DIT Vs Ericsson AB (Delhi High Court)- It was argued that the Explanation as initially inserted in the year 2007 after subsection (2) of section 9 sought to clarify as to when income received by way of interest, royalty or fees for technical services, can be regarded as deemed to accrue or arise in India. The subsequent amendment made in the Explanation by the Finance Act, 2010 enacts a further clarification (by effectively adding clause (ii) in the Explanation) in so far as the tax ability of fees for technical services are concerned. The Supreme Court in Ishikawajima (supra) has held that if the transfer of property in goods as well as the payment were both made outside India, the transaction of supply was not chargeable to tax in India in spite of the fact that the contract was signed in India.
The Court has further held that under the DTAA even if the non-resident has a permanent establishment in India, the income accruing from the supply would not be chargeable to tax in India if the permanent establishment is not involved in that activity. In the present case the finding of the Tribunal is that both the transfer of the property in goods as well as risk has passed outside India and, therefore, having regard to the provisions of the Act, the consideration receivable for the supply of such equipment is not chargeable to tax in India. According to the assessee, the judgement of the Supreme Court in the case of Ishikawajima insofar as it deals with the taxability of the offshore supplies is in no manner affected by the amendment made to section 9 by the Finance Act, 2010 as it only impacts the issue as to when income by way of fee for technical services can be deemed to accrue or arise in India. As it is nobody s case that the respondent has rendered technical services which are deemed to accrue or arise in India when it supplies the equipment or the software, the insertion of the Explanation below section 9 and the addition of clause (ii) in the said Explanation by the Finance Act, 2010 has no relevance insofar as the appeals before this Court are concerned.
Installation Contract –– The High Court observed the Installation Contract is between the installation contractee (sister concern of the assesee) and the cellular operators. There is no contract between the assessee and the installation contractor and no profit arises therefrom insofar as assessee is concerned. Merely because the installation contractor is a subsidiary of the assessee holding company would not, by itself, give rise to a business connection.
Permanent Establishment (PE) – In the present case, the High Court held that the assessee did not have any business connection in India .Thus, it was not necessary to go into the issue as to whether the assessee had any PE in India or not, during the relevant period in India .
Whether the Income from licencing of software which is an integral part of hardware can be treated as ‘Royalty’
– The Honourable High Court held that the supply contract cannot be separated into two i.e. hardware and software.
– The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers.
– It was observed that the lump sum price was bifurcated in two components i.e.. the consideration for the supply of the equipment and for the supply of the software only for the purpose of custom duty.
– It was further observed that in order to treat the consideration paid by the cellular operators as royalty, it is to be established that the cellular operators, by making such payment, acquired any right contemplated under Section 14 of the Copyright Act, 1957. In the presence case, this has not been established.
– It was held that the payment received by the assessee was towards the title of the equipment of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. As such, no part of the payment can be classified as payment towards royalty.
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High Court of Delhi
ITA 504/2007, ITA 507/2007, ITA 508/2007, ITA 511/2007, ITA 397/2007
Judgement Delivered On: 23.12.2011
ITA 504/2007
Director Of Income Tax Vs. Ericsson A.B., New Delhi.
ITA 507/2007
Director Of Income Tax Vs. Ericsson Radio System A.B., New Delhi
ITA 508/2007
Director Of Income Tax Vs. Ericsson Radio System A.B., New Delhi
ITA 511/2007
Director Of Income Tax Vs. Ericsson Radio System A.B., New Delhi.
ITA 397 of 2007
Director Of Income Tax Vs. M/S Metapath Software International Ltd.
