royalty” under s. 9(1)(vi) of the Act and Article 12(3) of the India-USA DTAA.

 

There is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. Where the software is an integral part of the supply of equipment, the consideration for that is not assessable as “royalty”. However, in a case where the software is sold separately, the consideration for it is assessable as “royalty”. On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident. The non-resident supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was “for the use of or the right to use copyright” and constituted “royalty” under s. 9(1)(vi) and Article 12(3) of the India-USA DTAA (Synopsis International 212 Taxman 454 (Kar), Samsung Electronics 345 ITR 494 (Kar), Lucent Technologies 348 ITR 196 (Kar), Citrix Systems 343 ITR 1 (AAR) & Microsoft/Gracemac Corp 42 SOT 550 (Del) followed).

 

Source: ITAT Online