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15. Through this ground No.5, the assessee objects to the addition of Rs.52,55,881/- under section 40(a)(i) of the I.T. Act. Brief facts are that the assessee purchased the software called 'Small World Software' from the Dutch company and bundled it with its own software and thus customized it and sold it to its own ITA.No.115 & 2184/Hyd/2011 Infotech Enterprises Limited, Hyd.

customers, both in India and abroad. As the payment is made to a non-resident company, the A.O. held that the payment represented, not the purchase price of the software but, actually, royalty payment to the Dutch company. The A.O. noticed that the tax was not deducted at source on the alleged royalty payment under section 195(1) of the Income Tax Act, and so invoked the provisions of section 40(a)(i) and, accordingly, disallowed the expenditure on the said royalty payment. The learned Counsel for the assessee contended before the DRP that the A.O. erred in holding that the amount of Rs.52,55,881/- paid to M/s. GE Network Solutions, Netherlands is disallowable under section 40(a)(i) of the I.T. Act, 1961. The Learned Counsel for the assessee further objected to the disallowance proposed by the A.O. as follows :

18. The learned Counsel for the assessee further submitted that the issue of taxability of Rs.52,55,881/- has to be considered both in terms of section 9(1)(i) and 9(1)(vi) of the I.T. Act and also DTAA between India and Netherlands. It was submitted that the assessee cannot meddle with the source code of the software in the process of customisation and it can bundle only its own software with the Small World Software utilising available facilities in the said Small Word Software. It was further submitted that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and the assessee did not get any rights to the copyright to the said software. Further, the assessee did not obtain any license in respect of software purchased from GE Network Solutions, Netherland. It was submitted that there is no business connection at all between the assessee and the Netherlands company and they are not Associated Enterprises (AE) and the amount of Rs.52,55,881/- is simply the purchase cost of trading goods and not royalty payment and hence, there is no liability to deduct tax at source and section 40(a)(i) is not attracted.

25. We find that the amount in question is not taxable u/s 9(1)(i) because even assuming for a moment there is a business connection between the assessee and the foreign software supplier there are no operations in India of the foreign company to which income may be reasonably attributed to as required under Explanation 1(a) to section 9(1)(i). Hence we find there is no applicability of S.9(1)(i) in the instant case.

26. Now we address the issue of characterization of these payments as Royalty so as to fall under Section 9(1)(vi) or Article 12 of India-Netherlands DTAA. W e find that the assessee has purchased the Small W orld Software from Netherlands and bundled it with its own software and thus customised it and sold it to its own customers both in India and abroad. The assessee cannot meddle with the copies of the software in the process of its customization. W e also observe that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and ITA.No.115 & 2184/Hyd/2011 Infotech Enterprises Limited, Hyd.

"The assessee did not render any independent technical services. It developed software on contract basis as per the agreement and handed over the same to the customer........ There is software development agreement between the client and the assessee. The expenditure incurred is for development of Software .... Such ITA.No.115 & 2184/Hyd/2011 Infotech Enterprises Limited, Hyd.