Case Law Details
Payment for transfer of right to use software loaded on hardware – not a royalty; Making available other personnel to subsidiary under control and supervision – constitutes Service PE.
Background
Lucent Technologies International Inc. 1(“the assessee”) 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 through its subsidiary Lucent Technologies India Limited (“LTIL”) (formerly known as AT&T India Private Limited).
Issues
The following two major issues were raised before the Income-tax Appellate Tribunal (“the Tribunal):
• Whether LTIL can be treated as permanent establishment (“PE”) of the assessee under clause 5(2)(l) of the India–USA Double Taxation Avoidance Agreement (“the Tax Treaty”)
• Whether payment received by the assessee for transfer of right to use of software can be treated as ‘royalty’ under the Income-tax Act, 1961 (“the Act”) or the Tax Treaty.
Facts
• The assessee entered into a contract with Escotel Mobile Communications Limited (“EMCL”) to prepare the designs, solutions, manufacture and supply and deliver all hardware, software and related services to establish GSM network in India. Further, LTIL also entered into an agreement with EMCL for the installation, testing, commission and achieving provisional acceptance as well as final acceptance of GSM network from EMCL.
•The assessee made available personnel, who were the employees of the affiliates of the assessee, to LTIL for remuneration for turnkey completion of GSM project in India.
•The assessee claimed the payments received under the license agreement for allowing use of computer software as its business profits.
•The Assessing Officer (“AO”) held that the assessee had a fixed place of business in India in the form of an office of its Indian subsidiary, i.e. LTIL, and hence, it will be treated as a dependent agent PE of the assessee in light of the following:
–employees who were coming to India were utilizing the office furniture and telephone facilities of LTIL and were provided perquisites like car, use of staff facilities etc., by LTIL.
–the terms of contract that had been signed by the assessee 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.
–the assessee had provided training courses in India to its customersthrough LTIL
• However, the Commissioner of Income-tax (Appeals) [“CIT(A)”] decided the matter partly in favour of the assessee and held that the assessee did not have a PE in India, but treated the payments received by the assessee for transfer of software as ‘royalty’ under the Tax Treaty.
Revenue’s contentions
• The revenue submitted that personnel provided by the assessee were functioning under the control of the assessee and provided services to LTIL (subsidiary).
• Hence, as per the Article 5(2)(l) of the Tax Treaty, LTIL is a service PE of the assessee.
• As regards the second issue, the revenue argued that paragraph 3(2) 2 of the Tax Treaty makes it mandatory to adopt the definition of the word ‘copyright’ as given in the law of the state applying the provisions of the Tax Treaty, and therefore, the definition as given in domestic Copyright Act, 1957 shall be applicable in the present case.
• It was further contended that though the Special Bench of the Tribunal in the case of Motorola Inc 3. 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 in view of the provisions of paragraph 3(2) of the Tax Treaty.
• The revenue contended that the distinction between the term ‘copyright’ and the ‘copyrighted article’, created artificially and not recognized by the Indian Copyright Act or the Indian Income-tax Act, 1961 is to be ignored and cannot be applied to decide the issue involved in the present case.
•The revenue 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 since in the case of Motorola Inc. (supra), 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.
Assessee’s contentions
• The assessee contended that personnel provided were not employees of the assessee and were not providing services to LTIL in India.
•The assessee submitted that the issue of categorizing the income from sale of software is squarely covered by the decision of Special Bench of the Tribunal in the case of Motorola Inc. (supra). A chart giving the comparison of the relevant facts as involved in the assessee’s case with that of Motorola Inc. was submitted before the Tribunal.
Tribunal’s observations
•The Tribunal observed that the agreement provided for the turnkey functioning of the project of GSM Network for which the assessee and LTIL were responsible.
•It was specifically noted by the Tribunal that the installation, commissioning, testing and bringing up to operational status of the hardware and the software supplied by the assessee was undertaken by the Indian subsidiary, LTIL. For this purpose, the assessee had made available personnel in the form of employees of the affiliates of the assessee to LTIL for remuneration.
•The Tribunal also observed that LTIL had 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 EMCL and LTIL. This clearly showed that the subsidiary LTIL was also acting on behalf of the assessee.
•In the present case, undisputedly the employees of the affiliates of the Assessee had been employed through LTIL for the services of installation, commissioning, testing and bringing up to operation of the hardware and the software sold by the assessee to EMCL through its contract in regard to the GSM project to be completed on a turnkey basis.
•As regards the second issue, the Tribunal held that material clauses of the license agreement entered into by the assessee with the Indian operators were similar to that of the agreement analyzed and relied upon by the Special Bench in the case of Motorola Inc. (supra)
Tribunal Ruling
•The employees of the affiliates over whom the assessee had control would be covered within the term ‘other personnel’ and consequently, it was held that a Service PE did exist as per the inclusive term contained in article 5(2)(l) 4 of the Tax Treaty.
•The decision rendered by the Special Bench of the Delhi Tribunal in case of Motorola Inc. (supra) on similar issue is directly applicable to the present case, and by following the above decision, held that the amount received by the assessee under the license agreement for allowing the use of the software was not royalty, either under the Act, or under the Tax Treaty, and the same constitutes the business profits of the assessee.
1. Lucent Technologies International Inc. v. DCIT [2009] 28 SOT 98 (Delhi)
2. Article 3(2) of the Tax Treaty provides that “As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to the provisions of article 27 (Mutual Agreement Procedure), have the meaning which it has under the laws of that State concerning the taxes to which the Convention applies”
3. Motorola Inc v. DCIT [ 2005] 96 TTJ 1 (Delhi SB)
4. Article 5(2)(l) of the Tax Treaty provides that if services other than included services as defined in the article 12 are performed within a contracting state through employees and other personnel of an enterprise for periods aggregating to more than 90 days within any twelve month period then there exist a Service PE of the enterprise in that contracting state.
