Smt. P. Madhavi Devi, Judicial Member - All the four appeals are assessee's appeals for the A.Ys 2006-07 to 2009-10. In the assessee's appeal for the A.Y 2006-07, assessee has raised the following grounds:—
"Each of the grounds given below is independent and without prejudice to the other grounds of appeal preferred by the Appellant.
On the facts and in the circumstances of the case, the learned CIT (A)-V Hyderabad:
| 1. |
Erred in confirming the order of the learned ADIT (International Taxation)-II Hyderabad (hereinafter referred to as ('ADIT') u/s 201 & 201(1A) r.w.s. 195 of the I.T. Act, 1961 ('the Act') dated March 31, 2009, which is unjustified, erroneous and needs to be summarily cancelled. |
2. |
Erred in upholding the order of learned ADIT, that the impugned payments for purchase of software is for use of or 'right to use copyright' and hence is taxable as royalty u/s 9(1)(vi) of the Act and the respective double tax avoidance agreements between India and the country, where the vendors are resident without appreciating the fact that the Appellant had not acquired any right to use the copyright but had only acquired a user right. |
3. |
Erred in law in confirming the levy of interest u/s 201(1A) of the Act by completely disregarding the provisions of the Act". |
2. Vide letter dated 13.06.2012, the assessee has also filed the following additional grounds of appeal:—
"4. Without prejudice to above grounds and without prejudice to the contentions under the provisions of relevant Double Tax Avoidance Agreements applicable to the above grounds of appeal, the Appellant submits that no tax could have been deducted at source in anticipation of retrospective amendments to the Income-tax Act, 1961 at a later date and therefore, the appellant pleads that it is impossible to make deduction of tax at source on the payments made prior to retrospective amendments made to the Income- tax Act, 1961.
The appellant therefore prays that this Hon'ble Bench be pleased to:
| 1. |
Admit the additional ground of appeal raised above |
2. |
Hear and adjudicate on the same |
3. |
Pass any other order that may be required in the circumstances of the case and render justice". |
3. Brief facts of the case are that the assessee company i.e. M/s. Qualcomm India Private Limited is a subsidiary of QUALCOMM Inc, San Diego, USA. Qualcomm group is engaged in the design, development, manufacture and marketing of digital wireless telecommunication products and services based on its Code Division Multiple Access (CDMS) technology. QIPL operates through its units in Hyderabad, Bangalore, Mumbai and New Delhi and is engaged in providing the software design, development and testing services to its group companies. QIPL delivers its products to Qualcomm Inc, USA at cost plus 15% consideration.
4. A survey u/s 133A of the I.T. Act has been conducted on 19.01.2009 in the business premises of the assessee to examine the assessee's compliance of TDS provision. During the said survey, from the ledger extracts of the assessee company, it has been found that QIPL has made several foreign remittances without deducting tax u/s 195 of the I.T. Act. The AO observed that the assessee has made payment without deducting tax for use of software licenses to various companies in USA, UK, and Germany etc. It was the case of the assessee that the payment is for purchase of the copyrighted article and therefore, the deduction of tax at source was not necessary. However, the AO held that where the license is given for the use of a copyright, it is in the nature of royalty, both under the Indian Income Tax Act and the DTAA between India and the vendor countries. He, therefore, held that the payments are in the nature of 'royalty' and TDS was required to be made. Further, he also observed that along with the licenses are the 'software support services' rendered by those companies to the assessee and since the payment for the use of the software itself have been treated as royalty, he held that the payments for support services are also in the nature of 'Fees for Technical Service' (FTS in short) and that the TDS is required to be made from such payment. Therefore, he treated the assessee as the "assessee in default" u/s 201(1) and also levied the interest u/s 201(1A) of the Act. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us.
5. It is seen that the assessee has raised grounds of appeal only against the order u/s 201(1) and 201(1A) in so far as the non deduction of TDS for purchase of copyrighted software. According to the learned Counsel for the assessee, the assessee has purchased the licensed software which has been used for discharge of its services to its AEs and there is no transfer of ownership or the right to use the copyright to the assessee. Therefore, it is not in the nature of royalty and no TDS was liable to be made. He also placed reliance upon the judgment of the Hon'ble Delhi High Court in the case of Pr. CIT v. M. Tech India (P) Ltd. [2016] 381 ITR 31/238 Taxman 178/67 taxmann.com 245 wherein after considering the decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132, it was held that where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product, rather than consideration for use of the patents or copyrights. The learned DR, on the other hand, supported the orders of the authorities below.
6. Having regard to the rival contentions and the material on record, we find that the software allegedly purchased by the assessee are the end user software license packages and the remittances are to companies in various countries, such as USA, UK, Germany, Japan, Singapore etc. The copies of the invoices are produced in the form of a paper book and a glance through them shows that the payments are for purchase of End User License packages. The assessee gets the right to use the product. Thus, it can be seen that what the assessee has been granted is the license to use the software to test whether the wireless equipments are working according to the desired specifications. Thus, it can be see that the software is for assisting the assessee in rendering its services of software development and testing services to its group companies. Thus, these softwares are, in a way, the tools used the assessee. By the issuance of license to use the software, it cannot be said that the assessee has been granted a right to utilize the copyright embedded in the software, but it is seen that the assessee has been granted only a right to use the software product. We agree with the assessee's contention that the software purchased by the assessee is the copyrighted articles and cannot be construed as the license to use the copyright itself. In view of the same, we find that this issue is covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of M.Tech India (P.) Ltd. (supra). The relevant paragraphs of the said decision are reproduced hereunder for ready reference:—
"12. In the cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh: (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty'. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.
13. A Coordinate Bench of this Court has also expressed a similar view in the case of Infrasoft (surpa). In that case, the Revenue sought to tax the receipts on sale of licensing of certain software as royalty. The Tribunal held that there was no transfer of rights in respect of the copyright held by the Assessee in the software and it was a case of mere transfer of copyrighted article. This Court concurred with the Tribunal and held that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income.
14. Insofar as the reliance placed by the Revenue on the decision of the Karnataka High Court in Samsung Electronics Co. (supra) is concerned, a Coordinate Bench of this Court in Infrasoft (supra) has unequivocally expressed its view that it was not in agreement with that decision. Thus, the said decision is of no assistance to the Revenue in this case.
15. In another case, Dynamic Vertical Software India P. Ltd. (supra), this Court had reiterated the view that payment made by a reseller for the purchase of software for sale in the Indian market could by no stretch be considered as royalty".
Further, since the payment for the licensed software has been treated as not 'royalty' but payments for purchase of software, the payment for 'support services' also cannot be treated as royalty.
7. In the result, assessee's grounds of appeal are allowed.
8. The additional ground of appeal is that the assessee cannot be expected to have deducted tax at source in anticipation of the retrospective amendment to the I.T. Act at a later date. We find that none of the Officers below have applied the amended provisions and therefore, this additional ground of appeal is misconstrued. In view of the same, the additional ground of appeal is not admitted and the assessee's appeals are allowed.
9. As regards the assessee's appeals for the A.Ys 2007- 08, 2008-09 and 2009-10 are concerned, common issues have been raised in all the appeals. For the sake of ready reference, the grounds of appeal for the A.Y 2007-08 are reproduced hereunder:
"Each of the grounds given below is independent and without prejudice to the other grounds of appeal preferred by the Appellant.
On the facts and in the circumstances of the case, the learned CIT (A)-V Hyderabad:
4. Erred in confirming the order of the learned ADIT (International Taxation)-II Hyderabad (hereinafter referred to as ('ADIT') u/s 201 & 201(1A) r.w.s. 195 of the I.T. Act, 1961 ('the Act') dated March 31, 2009, which is unjustified, erroneous and needs to be summarily cancelled.
2. Erred in upholding the order of learned ADIT, that the payments made to Verizon Business, USA for availing leased circuit line services were made for the use of scientific or commercial equipment and hence taxable as royalty u/s 9(1)(vi) of the Act and the Article 12(3) of the India-USA Double Tax Avoidance Agreement ('the India-USA tax treaty').
3. Erred in upholding the order of learned ADIT, that the impugned payments for purchase of software is for use of or 'right to use copyright' and hence is taxable as royalty u/s 9(1)(vi) of the Act and the respective double tax avoidance agreements between India and the country, where the vendors are resident without appreciating the fact that the Appellant had not acquired any right to use the copyright but had only acquired a user right.
4. Erred in upholding the order of learned ADIT, that the impugned payments for software support services as fees for technical services taxable u/s 9(1)(vi) of the Act and under the respective double tax avoidance agreements between India and the country, where the vendors are resident"
10. Brief facts are that during the survey u/s 133A of the Act conducted on 19.01.09 referred to in the appeal for A.Y 2006- 07 in the above paragraphs, it was found that the assessee has made remittance to Verizon Business Services, USA for 'leased circuit line charges' without deduction of tax at source. During the proceedings u/s 201(1) and 201(1A) of the Act, the AO observed that Qualcomm Inc, USA has entered into an agreement with Verizon i.e 'Verizon Business Services Agreement' on 10.05.2006 for provision of 'leased circuit line services' and this agreement consists of general terms along with technical specifications of these lines, the service level, pricing schedule and rebates etc. He also observed that as per clause (i) of the agreement, Verizon provides Vice Over IP Service, Network Access, Private Line- Metro Access Service, Private Line-US Private Line Service, Internet dedicated service, GigE Port only services, Internet Dedicated Ethernet Service, Internet Dedicated Managed Service, Managed WAN Service, Private IP Domestic, Private IP- International, Customer Premises Equipment etc. He also observed Verizon provides a network design consultant who will create a Customer Design Document (CDD) based on the Statement Of Requirements (SDR) agreed to by the customer.
11. After going through the 'Verizon Business Services Agreement' and various clauses thereof, the AO was of the opinion that the Verizon has provided connectivity facility which mainly consists of advanced connectivity network and equipments which have been connected through the under-sea cable and further connected by the routers and digital circuit. Thus, according to him, connectivity is to Band Connectivity upto the premises of the customer's locations and this connectivity helps in communicating and exchange of data and voice services. Further, he also went through the customer equipment agreement and observed that Verizon is providing highly technical equipment, which is customer specific and exceptionally designed for assessee's requirements. Therefore, he was of the opinion that the assessee is making payment for the scientific or commercial equipment and therefore, falls under clause (iva) of section 9(1)(vi) of the Act and falls within the category of 'royalty'. Since the assessee has not deducted tax at source while remitting the payment, the AO treated the assessee as "an assessee in default" u/s 201(1) and also levied interest u/s 201(1A) of the Act. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in 2nd appeal before us.
12. The learned Counsel for the assessee while reiterating the submissions made by the assessee before the authorities below has submitted that the business service agreement is between Verizon Business, USA and the Qualcomm Inc, USA and the assessee is only a beneficiary of such an agreement. He has also drawn our attention to various clauses of the agreement to demonstrate that 'providing of the equipments at the customers' premises is limited to the territory of the USA and not elsewhere. Therefore, according to him, even if certain equipment is provided by Verizon Business, USA to the group company, it is at USA and not to the assessee company in India. It is submitted by him that the service provided by Verizon to the assessee is only Bandwidth services and does not involve any right to use the scientific or commercial equipment as alleged by the AO. In support of his contentions that the leased circuit line charges are internet and Bandwidth services and payments for such services is not royalty, the learned Counsel for the assessee placed reliance upon the following judgments:—
| (a) |
Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168 (Delhi). |
(b) |
CIT v. Estel Communications (P) Ltd. [2009] 318 ITR 185 (Delhi) |
(c) |
B4U International Holdings Ltd. v. Dy. CIT [2012] 21 taxmann.com 529/52 SOT 545 (Mum.) |
(d) |
Infosys Technologies Ltd. v. Dy. CIT [2011] 45 SOT 157/10 taxmann.com 1 (Bang.). |
Thus, according to the learned Counsel for the assessee, the order u/s 201(1) and 201(1A) has to be set aside. The learned DR, on the other hand, supported the orders of the authorities below and also filed a copy of the statement of Shri Sahet Sashikant Thakoor, the Manager, IT with QIPL, recorded during the course of survey proceedings on 19.01.2009 in support of the findings of the authorities below that Verizon provided scientific or commercial equipment to the assessee.
13. Having regard to the rival contentions and the material on record, we find that Verizon Business, USA, has entered into an agreement with Qualcomm Inc, USA and the assessee being a group company of Qualcomm of USA, is also receiving services from Verizon Business, USA. From the nature of the services rendered by Verizon Business, it is seen that these are basically internet or bandwidth services provided to facilitate the assessee in discharge of its obligations to its group companies i.e. providing software design, manufacture and testing services to its group companies through the bandwidth services provided by Verizon. The bandwidth services definitely require certain sophisticated equipment which has to be installed at the customers' premises. It is the contention of the assessee that the equipment provided at the customers' premises is in the nature of 'modem' and 'routers' which cannot be considered as scientific equipments as defined u/s 9(1)(vi) of the Act and further it is also stated that the equipment is to be provided at the customer's premises in USA only and not outside USA. Therefore, the undersea cables and the routers etc, which are part of the equipment are not the customer's equipment but rather it is the equipment installed and used by Verizon Business Services, USA for rendering their services of providing bandwidth or internet services to its customers worldwide. It is stated that the internet facility to be provided by Verizon USA to its customers across the world requires sophisticated and complex equipments, but it cannot be said that the assessee is given an exclusive right to use those equipments for which it is making the payment. Further, when we go through the statement of Mr. Thakoor (referred above), we find that the assessee is also provided with CPE (Customer Premises Equipment) by Verizon through its partner in India. It is not just network connection but the equipment required to access the network connection. From the CPE agreement, it is seen that a customer may purchase or take on rent/lease the CPE. The customer may also provide its own CPE if approved by Verizon and maintenance is done by Verizon subject to the customer providing the necessary information to Verizon. Therefore, it is clear that the CPE is not personalized/sophisticated modified equipment for specific and exclusive use of the assessee. It is a sophisticated product, but the payment made by the assessee cannot be said to be for use of scientific or commercial equipment within the meaning of 'royalty' under the Indian Income Tax Act.
14. In the case of Asia Satellite Telecommunications Co. Ltd (supra), the Hon'ble Delhi High Court was considering the case of a lease of transponder capacity to TV channels to a non resident and the Hon'ble Delhi High Court has held that the process carried on in the Transponder in receiving signal and transmitting the same, is an inseparable part of the process of the satellite and that process is utilized only by the person who is in control thereof and therefore, the payment made for use of such a property cannot be treated as royalty.
15. In the case of Estel Communications (P) Ltd (supra), the Hon'ble Delhi High Court has held that the use of internet facility may require sophisticated equipments, but that does not mean that the technical services were rendered by the non-resident to the assessee and there being no privity of contract between the customers of the assessee and the non residents, the conclusion as arrived by the Tribunal that no technical services were provided by the non-resident to the assessee within the meaning of section 9(1)(vii) is justified.
16. The Coordinate Bench of the Tribunal in the case of Infosys Technologies Ltd (supra) has also held that the payments towards the service providers to AT&T or MCI Telecommunications are for the use of bandwidth provided for down linking signals in the USA and are not in the nature of consultancy or managerial services nor is it for the use of right to use industrial, commercial or scientific equipment and hence not royalty.
17. We find that all the above cited judgments are very much applicable to the facts of the case before us and respectfully following the said decisions, we hold that the payments made to Verizon Business USA for providing internet and bandwidth services and also providing CPE to the assessee is not in the nature of royalty and therefore, TDS provisions are not applicable.
18. As regards the other ground relating to the payment made for purchase of software and software support services being treated as royalty, we find that these issues have arisen in the assessee's appeal for the A.Y 2007-08 for and the detailed reasons given by us in the Para 6 above, we hold that these payments are not in the nature of royalty and the TDS provisions u/s 195 are not applicable. The assessee has raised additional ground of appeal as raised for the A.Y 2006-07 and for the reasons given in Para 8 above, the additional ground is not admitted for these years also.
19. In the result, assessee's appeals are allowed.