Case Law Details
Court : Mumbai bench of the Income Tax Appellate Tribunal
Citation : DDIT Vs. Alcatel USA International Marketing Inc [2010-TII-123-ITAT-MUM-INTL]
Brief :Recently, the Mumbai bench of the Income-tax Appellate Tribunal held that the payment received by the taxpayer company towards the sale of copyright article does not amount to royalty within the provisions of Article 12(3) of the India-USA tax treaty (tax treaty).
Facts of the case
The taxpayer, a tax resident of USA, was marketing and selling Alcatel products to customers outside USA. The taxpayer supplied software under the Subscriber Data Note (SDN) network software agreement to Reliance Infocomm Ltd (RIL) for the purpose of telecommunication network of RIL.
• The Agreements clearly mentioned that
– The taxpayer grants a perpetual, irrevocable, non-exclusive, unrestricted right to Reliance for the use of Software within Reliance’s network. However, title to the copyright in software remains with the taxpayer.
– Reliance shall not transfer, assign, sub license or outsource the license without the written permission of the taxpayer except where it is required for its own network.
– Reliance shall not use the software for commercial time sharing with non-affiliate third parties, rental, lease and sub-licensing to non affiliate third parties and service-bureau purposes.
• The taxpayer company received consideration of INR 167.26 million for the supply of the said software. The software supplied by the taxpayer company to RIL creates a database to store subscriber profiles and other information, e.g. customer phone number, calling plan, etc and make this information available to different network element requesting it.
• The AO treated the consideration received by the taxpayer as royalty taxable in India.
Taxpayer’s contentions
• The taxpayer contended that the consideration received for the supply of software was not taxable in India as the same was in the nature of business profit and not royalty and in the absence of PE of taxpayer in India the consideration received was not taxable in India.
Tribunal’s ruling
• The Tribunal observed that identical issue has been dealt by Delhi Tribunal in taxpayer’s own case for assessment year 2003-04. The Delhi Tribunal after relying on the decision of the Delhi Special Bench in the case of Motorola Inc. Ericsson Radio Systems AB and Nokia Corporation Vs. DCIT [2005] 96 TTJ 1 (Del) (SB) held that the transaction under consideration cannot be considered as royalty under the provisions of Act or under the tax treaty.
• The Tribunal, after examining the relevant clauses of the agreement between the taxpayer and RIL and the provisions of the Act and the tax treaty, held that payment received by the taxpayer company towards the sale of copyright article does not amount to royalty within the meaning of Article 12(3) of the DTAA between India and USA
Our Comments
The Mumbai Tribunal has reiterated the principle that payment received by the taxpayer towards the sale of copyright article does not amount to royalty within the provisions of Article 12(3) of the tax treaty. Various bench of the Tribunal as well as Authority for Advance Ruling have held on the similar lines.
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IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH ‘ L ’ MUMBAI
BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI R S PADVEKAR, JM
ITA No. 3728/Mum/2009
(Asst Year- 2004- 05)
| The Dy Director of Income Tax (International Taxation)1(1) Mumbai |
Vs. |
Alcatel USA International Mktg Inc. (Now known as Alcatel –Lucent USA Inc) C/o S R Batliboi & Co CAs 18th Floor – Express Towers Nariman Point Mumbai PAN AAECA4907H |
|
(Appellant) |
(Respondent) |
Assessee by: Shri Kanchan Kaushal/Mr Dhanesh Bafna
Revenue by: Shri Narender Singh
Date of Judgment: 25th, day of June 2010.
O R D E R
PER R S PADVEKAR:
In this appeal, the revenue has challenged the impugned order of the ld CIT(A)-XXXI, Mumbai for the assessment year 2004- 05 dated 25.3.2009.
2 The only issue arises from the grounds taken by the revenue is whether the ld CIT(A) erred in holding that the payment of Rs. 16,72,61,927/- received by the assessee company was on account of sale of copyright article and does not amount to royalty within the meaning of Article 12(3) of the DTAA between India and USA.
3 The facts which reveal from the records are that the assessee company is incorporated in USA and also a tax resident of USA. The assessee markets and sells Alcatel products to customers outside USA. The assessee has supplied software under the Subscriber Data Note (SDN) network software agreement to Reliance Info comm Ltd. (RIL) which is used for the purpose of telecommunication network of RIL. For the supply of the said software, the assessee company received the gross consideration of Rs.16,72,61,927/-. The software supplied by the assessee company to RIL i.e SDN creates a database to store subscriber profiles and other information, e.g customer phone number, calling plan, etc and make this information available to different network element requesting it.
3.1 The assessee contended before the A.O. that the consideration received for the supply of software from RIL was not taxable in India as the same was in the nature of business profit and not royalty and as the assessee is the tax resident of USA; in view of the DTAA between India and USA, the same cannot be taxed. The assessee also relied on the agreement entered into with RIL.
3.2 As per Para 42.1 of the said agreement, there is a license clause which reads as under:
“Here it is mentioned that the assessee grants a perpetual, irrevocable, non-exclusive, unrestricted (within Reliance’s network) right to Reliance for the use of Software.”
Other Paras, which are referred by the A.O. read as under: “Para 6.4 – Title to the copyright in software remains with the assessee.”
“Para 42.3 – Reliance shall not transfer, assign, sub license or outsource the license without the written permission of the assessee except where it is required for its own network.”
42.7 Reliance shall not use the software for (i) commercial time sharing with non-affiliate third parties (ii) rental, lease and sub-licensing to non affiliated third parties (iii) service-bureau purposes.”
4 The sum and substance of the controversy is in respect of nature of the pA.Y.ment received by the assessee for providing software to RIL, whether the same is ‘royalty’ or it is consideration towards sale of the software.
5 The A.O. relied on the assessment order for A.Y. 2003-04, in which identical issue has been considered by the A.O. and the claim of the assessee was rejected that it was business income and not royalty. When the issue reached before the Tribunal for the A.Y. 2003- 04 in appeal being ITA No. 2031/Mum/07, the Tribunal confirmed the order of the ld CIT(A) in which it was held that the amount received for allowing use of the software cannot be treated as ‘royalty’ either under I. T. Act or DTAA. The operative part of the order of the Tribunal reads as under:
“We have heard the ld DR as well as the ld counsel appearing on behalf of the assessee and carefully perused the record. Admittedly, the issue stands squarely covered by the decision of the ITAT, Delhi (Special Bench) in the ca of Motorola Inc. Ericsson Radio Systems AB and Nokia Corporation vs DCIT 96 TTJ 1 (2005 TIOL -103 ITAT Del SB). Ld DR made a feeble attempt to place reliance upon the decision of the Apex Court in the case of TATA Consultancy Services 271 ITR 407. (2004 TIOL -87-SC-CT-LB to submit that software falls within the definition of ‘goods’ and hence there was transfer of rights in the software and thus the A.O. was justified in considering the receipt as royalty payment towards transfer of the goods. Ld counsel however, placed reliance upon the decision of ITAT Delhi Bench, n the case of Infra soft Ltd. Vs ADIT ITA No.47/Del/2008 dated 19 December, 2008 (29 TIOL-21-ITAT Del) to submit that the decision of the Apex Court has limited application and the principle therein cannot be applied to the peculiar facts of the instant case in as much as the amount received by the assessee under the license agreement was in lieu of allowing the use of software and thus it cannot be termed as a royalty either under the Income Tax Act or under DTAA. In the light of the decisions cited by the ld counsel appearing on behalf of the assessee and in the absence of any contrary view taken on this issue, we do not find any infirmity in the order passed by the ld CIT(A) and accordingly reject ground no.1 of the revenue.”
6 In the assessment year 2004- 05, the ld CIT(A) has dealt with the issue in detail in his order and after examining the relevant clauses of the agreement between the assessee and RIL as well as the provisions of the I T Act and DTAA between India and U.SA., held that payment received by the assessee company is towards the sale of copyright article and does not amount to royalty within the meaning of Article 12(3) of the DTAA between India and USA. In our opinion, there is no difference in the facts and material here before us and accordingly, we follow the order of the Tribunal for A.Y. 2003- 04 (supra) and agree with the findings of the ld CIT(A).
7 In the result, the appeal filed by the revenue is dismissed.
Order pronounced on the 25th, day of June 2010.
