Income Tax Appellate Tribunal - Bangalore
Avesthagen Ltd.,, Bangalore vs Ito, Bangalore on 3 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH "C"
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND
SHRI A. K. GARODIA, ACCOUNTANT MEMBER
I.T.(IT)A. No.173/Bang/2016
(Assessment Year:2007 - 08)
M/s. Avesthagen Ltd.,
No. 7/6, Burnton Road,
Back side of Ajantha Hotel,
Bangalore - 560025.
PAN AABCA7217K .... Appellant.
Vs.
The Income Tax Officer,
International Taxation, Ward - 1 (1),
Bangalore. ...Respondent.
Appellant By :Shri Deepak Chopra, C. A.
Respondent By :Dr. P. V. Pradeep Kumar, Addl. CIT(DR)
Date of Hearing :17.07.2018
Date of Pronouncement :03.08.2018
O RD E R
Per Shri A. K. Garodia, A.M. :
This is an assessee's appeal directed against the order of the ld. CIT(A)-12 Bengalurudated 21.12.2015for Assessment Year 2007 - 08.
2. The assessee has raised the following grounds:-
"1. The learned Assessing Officer had erred in passing the order in the manner passed by kith and the learned Commissioner of Income tax (Appeals) has erred in confirming the same. The orders passed being bad in law and are liable to be quashed.
2. In any case and without prejudice, the learned Assessing Officer had erred in treating the appellant as an assessee in default U/s. 201 of the I.T. Act, 1961, on the ground that the appellant has not deduced tax at source u/s. 195 of the I.T. Act, 1961 and the learned Commissioner of Income tax (Appeals) instead of quashing the order, has erred in confirming the same. On the facts and circumstances of the case and the law applicable, the payments as made are not amenable to provisions of section 195 of the I.T. Act, 2 IT(IT)A No.173/Bang/2016 1961. The action of assessing officer in treating the appellant as assessee in default being erroneous is to be deleted.
3. The learned Assessing Officer had erred in holding that the payment of Rs. 44,76,000/- made by the appellant on account of provision of standard off the Shelf Software constituted Royalty in terms of Section 9(1)(vi) of the I.T. Act, 1961 read with Article 12 of Double Taxation Avoidance Agreement entered between India and USA and the learned Commissioner of Income tax (Appeals) has erred in confirming the same. The conclusion drawn by the authorities below being erroneous on facts and law is to be disregarded in toto.
4. The lower authorities have erred in not appreciating that:
i) the liability to deduct tax at source U/s. 195 of the I.T. Act, arises only in respect of income chargeable to tax in India;
ii) income of non-resident is not chargeable to tax in India in terms of exception prescribed U/s. 9(1)(iv)(b) of the I.T. Act;
iii) the appellant has acquired a copy of the Software for its own use and does not have the right to commercially exploit the copy right in the software;
iv) the software packaged in CD format is classified as goods in the Customs Tariff;
On proper appreciation of facts and the law applicable, there being no liability to deduct tax at source U/s. 195 of the Act on aforesaid payment, the order as passed levying tax and Interest u/s. 201(1) & 201(1A) of the Act, 1961 is wholly erroneous and is to be quashed.
5. The learned Assessing Officer had erred in passing the order U/s. 201(1) and 201(1A) of the I.T. Act, and levying tax of Rs. 4,97,334/- U/s. 201 of the I.T. Act, 1961 and Interest of Rs. 2,66,073/- U/s. 201(1A) of the I.T. Act, and the learned Commissioner of Income tax has erred in confirming the same. The levy of tax and interest being contrary to law applicable is to be deleted.
6. In any case and without prejudice, the interest as levied/confirmed is excessive.
7. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the time of hearing, it is requested that the order as passed/confirmed is to be quashed or at least:
i) the appellant not to be held as an assessee in default;
ii) the levy of Tax U/s. 201(1) be deleted; and 3 IT(IT)A No.173/Bang/2016
iii) thelevy of Interest U/s. 201(1)(A) of the I.T. Act, 1961 be also deleted."
3. The learned Authorised Representative of the assessee submitted that even before the AO in the proceedings u/s 201 (1) and 201 (1A) of the I T Act, this was the claim of the assessee that the payments have been made for purchase of the license to use their copy righted software for a period of 12 months. It is the case of the assessee that this transaction falls under the category of sale of goods and it is not covered u/s 9 91) of I T Act. At this juncture, the bench pointed out that now, this issue is covered against the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of M/s Samsung Electronics, 203 Taxman 477. In reply, he submitted that admittedly, this judgment is against the assessee. Thereafter, he submitted that at the relevant point of time, there were various tribunal orders holding the field as per which, it was held that the payment for software in the nature of copyrighted article does not partake the character of royalty under the act and treaty. He submitted that such tribunal orders are cited before CIT (A) also as noted by him in Para 5 of his order. He submitted that in this view of the matter, the assessee was under bonafide belief that no TDS is required to be made and therefore, it cannot be said that the assessee is in default.
4. As against this, it was submitted by the learned DR of the revenue that in earlier tribunal orders cited by the assessee before CIT (A) as noted by him in Para 5, the facts were different because in those cases, there was outright purchase of software but in the present case, there was annual license. He also submitted that in the similar facts, there were various judicial pronouncements to the effect that licensing of software for use is not outright sale because IPR is not transferred and it remains with the supplier. He submitted that these judicial pronouncements are noted by the AO in the order passed by him and therefore, there cannot be a bonafide belief as being claimed. He further submitted that even if some favourable tribunal orders were present, the assessee should have made application u/s 195 (2) for making payment without TDS and since, this was not done, the assessee was rightly held to be an assessee in default.
4IT(IT)A No.173/Bang/2016
5. We have considered the rival submissions. We find that the issue in the present case on merit is squarely covered against the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of M/s Samsung Electronics (Supra). Regarding the claim of bonafide belief of the assessee that the assessee was not required to deduct TDS in view of several tribunal orders cited before CIT (A) as noted by him in Para 5 of his order, we examine this claim by examining the applicability of the those tribunal orders in the present case and availability of other judicial pronouncements against the assessee as noted by the AO in the order passed by him u/s 201 (1) and also the provisions of section 195 (2) of I T Act.
6. In sub Para (A) & (B) of Para 5 of the order of CIT (A), the judgments noted are of AAR and not of tribunal or High Court. The first tribunal order noted is in Sub Para (C) being the tribunal order rendered in the case of Motorola Inc vs. DCIT, 96 TTJ 001 (Del) (SB). In this case, the dispute was in respect of supply of GSM cellular equipment to cellular operators in India and not in respect of purchase of software or obtaining license to use software alone as in the present case. In that case, this is the finding of the tribunal that the payment was not for any copyright in the software but for copyright article but in the present case, the payment is for license touse the software and therefore, this tribunal order has no relevance in the present case.
7. The second tribunal order cited before CIT (A) as noted by him in Para 5 (D) is the order rendered in the case of Samsung Electronics Co. Ltd. vs. ITO as reported in 94 ITD 91. The facts are noted by the tribunal in Para 2 and therefore, we reproduce this Para. It reads as under:-
"2. The fact involved in the present case is that the assessee is a branch of Samsung Electronics Company Ltd., Korea, engaged in the development, manufacture and export of software for use by its parent company, i.e., Samsung Electronics Co. Ltd., Korea. The assessee develops various kinds of software for telecommunication system, for office appliances, for computer systems and for mobile devices, etc. The software developed by the assessee is for in-house use by the parent company. In the asst. yr. 1999-2000, the assessee imported software products of Rs. 2,28,960 from Tektronix inc., USA. Similarly, during the other two years, it imported software products from USA, France and Sweden. According to the assessee, the imported software 5 IT(IT)A No.173/Bang/2016 product, namely, Telelogic Tau TTCN Suite, are readily available software in the market. Hence, payment made to the foreign companies cannot be treated as royalty, as per the provision of s. 9(1)(vi) r/w Double Taxation Avoidance Agreements (DTAA for short) between India and USA, India and France respectively. The contention of the assessee was not accepted by the ITO (TDS). It was held by the AO that the assessee was a defaulter by not deducting tax from the remittance made by the assessee for purchase of these softwares. The reply of the assessee was not accepted by the AO and it was held that as per the provision of s. 9(1)(vi) of the Act, the payment made by the assessee is royalty. Hence, the assessee was bound to deduct the tax. The ITO also placed reliance on the definition of the term 'Royalty', as mentioned in DTAA (supra). Accordingly, it was held by the ITO that the assessee was a defaulter within the meaning of s. 201(1) of the Act, for non-deduction of tax. Further, the interest under s. 201(1A) was also levied for the three years, as follows :
Asst.
201(1) 201(1A)
years
1999-2000 Rs. 25,440 Rs. 12,211
2000-01 Rs. 1,202 Rs. 216
2001-02 Rs. 16,87,270 Rs. 58,447
Total Rs. 17,13,912 Rs. 70,874
Against the said orders, the assessee moved appeals before the CIT(A). However, by the impugned common order dt. 29th Nov., 2001, the appeals were dismissed by the CIT(A). Against the said finding, the assessee is in appeal before the Tribunal.
Submission of assessee :"
8. Thereafter, the issue was decided by the tribunal as per Para 20. Hence, for ready reference, this Para is also reproduced hereinbelow:-
"20. In this case, the assessee had acquired a readymade off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called 'software'. Looking to the circumstances of the case and considering the fact that the definition of 'royalty' as provided in the treaties does not apply to the facts of the case. We are of the view that the finding recorded by the authorities below cannot be sustained. Accordingly, we hold that the remittance made by the appellant for purchase of software is not an income in India, hence, no tax is to be deducted in India. under s. 195 of the IT Act, 1961. Since we have decided the issue on merits, therefore, we are not going into the technical objections reused on behalf of the assessee."6
IT(IT)A No.173/Bang/2016
9. As per above Para, it comes out that this tribunal order is on this basis that there is purchase of readymade off the shelf computer programmewhereas in the present case, admittedly, there is no purchase and only annual license is taken for use of software. Hence, this tribunal order is not applicable in the present case.
10. The third tribunal order cited before CIT (A) as noted by him in Para 5 (D) is the order rendered in the case of Lucent technologies Hindustan Ltd. vs. ITO as reported in 92 ITD 366. The matter was decided by the tribunal as per Para 10 and therefore, this Para is reproduced herein below for ready reference:-
"10. We have carefully considered the rival submissions and gone through the records in the light of the paper book filed by the parties as also the principles laid down by the judicial authorities to which our attention was drawn, at the time of hearing by both the parties. The facts of the case clearly reveal that the assessee is engaged in the manufacture and sale of electronic switching systems required for the telecommunication industry and a substantial part of its sales are to the DOT. As the facts reveal, initially DOT places a purchase order for supply of digital local telephone exchange equipment on the assessee. The price for the equipment to be supplied is a lump sum price and the equipment to be supplied consists of various modules as well as the software that runs the equipment. The price of the equipment to be supplied for the Vanasthalipuram Exchange is Rs. 6,84,94,690. The cost of the switching equipment is Rs. 5,04,49,736. The break up of this sum is to be found at pp. 5 to 7 of the paper book. The cost of the software component embedded therein is Rs. 50,78,876 as is clear from p. 8 of the compilation. On the basis of the order so received from the DOT, assessee placed an order on Lucent, USA for supply of parts and components of the switching system. Purchase order placed for Vanasthalipuram Exchange is at pp. 14 to 16 of the paper book. A perusal thereof would clearly reveal that a single purchase order for a lump sum consideration of USD 1,29,804.56 is placed on Lucent, USA. The annexure to the orders sets out the various items that are to be supplied by Lucent, USA and it is clear therefrom that the application software has also to be supplied by Lucent, USA. Lucent, USA, in turn, raised two invoices, one for supply of various items of hardware and the other for supply of software. However, as is clear from pp. 17 and 18A, which are respective invoices that such supplies are made pursuant to a single purchase order. The transaction, viewed from this angle, clearly shows that what the assessee has purchased is an integrated equipment both of hardware and software from Lucent, USA. In other words, the acquisition of software was inextricably linked to the acquisition of hardware and 7 IT(IT)A No.173/Bang/2016 one cannot function without the other. It is impracticable to have such value addition without the help of the other. In our view, the assessee's transaction with Lucent, USA is a purchase of an integrated equipment, which consists of both hardware as well as software. One cannot function without the help of the other. As pointed out by the learned counsel, what the assessee has purchased is a copyrighted article and not copyright of the rights. Therefore, it is wrong on the part of the Department to have separated the transaction of purchase of software and viewing the purchase of software as an independent transaction. The assessee had not acquired any rights in the software. The assessee cannot be seen to be duplicating the software in making use of the same. The software that is so supplied by Lucent, USA is customer-specific and cannot be even reused or duplicated in any other exchange where identical orders are placed by the DOT. In other words, software that is supplied by Lucent, USA is customer-specific and is required only to be integrated into hardware that is supplied for specific unit. The Department, therefore, in our view is not justified in bifurcating the transactions as one of supply of hardware and the other of software and treating software as a part of royalty. It must be appreciated that the assessee, in this case, has not acquired rights in the copyright program so that it can be exploited commercially. It is a customer- specific supply and it is a case of clear business transaction of purchase of equipment along with software to make the hardware functional. In our view, therefore, Department is not justified in treating the impugned payments as royalty simpliciter and thereby holding that the assessee is an assessee-in-default for failure to deduct tax at source. In our considered view, the facts of the case as already explained in earlier paragraphs and discussions herein, the payment for impugned transactions does not partake the character of royalty and, therefore, there is no question of any obligation on the part of the assessee to deduct tax at source in respect of these disputed payments. The assessee is under no obligation to deduct tax at source under s. 195 of the Act in respect of the sums paid for acquiring software. Therefore, the orders of the ITO (TDS) under ss. 201 and 201(1A) of the Act are therefore vacated."
11. It is seen that this tribunal order is on this basis that the assessee's transaction with Lucent, USA is a purchase of an integrated equipment, which consists of both hardware as well as software. But in the present case, only license to use software was acquired and therefore, this tribunal order is also not relevant in the present case.
12. The next tribunal order cited before CIT (A) as noted by him in Para 5 (D) is the order rendered in the case of Hewlett Packard (India) (P) ltd. vs. ITO 5 SOT 660. The conclusion of tribunal in that case was as under:-
8IT(IT)A No.173/Bang/2016 "Conclusion:
Assessee importing ready-made software packages from H in USA and selling them to its customers in packed condition, payment made to H by assessee was not 'royalty' within the meaning of art. 12(3) of DTAA between India and USA but was commercial income in terms of art. 7 thereof."
13. It is seen that this tribunal order is on this basis that the assessee hasimported readymade software packages from USA. But in the present case, only license to use software was acquired and therefore, this tribunal order is also not relevant in the present case.
14. Similar are the facts and decision of the tribunal in the case of Sonata Software Ltd. vs. ITO, 6 SOT 700 and hence, this tribunal order is also not relevant in the present case for same reasons.
15. In the case of Mphasis BFL Ltd. vs. ITO, 9 SOT 756, the tribunal followed the earlier tribunal order rendered in the case of Samsung Electronics Co. Ltd. vs. ITO (Supra). We have already seen that the tribunal order rendered in the case of Samsung Electronics Co. Ltd. vs. ITO (Supra) is not applicable in the facts of the present case and hence, for the same reasons, this tribunal order is also not applicable in the present case.
16. In the case of Sonata Information Technology Ltd. vs. Ad. CIT, 106 TTJ 797,, the tribunal followed the earlier tribunal orders rendered in the case of Samsung Electronics Co. Ltd. vs. ITO (Supra) and in the case of Sonata Software Ltd. vs. ITO 9Supra). We have already seen that both these tribunal orders are not applicable in the facts of the present case and hence, for the same reasons, this tribunal order is also not applicable in the present case.
17. In the case of Velankani Mauritius Ltd. vs. DDIT, 132 TTJ 124, the conclusion of the tribunal is reproduced herein below:-
"Conclusion:
Sale of off-the-shelf shrink-wrapped software by foreign companies to a company in India is sale of copyrighted article and, therefore, income therefrom is not royalty either under the IT Act or under the terms of the relevant DTAAs."9
IT(IT)A No.173/Bang/2016
18. It is seen that this tribunal order is on this basis that the assessee has imported off the shelf shrink wrapped software. But in the present case, only license to use software was acquired and therefore, this tribunal order is also not relevant in the present case.
19. Remaining two tribunal orders rendered in the case of Appellant Communication Technologies Ltd. vs. ITO dated 16.05.2005 in ITA 61 & 62/B/2002 and in the case of M/s Synopsys India P. Ltd. vs. ITO dated 106.01.2006 in ITA No. 919 & 920/B/2002 are not reported orders and copy is not made available to us and therefore, the applicability of these two tribunal orders cannot be examined by us.
20. As per the provisions of sub section (2) of section 195, if the assessee feels that the assessee considers that the sum being paid by the assessee to a non resident is not an income chargeable to tax in the hands of the recipient then the assessee may apply to the AO to determine the portion of such sum chargeable to tax and on such determination, TDS should be made on such portion. In our considered opinion, in case, where the assessee feels that whole or part of the sum to be paid by the assessee to a non resident is not chargeable to tax in India in the hands of the recipient, the assessee should make application u/s 195v (2) instead of deciding that no TDS is to be deducted. This view of us is fortified by the judgment of Hon'ble Apex Court rendered in the case of Transmission Corporation of A. P. Ltd. vs. CIT as reported in 239 ITR 587. But the assessee has not made any such application to the AO.
21. As per above discussion, we find that the issue on merit is covered against the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of M/s Samsung Electronics (Supra). The contention raised about bonafide belief is also not acceptable because we have seen that out of several tribunal orders cited by the learned AR, no tribunal order is applicable in the facts of the present case. Hence, we hold that no interference is called for in the order of CIT (A).
10IT(IT)A No.173/Bang/2016
22. In the result, the assessee's appeal is dismissed. Order pronounced in the open court onthe date mentioned on the caption page.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (A.K. GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 03rd August, 2018.
/MS/
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.