Karnataka H.C : The amount(s) paid by the appellant(s) to the foreign software suppliers was not ‘royalty’ and that the same did not give rise to any ‘income’ taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source

High Court Of Karnataka

CIT, International Taxation Vs. Sunray Computers (P.) Ltd.

Assessment Years : 1999-2000 To 2002-03

Section : 9

V.G. Sabhahit And Ravi Malimath, JJ.

IT Appeal Nos. 168 & 170 Of 2004 And 756 To 758 Of 2006

October 21, 2011

JUDGMENT

V.G. Sabhahit, J. – ITA Nos. 756, 757 & 758/2006 are filed by the revenue being aggrieved by the common order dated 18-11-2005 passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘B’ (hereinafter referred to as the ‘ITAT’) for the assessment years 2000-01, 2001-02 & 2002-03 wherein the ITAT has set aside the order passed by the Assessing Officer which has been confirmed by the appellate authority, by following the judgment passed by the ITAT in Samsung Electronics Co. Ltd. v. ITO (TDS )- I [2005] 94 ITD 91 (Bang.) by holding that payment made by the respondent herein – the appellant before the ITAT towards purchase of software is not royalty.

2. ITA Nos. 168 & 170/2004 are filed by the revenue being aggrieved by the order passed by the ITAT in ITA Nos. 114 & 115/Bang/2002 for the assessment years 1999-2000 and 2000-01 wherein the ITAT by order dated 31-10-2003 held that payment made by the assessee towards purchase of software is not royalty, by setting aside the order passed by the appellate authority and confirming the order passed by the Assessing Officer wherein it was held that payment made by the respondent is a royalty.

3. The substantial question of law that arises for determination in these appeals are as under:

“Whether on facts and circumstances of the case, the ITAT was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not ‘royalty’ and that the same did not give rise to any ‘income’ taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source?”

4. We have heard the learned counsel appearing for the appellant and respondent.

5. The assessee Lucent Technologies, India had imported software from Lucent Technologies. U.S.A. for the assessment years 1999-2000 and 2000-01. They had separately imported hardware from Lucent Technologies, Taiwan. The ITO initiated proceedings under Sections 201(1) and 201(1A) of the Act against the assessee for failure to deduct tax at source in respect of payment made to Lucent Technologies, USA for the software imported.

6. The case of the assessee is that if had obtained orders from the Department of Telecommunications for the manufacture and supply of telecommunications/switching equipments. In order to execute its orders in India it had placed order’s on Lucent Technologies, USA for the supply of software. It had placed orders with Lucent Technologies, Taiwan for the supply of hardware. The assessee had integrated the software and the hardware and had executed its commitment to the Telecommunication Department.

7. The Income-tax Officer and as confirmed by the Commissioner of Appeals proceeded to hold that the software and the hardware had been imported by the assessee through two separate countries and integrated in India by the assessee. The execution of the contract by the assessee with the Telecommunication Department in India was a separate contract from the import of software from the USA. Even though the software was utilised in the execution of the contract by the assessee the payments made by the assessee cannot be integrated into the contract executed with the telecom Department. It was therefore held that the payments were made for supply of software which was utilised by the assessee and consequently the provisions of Section 9(1)(vi) of the Act read with the Double Taxation Avoidance Agreement between India and USA was applicable. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. The Tribunal held that the assessee had purchased integrated equipment both hardware and software from U.S.A. and Taiwan. The acquisition of software without the hardware does not serve any purpose. It held that the transactions of purchase of software and purchase of hardware as two different transactions. That the assessee had not acquired rights in the Copy-right programme and hence the same could not be exploited commercially. Consequently the Tribunal held that the payment made by the assessee for acquiring of the software cannot be termed as royalty payments, and therefore no deduction of tax was allowable and consequently Section 195 of the Act was not applicable and hence the order under Sections 201(1) and 201(1A) was set aside. However the assessee has been paying royalty for the use of software. Aggrieved by the same, the revenue has preferred these appeals.

8. The Tribunal proceeded to consider the contracts entered into between the assessee and Lucent Technologies, U.S.A. and Taiwan. It failed to take note of the fact that the ITO as well as the Commissioner of Appeals have clearly held that the transaction which is liable to tax in India is the amounts received by Lucent Technologies, USA, for the supply of software to the assessee in India as per Section 9(1)(vi) of the Act read with the Double Taxation Avoidance Agreement between India and the USA.

9. This supply of software by Lucent Technologies, USA to the assessee was an independent transaction. The hardware utilised by the assessee was received from Lucent Technologies, Taiwan. Only after receipt of both the software and the hardware, they have been integrated by the assessee in India and thereafter supplied to the Department of Telecommunications as an end product in terms of the assessee’s independent contract. Therefore the finding recorded by the Tribunal by examining the transactions of the assessee, in respect of the transactions of Lucent Technologies, USA, which is the subject matter of liability to tax in India, is therefore erroneous. Consequently the payments made by the assessee amounts to royalty and is liable to be taxed in India under Section 9(1)(vi) read with the Double Taxation Agreement.

10. The Commissioner of Appeals has also recorded a finding that in accordance with the second proviso to Section 9(1)(vi) of the Act, a lumpsum paid by the respondent including the granting of licence in respect of computer software supplied by any resident manufactured along with the computer or computer based equipment under any of the Schemes approved under the policy of computer software export. Software Development Training, 1996 of the Government of India, would fall under Section 9(1)(vi) of the Act was not applicable. In the case of the assessee, no such approval was obtained by the assessee. The Tribunal therefore committed an error in looking into the contract between the assessee and the telecom Department and did not give any importance to the contract entered into between the assessee and its contract with Lucent Technologies, USA and Lucent Technologies, Taiwan. In order to understand the transaction liable to tax it is imperative to consider the contract entered into by the assessee with Lucent Technologies, USA, and Lucent Technologies, Taiwan. The non-consideration of these two agreements is therefore erroneous. The examination of the contract only between the assessee and the telecom Department, is therefore erroneous. It is therefore clear that the Parliament was aware of the import of software both independently and under an integrated system. Therefore in view of the proviso, the finding recorded by the Tribunal upholding the contention of the assessee that the payments made for the supply of software cannot be brought under Section 9(1)(vi) of the Act as it was an integrated import cannot be sustained. In that view of the matter, these two appeals would have to be allowed by setting aside the order of the Tribunal and confirming the order passed by the assessing authority and the appellate authority and consequently by answering the substantial question of law in these appeals in favour of the Revenue and against the assessee.

11. For the aforesaid reasons we pass the following:

ORDER

The appeals are allowed. The order dated 18-11-2005 in 1TA Nos. 756/2006, 757/2006 and 758/2006 and the order dated 31-10-2003 in ITA Nos. 168/2004 and 170/ 2004 passed by the ITAT are set aside and the orders passed by the appellate authority confirming the order passed by the Assessing Officer in all the appeals are restored.

[Citation : 348 ITR 196]

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