Sistema Shyam Teleservices Ltd.,, New ... vs Department Of Income Tax

Income Tax Officer Vs. M/s Sistema Shyam Tele Services TDS Ward 2(2), Ltd. A-60, Naraina Industrial International Taxation, Area, Phase-I, New Delhi. New Delhi.

(PAN AACCS 1709 H)

(Appellant) (Respondent)

Date of Hearing : 08.05.2015 Date of Pronouncement : 22.07.2015

Assessee by : Sri B.R.R. Kumar, Sr. DR Respondent by: Sri Alok Vasant, AR

ORDER

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

1. These appeals have been filed by the Revenue against the order of the

CIT(A)-XXIX, New Delhi dated 11.02.2013 in Appeal No. 06 & 07/2011-12 for

AYs. 2009-10 and 2010-11 respectively.

ITA No. 2629 & 2630/Del/2013

2. Although the Revenue department has taken as many as 14 grounds in this

appeal, but the sole issue for adjudication is that whether the payment made by

the assessee company for purchase of software amounts to royalty and hence the

same subject to TDS u/s 195 of the Income Tax Act, 1961 (for short the 'Act').

3. Briefly stated the facts giving rise to this appeal are that the assessee is

engaged in the business of providing cellular mobile telephone and wireless

services and other related services in various telecom circles of India. The

assessee company was desirous of procuring a CDMA Mobile Telephone

System from Huawei International Pte Limited, Singapore for the purposes of

installation in various telecom circles in the country, in respect of which it had

obtained telecom licenses. There was a contract between the assessee company

and Huawai for supply of system as whole which comprised of both hardware

and software and the software supplied was specifically designed for the

hardware supplied and can be used only to make the hardware supplied under

the contract, operational. Accordingly, the payments were made by the assessee

company pursuant to the supply of integrated equipment i.e. CDMA Mobile

Telephone System was ordered as per purchase orders in terms of Article 4 of

the Contract. As contended by the assessee, the assessee was under belief that

the consideration payable under the supply contract for purchase of embedded

software does not attract a withholding tax as per the provisions of Act read with

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DTAA between India and Singapore, made payments without deduction of tax

at source.

4. The AO issued show cause notices dated 25.02.2010 wherein the assessee

was required to submit various documents and also to explain why the alleged

payment for software should not be treated as royalty in terms of provisions of

the Act and also in terms of Tax Treaty between India and Singapore.

Subsequently, the AO also issued another notice on 22.12.2010 for initiating

proceeding u/s 201 and 201(1)(A) of the Act wherein the assessee was required

to explain as to why it may not be treated as assessee in default for not deducting

and depositing tax at source in respect of payments made to the supplier under

the said contract. Thereafter, the AO passed a consolidated order u/s

201(1)/201(1A) of the Act on 31.03.2011 for FYs. 2008-09 and 2009-10,

wherein he dismissed the submissions of the assessee and held that payments

towards the software component of the equipment are characterized as royalty

and thereby attracted withholding tax in India. The AO also held that payments

attracted tax on grossed up basis. Consequently a composite demand of

Rs.1,84,70,751/- for FY 2008-09 and 2009-10 was computed and a consolidated

demand notice was issued and served on the assessee.

5. Being aggrieved by the above action of the AO, the assessee preferred an

appeal before the CIT(A) which was allowed by passing the impugned

consolidated order for both the years. Now, the Revenue Department is 3 ITA No. 2629 & 2630/Del/2013

appearing before this Tribunal in these second appeals with the main issue as

mentioned hereinabove.

6. We have heard arguments on both the sides and carefully perused the

relevant material placed on record. The Ld. Departmental Representative (DR)

supporting the impugned order of the AO was correct in passing the order dated

31.03.2011 and holding that the payments made by the assessee clearly

constitute payments of royalties and the assessee was duty bound to withhold tax

on these payments at the rate of 10%. The Ld. Departmental Representative

further submitted that since the agreement with the payee Singapore companies

was net of taxes therefore, after grossing up such rates would come to 11.11%

and, therefore, the demand of tax and interest was rightly raised by the AO. The

Ld. DR further submitted that CIT(A) was not correct in granting relief to the

assessee, therefore, the impugned order may be set aside by restoring that of the

AO.

7. The Ld. Assessee Representative (AR) contended that the Assessing

Officer ignored the judgment of the Hon'ble jurisdictional High Court of Delhi

and other judgment on the issue which were rightly considered by the CIT(A)

while granting relief to the assessee. The Ld. counsel further pointed out that the

issue is squarely covered in favour of the assessee by the judgment of the

Hon'ble Jurisdictional High court of Delhi in the case of DIT Vs. Ericsson AB

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(2011-TII-46-HC-DEL-INTL) and view taken by the Hon'ble Delhi HighCourt

in the case of DIT Vs. M/s Nokia Network Oy(2012-TTI-49-HC-DEL-INTL).

8. The Ld. AR also took us through finding of the CIT(A) from Paras 6.1 to

6.4 of the impugned order and submitted that the Revenue Department has

agitated issue without any basis and the appeals may kindly be dismissed and

the order of the CIT(A) may kindly be upheld.

9. On careful consideration of above, at the very outset, we note that the

CIT(A) has decided the issue in favour of the assessee after considering the ratio

laid down by the Hon'ble Jurisdictional High Court of Delhi in the case of DIT

Vs. Ericsson AB (Supra) and DIT Vs. Nokia Network Oy (Supra) the relevant

observations and finding of the CIT(A) on this issue reads as under:

6.1 I have carefully considered the facts of the case, the submissions of the appellant and the arguments given by the Id. AO in the impugned order.

From Article 2 and clause 39(iii) of Annexure-l of the contract, it is seen that under the supply contract, the appellant has purchased integrated system comprising of hardware and embedded software. Even software supplied on separate media was meant for re-loading into the system whenever there is malfunctioning etc. The issue of taxability of software has been subject matter of intense litigation in the past. On the issue of taxability of integrated supply of hardware and software i.e. supply of software embedded with the supply of equipment, it was ruled by Delhi tribunal's special bench in the matter of Motorola Inc. that in the case of composite contracts for integrated supply of hardware and software to the cellular operators, no copyright was transferred and payment received by the assessee was towards the title of GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. The judgment of the Delhi Tribunal has been upheld by the jurisdictional Hon'ble Delhi High Court in a recent judgment in the case of Director of Income-tax Vs. Ericsson AB [2011-TII-46-HC-DEL-

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ITA No. 2629 & 2630/Del/2013

INTL]. In this ruling, the High Court has held that the contract for the integrated supply of hardware and software was to be treated as contract of supply of goods. The relevant extract from the judgment are reproduced below:

"54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any of the copyrights referred to in Section 14(b) of the Copyright Act, 1957.

55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. 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. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services Vs. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and therefore, liable to sales tax.

56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty.

..............

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58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment an dfor the supply of the software. However, it was argued by the learned counsel for the assessee that this separate specification of the hardware/software supply was necessary because of the differential customs duty payable.

59. Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation- II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work. Section 2 (0) of the Copyright Act makes it clear that a computer programme is to be regarded as a "literary work ': Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act,1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article".

60. Mr. Dastur is right in this submission which is based on the commentary on the GECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case.

61. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. "

Further, the above view has also been upheld by a very recent ruling of jurisdictional Delhi high court in the case of Director ofIncome-tax vis Mls Nokia Networks OY [2012-II- 49-HC-DEL-INTL].

7 ITA No. 2629 & 2630/Del/2013

6.2 There is no other ruling of any other High Court on the issue of taxability of integrated supply of hardware and software. Moreover, being ruling of jurisdictional high court, it is binding upon all subordinate judicial authorities. The appellant has demonstrated that the facts of its case are similar to those under consideration of Hon'ble Delhi High Court in the case of Ericsson (supra). I am also in agreement with the contention of the appellant that facts of its case are distinguishable from the recent ruling of Karnataka High Court in the case of CIT Vs. Samsung Electronics Company Ltd. which was given which was given in the context of standalone import of software. Similarly, the ruling of Delhi Bench of Tribunal in the matter of Gracemac Corpn was in !he context of shrink wrapped software and, therefore, not applicable in the instant case. On the aspect of the retrospective amendment made to section 9( I )(vi) of the Act, Hon'ble Delhi high court in case of Nokia Networks Oy has held that the integrated software supplies would not be taxable as Royalty even after the amendment in domestic law. 6.3 Therefore, respectfully following the decision of jurisdictional Delhi High Court, it is held that the consideration paid by the appellant for the purchase of embedded software was to be treated as consideration for supply of goods and therefore taxable as business income & not as royalty. It is not AO's case that the supplier has a PE in India. Therefore, payment made by the appellant is not chargeable to tax in India and hence not subject to with-holding tax u/s 195 of the Act. Strength is derived from GE India Technology Centre Pvt. Ltd. v. CIT (2010) 327 ITR 456 (SC). The grounds of appeal no. 1 to 3 are thereby allowed.

6.4 In view of the finding given above that payment made for purchase of software embedded in hardware is not in nature of royalty and hence not subject to with-holding tax u/s 195, grounds of appeal no. 4 to 7 become infructuous and hence not being separately adjudicated."

10. Firstly, we may point out that the Ld. DR in the rejoinder fairly accepted

that the similar issue in the similar set of facts and circumstances has been

decided by the Hon'ble jurisdictional High Court of Delhi in favour of the

assessee in the case of DIT Vs. Ericsson AB (Supra) and DIT Vs. Nokia

8 ITA No. 2629 & 2630/Del/2013

Network Oy (Supra) wherein the earlier view was further upheld by the Hon'ble

jurisdictional High Court of Delhi.

11. In view of above, in our humble understanding, the issue is squarely

covered in favour of the assessee by the said decision of Hon'ble jurisdictional

High Court of Delhi. We further held that the CIT(A) was quite correct and

justified in holding that the consideration paid by the assessee for purchasing of

embedded software was to be treated as consideration for supply of goods and

therefore, the same was taxable as business income and not as royalty. It was

also held that therefore, the payments made by the assessee is not chargeable tax

in India and hence not subject to withholding tax u/s 195 of the Act. We are

unable to see any perversity ambiguity or any other valid reason to interfere with

the finding and conclusion of the CIT(A) and hence we upheld the same.

Accordingly, the sole issue/ground raised by the Revenue in both the appeals

being devoid of merits is dismissed.

12. In the result both the appeals of the Revenue are dismissed.

The decision is pronounced in the open court on 22nd July, 2015.

Sd/- Sd/- (S.V. MEHROTRA) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 22nd July, 2015. Aks/-

9 ITA No. 2629 & 2630/Del/2013

Copy forwarded to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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