UT Starcom Inc Vs ACIT (ITAT Delhi)
ITAT Delhi held that the receipts from sale of software licenses are not in the nature of royalty income. Also held that, though, such income may be in the nature of business profit, however, no part of which can be attributed to the PE in India.
Facts- The assessee is a non-resident corporate entity and a tax resident of USA. The assessee is engaged, inter alia, in the business of developing and marketing of telecommunication equipments and related software.
AO noticed that, though, the assessee had receipts of Rs.7,34,95,361/- from certain Indian companies, however, the assessee had not offered such receipts to tax. When AO called upon the assessee to explain, why such receipts should not be treated as royalty income, the assessee submitted that it had sold the software along with hardware on outright sale. The assessee submitted that the software sold by the assessee is embedded in the hardware and only for the purpose of operating hardware. Therefore, it cannot be treated as royalty.
However, AO concluded that the receipts from transfer of right to use the software are in the nature of royalty. Further, he held that since the assessee had a branch office in India and the agreements with the Indian telecommunication companies have been signed in India by an employee of the branch office, the royalty income is connected to the branch office, which constitutes Permanent Establishment of the assessee in India. Thus, he held that the receipts would be taxable in India, as royalty income, both u/s. 9(1)(vi) read with section 115A/44D of the Act as well as under the India- USA DTAA, since, the assessee had a PE in India in terms of Article 5 of the treaty.
Commissioner (Appeals) directed the Assessing Officer to compute the income of the PE in accordance with judgment of the Tribunal in case of Motorola Inc. Vs. DCIT [2005] 95 ITD 269 (Delhi ITAT) (SB), i.e., on the basis of percentage of net profit on global service applied to Indian sales. Being aggrieved with the order passed by learned first appellate authority, both the assessee and the Revenue are in appeal.
Conclusion- Neither manufacturing nor any other activities relating to the hardware and software supply has taken place in India. In such a scenario, the profit/income from offshore supply of equipments and software cannot be attributed to the PE, as, only such part of income relating to operation carried out in India can be attributed to the PE and taxed in India.
Held that the receipts from Indian telecommunication companies cannot be taxed, either as royalty or as business profits in India.
Held that the receipts from sale of software licenses are not in the nature of royalty income. We have also held that, though, such income may be in the nature of business profit, however, no part of which can be attributed to the PE in India.
FULL TEXT OF THE ORDER OF ITAT DELHI
This bunch of three appeals arise out of two separate orders of learned Commissioner of Income Tax (Appeals). Cross appeals for the assessment year 2004-05 have been filed by the assessee and the Revenue. The appeal for assessment year 2005-06 has been filed by the assessee alone.
ITA No.998/Del/2009 (Assessee’s Appeal) AY: 2004-0 5
2. In ground no. 1, the assessee has challenged the addition made on certain receipts from Reliance Infocomm Ltd. as royalty, both under the domestic law as well as India – United States of America (USA) Double Taxation Avoidance Agreement (DTAA).
3. Briefly the facts relating to this issue are, the assessee is a non-resident corporate entity and a tax resident of USA. As stated, the assessee is engaged, inter alia, in the business of developing and marketing of telecommunication Equipments and related software. In the relevant assessment year, the assessee had a branch office in India. For the assessment year under dispute, the assessee filed its return of income on 31.10.2004 declaring income of Rs. 1,19,62,800/-. Subsequently, the assessee filed a revised return of income on 03.01.2006 claiming credit of excess Tax Deducted at Source (TDS). Be that as it may, in course of assessment proceeding, the Assessing Officer noticed that, though, the assessee had receipts of Rs.7,34,95,361/- from certain Indian companies, however, the assessee had not offered such receipts to tax. When the Assessing Officer called upon the assessee to explain, why such receipts should not be treated as royalty income, as, it was for transfer of right to use the copyright in the software, the assessee submitted that it had sold the software along with hardware (equipments) on outright sale. The assessee submitted that the software sold by the assessee is embedded in the hardware and only for the purpose of operating hardware. Therefore, it cannot be treated as royalty. The Assessing Officer, however, was not convinced. Referring to agreements entered with various Indian telecommunication companies, such as, Bharti Telenet Ltd., Tata Teleservices Ltd., and Reliance Infocomm Ltd., the Assessing Officer concluded that the receipts from transfer of right to use the software are in the nature of royalty. Further, he held that since the assessee had a branch office in India and the agreements with the Indian telecommunication companies have been signed in India by an employee of the branch office, the royalty income is connected to the branch office, which constitutes Permanent Establishment (PE) of the assessee in India. Thus, he held that the receipts would be taxable in India, as royalty income, both under section 9(1)(vi) read with section 1 15A/44D of the Act as well as under the India- USA DTAA, since, the assessee had a PE in India in terms of Article 5 of the treaty. He further observed, even assuming assessee’s claim that the receipts are not in the nature of royalty income is correct, still they will be taxable as business profits under Article 7(1) of the treaty, as, the assessee has a PE in India. He held, since the assessee had already claimed all expenses in the return of income attributable to the PE, no further expenses can be deducted from the receipts. Thus, he held that the entire amount of Rs. 7,34,95,361/- is taxable in India.
4. Being aggrieved with the said addition, the assessee preferred an appeal before learned first appellate authority. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) held that, insofar as receipts from Bharti Telenet Ltd. and Tata Teleservices Ltd. are concerned, since the assessee has transferred limited, non-transferable, non-exclusive right to use the software solely in the operation of telecommunication equipments purchased by them, such receipts cannot be treated as royalty income. However, he observed, since, the agreement with Reliance Infocomm Ltd. is differently worded, in the sense, that a perpetual, irrevocable, exclusive, unrestricted licence has been granted, the receipts from Reliance Infocomm Ltd. would be taxable as royalty income.
5. Insofar as issue relating to existence of PE and the taxability of the receipts from supply of software as business profit, learned Commissioner (Appeals) held that the receipts from Bharti Telnet and Tata Teleservices Ltd. are taxable as business profit under Article 7 of India – USA DTAA as the assessee had a PE in India and such receipts are integrally connected to the PE. Insofar as deductibility of expenses from the profit attributed to the PE, learned Commissioner (Appeals) directed the Assessing Officer to compute the income of the PE in accordance with judgment of the Tribunal in case of Motorola Inc. Vs. DCIT [2005] 95 ITD 269 (Delhi ITAT) (SB), i.e., on the basis of percentage of net profit on global service applied to Indian sales. Being aggrieved with the order passed by learned first appellate authority, both the assessee and the Revenue are in appeal.
6. We have considered rival submissions and perused the materials on record. Undisputedly, the assessee had entered into agreements with certain India telecommunication companies, such as, Bharti Telenet Ltd., Tata Teleservices Ltd. and Reliance Infocomm Ltd. for supply of basic telecom infrastructure equipment software and assisting them to set up telecommunication network. Basically, these telecom equipments and software were put to use by Indian telecommunication companies to provide basic telecommunication services, value added services, and broad-band services. In sum and substance, the equipments and software were provided to the Indian telecommunication companies to set up mobile telecommunication networks in India. On a perusal of the agreements entered into by the assessee with Indian telecommunication companies, we do not find any perceptible difference in them. The agreements clearly reveal that the assessee has supplied telecommunication hardware with software. The software provided are embedded in the hardware and are required to operate the telecommunication network. It is a fact on record that learned Commissioner (Appeals) after appreciating the materials placed before him was convinced that the software supplied by the assessee was embedded in the hardware and were required for operating the hardware/equipment. Insofar as agreement with Reliance Infocomm Ltd. is concerned, learned Commissioner (Appeals) has taken a different view by stating that the assessee has transferred a perpetual, irrevocable, exclusive, unrestricted licence. After perusing the agreement with Reliance Infocomm Ltd. as a whole, we find the following features.
