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Frontline Soft Limited and Call Vs. the Deputy Commissioner of - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
AppellantFrontline Soft Limited and Call
RespondentThe Deputy Commissioner of
Excerpt:
1. these appeals filed by the assessees are directed against separate orders dated 27th june 2003 of the commissioner of income-tax (appeals)-v, hyderabad for the assessment years 2002-03 and 2003-04.2. grounds raised in these appeals are common based on identical facts.therefore, both appeals are decided by this common order for the sake of convenience. to know the exact grounds of appeal, we reproduce the following grounds of appeal raised in i.t.a. no. 1080/hyd/2003 for assessment year 2002-03: 1) on the facts and circumstances of the ase, the commissioner of income-tax (appeals) erred in partly dismissing the appeal and confirming the order of the assessing officer, passed under section 201(1) and section 201(1a) of the income-tax act, 1961. 2) the commissioner of income-tax.....
Judgment:
1. These appeals filed by the assessees are directed against separate orders dated 27th June 2003 of the Commissioner of Income-tax (Appeals)-V, Hyderabad for the assessment years 2002-03 and 2003-04.

2. Grounds raised in these appeals are common based on identical facts.

Therefore, both appeals are decided by this common order for the sake of convenience. To know the exact grounds of appeal, we reproduce the following grounds of appeal raised in I.T.A. No. 1080/HYd/2003 for assessment year 2002-03: 1) On the facts and circumstances of the ase, the Commissioner of Income-tax (Appeals) erred in partly dismissing the appeal and confirming the order of the Assessing Officer, passed under Section 201(1) and Section 201(1A) of the Income-tax Act, 1961.

2) The Commissioner of Income-tax (Appeals) on the facts and the circumstances of the ase ought to have held that there was no business connection in India, and that IGTL had not earned any income taxable in India, making it mandatory for the appellant to deduct tax on the payment made to IGTL. The finding of the Commissioner of Income-tax (Appeals) that the provisions of Section 9(1)(vi) of the Income-tax Act applies is erroneous and incorrect.

3) The Commissioner of Income-tax (Appeals) ought to have appreciated that the appellant along with others was user of equipment known as 'MUX' that belonged to IGTL, and that the appellant was not obtaining ay service whatsoever from IGTL. The agreement entitled the appellant only to non-exclusive use of the equipment, and could not be termed as an agreement for provision of any service by IGTL to the appellant.

4) The Commissioner of Income-tax (Appeals) erred in applying the ratio of the decision in Asia Satellite Telecom Company Limited v. Deputy Commissioner of Income-tax 78 TTJ 489 (Del.) without appreciating that the facts were entirely different. In that case, the Tribunal has held that transponder was not a part of the Satellite, and therefore the use of Transponder w sot use of an equipment. In contract, in the present case, the appellant used the 'MUX' of IGTL on non-exclusive basis. There is no finding that 'MUX' is not equipment, and any such finding would only be perverse.

5) The Commissioner of Income-tax (Appeals) also ought to have appreciated that the assessing Officer in the ase of IGTL has exercised his discretion and issued certificate for remittance without deducting tax at source.

6) The Commissioner of Income-tax (Appeals) erred in holding that the provisions of Section 195 of Income-tax Act applied to the payments for obtaining license in respect of software programs. The Commissioner of Income-tax ought to have appreciated that in case of acquisition of license to software, the appellant virtually has ownership right excepting the right of reproduction and copying which was similar to the right acquired on purchase of a book or data in other similar forms.

7) The Commissioner erred in finding that the payment for nonexclusive right to use the software was akin to payment of royalty. The Commissioner of Income-tax failed to appreciate that in commercial parlance, one does not pay royalty to acquire limited ownership right, say for a book or software.

8) The Commissioner of Income-tax (Appeals) erred in confirming the liability to deduct tax, the liability to gross up and the liability to interest.

3. At the time of hearing, the learned A.R. submitted that ground No. 1 & 8 are general in nature. Grounds No. 2 to 5 pertain to one issue, deduction of tax at source from payment made to IGTL and grounds No. 6 & 7 are pertaining to second issue, deduction of tax at source payments made to True Dial Technologies.

4. The brief facts of the case are that the assesses company is engaged in the business of development of software and running a call centre. A survey Under Section 133A carried out as on 11.12.2002. It was noticed that certain payments in foreign currency were made to two parties in USA viz. IGTL Solutions (USA) and True Dial Technologies Inc.

(hereinafter called as IGTL & TDT in that order) during the financial years relevant to A.Y. 2002-03 and 2003-04 without deduction of tax at source under sc. 195 read with Section 9(1)(vi) & (vii) of the Act.

5. Payments made to IGTL were towards availing the connectivity facility to enable the appellant to generate and to cater to outbound PSTN calls within USA through co-located equipment comprising of multimodal switches (MUX) belonging to IGTL and located in that country with a certain bandwidth. IGTL provided MUX and ancillary equipment in USA which it owned and maintained for specific use of the appellant company. The agreement entered into with IGTL were of two types, one for availing the connectivity facility and the other for availing maintenance services like fault rectification services etc. The Assessing Officer, however, was of opinion that: (i) Payments towards use of the co-located equipment comprising of multimodal switches belonging to IGTL and for using the mux and ancillary equipment in USA was of the nature of royalty paid for the use of or right to use of an industrial commercial or scientific equipment falling under the provisions of Section 9(1)(vi) of the Act read with Article 12(3)(b) of the DTAA with USA. Similarly payments towards maintenance of these equipments in USA were in the nature of fees paid for technical services as envisaged in Section 9(1)(vii) of the Act which was covered under the definition of fees for 'included services' under Clause 4(a) of Article 12 of the DTAA with USA. ii) In terms of the provisions of Section 9(1)(vi) of the Act, any royalty paid to a non-resident was income deemed to accrue or arise in India, n this connection reference could be made to the definition of the term 'royalty' as per Clause (iva) of Explanation 2 to Section 9(1)(vi) wherein consideration paid for the use or right to use any industrial, commercial or scientific equipment have been included within the definition of 'royalty'.

iii) Similarly, the payments made for availing maintenance facilities in respect of the co-located equipment etc. in USA were covered, according to the Assessing Officer, within the meaning of the expression 'fees for technical services' as envisaged in Section 9(1)(vii) of the Act, which was income deemed to accrue or arise in India.

iv) Also Clause 2 of Article 13 of DTAA states that royalties and "fees for included services" may also be taxed in the contracting state in which they arise and according to the laws of the state.

Clause 3(b) of Article 12 of the DTAA defines royalty as payment of any kind received as a consideration for the use of, or the right to use any industrial commercial or scientific equipment.

v) Further, Clause 4 of Article 12 defines "fees for included services" as payments of any kind to any person in consideration for rendering of any technical and consultancy services if such services are ancillary and subsidiary to the application or enjoyment of the right property or information for which a payment described in paragraph 3(b) is received. The rate of taxation as per Clause 2(b) has been fixed in the DTAA at 10%.

vi) The payment made to IGTL was for the use of the equipment and maintenance of the same. From the service level agreement, it is evident that the maintenance service provided were undoubtedly of a highly technical nature. Payments made for availing such services would not fall under the purview of 'business profit' as claimed by the appellant, since Clause 6 of Article 7 of the DTAA specifically excludes all items of income which are dealt with separately in other articles from being taxed as 'business profits'. Hence, the question of considering the claim that the recipient non-resident party had no permanent establishment in India did not arise.

vii) The payment made to IGTL we chargeable to tax in India s per the provisions of Section 9(1)(vi) and Section 9(i)(vii) of the Act read with Clause 3(b) and Clause 4(a) of Article 12 of the DTAA. Further Article 7 of the DTAA had no application to the facts of the present case. The rate of 10% prescribed in Article 13 the DTAA being more beneficial to the overseas parties, tax was deductible Under Section 195 @ 10% of the gross payments, keeping in view the provisions of Section 90(2) of the Act.

Hence, according to the Assessing Officer, the assessee having not made any deduction of tax at source without making any application Under Section 195(2) before the Assessing Officer (TDS) and without ensuring that an application Under Section 195(3) was filed by the recipient to obtain necessary exemption was liable to be treated as an assessee in default, in terms of the provisions of Section 201(1) of the Act. In this regard, the Assessing Officer referred the decision of the Hon'ble apex court in the case of Transmission Corporation of A.P. Limited 239 ITR 587, according to which, in a case where o application is made Under Section 195(2) or Under Section 195(3) for obtaining a clearance for non-deduction of tax at source, payments which contain even a small component of income should be made only after deduction of appropriate tax Under Section 195. The Assessing Officer also grossed up the demand invoking the provisions of Section 195A of the Act, since as per Clause 3(h) of the connectivity agreement entered into between the appellant and IGTL, the appellant had greed to meet the liability arising towards tax deductible at source and IGTL was to be paid the specified amount, net of taxes, including tax deductible at source.

Beside, he also charged interest Under Section 201(1 A) of the Act at the appropriate rate. In respect of payments made to IGTL the A.O.raised a demand of Rs. 5,26,337/- under Section 201(1) of the Act and a demand of Rs. 79,644/-towards interest payable Under Section 201 (1A) of the Act in respect of assessment year 2002-03. A similar demand of Rs. 9,72,400/- was raised Under Section 201(1) of the Act and interest payable Under Section 201(1A) of the Act of Rs. 83,028/- in respect of assessment year 2003-2004.

6. The C.I.T. (Appeals) held that according to Section 9(1)(vi) the payments made to the non-resident was in connection with the use of the infrastructural facility of communication net work belonging to the non-residents in USA which is nothing but royalty in accordance with word "Royalty' defied in Explanation 2(iii), 2(iv(a)) and 2(vi) to Section 9(1)(v) of the Act. While deciding the appeal, the C.I.T. (A) has considered the decision of the ITAT, Delhi Bench in the case of Asia Satellite Telecommunications Co. Ltd. in ITA Nos. 166/Del/2001 & 861/Del/201 dated 1.11.2002. So as to teat the payment as royalty, the C.I.T. (Appeals) observed that once it is held that a process was being made use of by the non-resident for which a consideration was being paid, there can be no dispute that any consideration paid for availing such process would be covered within the meaning of the term 'royalty' if one take into consideration the provisions of Clause (vi) of Explanation 2 to Section 9(1)(Vi). Therefore, irrespective of whether any process is used or any services in connection with such process have been availed, the same falls within the meaning of the term 'royalty' as defined in Explanation 2. The C.I.T. has also distinguished the decision of the ITAT, Bangalore Bench cited by the assessee in the case of Wipro Limited observing as under: In that case, the Hon'ble ITAT held that when an assessee utilizes the services for link up from India through VSNL and down link the same through telecom companies outside India, most of the services are provided through customer based circuits (CBC) which are like hot lines between the assessee and its customers abroad. Though the CBC I one service, it is commercially divided into two portions viz., the Indian portion and the international portion. The services with regard to the Indian portion are provided by VSNL are STPI. The international portion is handled by the foreign companies. However, in the present case, facts are different and services rendered by the non-resident recipient are of a different kind. Hence the aforesaid decision has no application to the facts of the present case. Moreover, the appellant company, in any case, deducts tax at source Under Section 195 from payments made towards hiring of international bandwidth for transmission of data. The dispute is only in respect of the amounts paid for use of the infrastructure provided by IGTL to the appellant in order to enable it to get an access to the overseas telephonic network in USA, run by third parties. It may be made clear that IGTL is not a telecom service provider in USA such as MCI WorldCom or AT & T etc. It only provides linking infrastructure. Hence the relationship between IGTL and the appellant is not one between a telecom service provider and a subscriber.

7. The learned A.R. referring to various Clauses of the agreement executed between the assessee and the USA party (page 1, 14, 16, 22 & 25 of paper book) submitted that the entire activity relating to availing both the facilities by the assessee company took place in USA and at no stage such activities were conducted in India. Since the services were rendered outside India, it could not be said that the income had either accrued or arisen in India. Therefore, there was no question of any applicability of the provision of Section 195 read with Section 9(1)(vi) and 9(1)(vii) of the Act. The learned A.R. relied upon the decision of the ITAT, Bangalore in the case of Wipro Ltd. v. ITO 80 TTJ (Bang) 191 and submitted that there was no business connection in India and that IGTL had not earned any income taxable in India, making it mandatory for the assessee to deduct tax on the payment made to IGTL. The assessee was not obtaining any service whatsoever from IGTL.

The agreement entitled the assessee only to no exclusive use of the equipment, and would not be termed as an agreement for provision of any service by IGTL to the assessee. The A.R. has also relied upon other decisions of Bangalore Bench in the/case of Wipro Ltd. v. Income Tax Officer 92 TTJ (Bang.) 796, Software Technology Parks of India v.Income Tax Officer 3 SOT 529 (Bang.).

8. The learned D.R. submitted that source of income is generated in India, therefore, same is to be taxed in India in accordance with Section 9(1) of the Act and liable to TDS Under Section 195. The lered D.R. in support of his contention relied upon the judgment of the Hon'ble A.P. High Court in the case of EIKEM Technology v. DCIT 250 ITR 164 (AP). The learned D.R. further submitted that after insertion of Clause (iva) to the Explanation 2 to Section 9(1)(vi) w.e.f. 1.4.2002, the Royalty means consideration for use or right to use ay industrial, commercial or scientific equipment. Thus the case of the assessee is directly covered by this clause. The learned D.R. submitted that decisions relied upon by the learned D.R. are distinguishable, as in those decisions the Clause inserted to Explanation 2(iva) to Section 9(1)(vi) has not been considered. The learned D.R. further submitted that for the purpose of Section whether income is taxable in India or USA is immaterial. The assessee is liable to deduct tax at source as per Section 195. If the assessee wants no tax to be deducted at source, he is to make a request to A.O. Under Section 197. The learned D.R. in support of his contention relied upon the decision of the Apex Court in the case of Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal 33 ITR 245. The learned D.R. further submitted that since fund is going out of India, the tax has to be deduced even income is not chargeable to tax because that income may not come back to India. The learned D.R.further submitted that when the entry in the books of account made, tax has to be deducted at source. The learned D.R. in support of his arguments relied upon various decision including the decision of the Apex Court in the case of Transmission Corporation of A.P. Ltd. and Anr. 239 ITR 587. The learned D.R. has also relied upon the decision on which the A.O. has relied which are reported in 285 ITR 530, 76 ITD 37, 99 ITR 99. While making alternate submission, the learned D.R.submitted that the assessee is liable to deduct tax at source as payment is against technical services as per Section 9(1)(vii).

9. The lered D.R. submitted that Tax Residence Certificate was not produced by the assessee. The learned D.R. submitted that this contention was not raised before the lower authorities.

10. In rejoinder, the learned A.R. submitted that the judgment of the Apex Court in the case of in the case of Transmission Corporation of A.P. Ltd. and An. 239 ITR 587 was in respect of non-chargeable to tax, thus not applicable to the facts of the case under consideration. The learned A.R. further submitted that making application under Section 197 does not decide liability regarding tax deducted at source. The learned A.R. submitted that liability to tax deducted at source arises only in case income is liable to tax. The learned A.R. further submitted that contentions of the learned D.R. are incorrect to say that there is any connection with monthly collection of income made by assessee ad IGTL. The learned A.R. submitted that payment made is not for use of equipment but similar to payment as made in Wipro's case.

The learned A.R. submitted that there is no use of technical services as there is no technical person required - nor in the technology involved nor assessee is interested in technology. He is interested in end use of equipment to provide services to customers. Thus IGTL has no business connection in India.

11. We have heard the learned representatives of the parties, record perused and gone through the decisions cited. In brief, the first controversy raised in grounds No. 2 to 5 of the appeal under consideration is whether payment made by the assessee to IGTL (NRI) engaged in business of providing connectivity facility, which facilitate call centers in India (run by assessee) in India to establish outbound calls to clients/people in United States of America (USA) is liable to deduct tax at source. Section 195 says that any person responsible for paying to a no-resident, any other sum chargeable under the provision of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode whichever is earlier, deduct income-ax thereon at the rate in force The condition laid down in this provision is sum should be chargeable to tax Section 9 of the Act provides certain circumstances where income deemed to accrue or arise in India which is sum chargeable to tax The AO invoked Section 9(1)(vi) & (vii) which reads as under: (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India, or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this Clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of or the imparting of information outside India in respect of, any data documentation, drawing or specification relating to any patent invention, model design secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976 and the agreement is approved by the Central Government.

Provided further that nothing contained in this Clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment, made by a person, who is a resident, for the transfer of all or any rights (including the granting of a license) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

Explanation 1: For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement mde before the 1st day of April, 1976.

Explanation 2. - For the purpose of this Clause 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'capital gains' for- (i) the transfer of all or any rights (including the granting of a license in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark of similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use of or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literacy, artistic or scientific work including firms or video tapes for use in connection with television or tapes for use in connection with ratio broadcasting, but not including consideration for the sale distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in Sub-clauses (i) to (iv), (iva) and (v).

Explanation 3 - For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic date; (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this Clause shall apply in relalion to any income by way of fees for technical services payable in pursuance of an agreement mde before the 1st day of April 1976, and approved by the Central Government.

Explanation 1 - For the purpose of the foregoing pioviso, an agreement made on or after the 1st day of April 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government befoie that dale.

Explanation 2 - For the purposes of this clause, "fees for technical services" moans any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries." Explanation 2 to Section 9(1)(vi) defines 'Royalty' means consideration including lump sum consideration paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property and also the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. Lump sum consideration paid which is in the nature of income chargeable under the head 'capital gains' is excluded from the meaning of royalty.

12. The term 'Royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grant of that right.

13. By the Finance Act 2001, Clause (iva) has been inserted in Explanation 2 in Clause 9(1)(vi) to wide the definition of the expression 'Royalty' w.e.f. 1.4.2002. As per this clause, royalty would include consideration in respect of the use or right to use any industrial, commercial or scientific equipment.

14. In the light of the above discussion, first of all we examine the facts of the case under consideration in the light of insertion of Clause (iva) in Explanation 2 in Section 9(1)(vi) which is with effect from 1.4.2002. In the case under consideration, IGTL engaged in the business of providing connectivity. The assessee approached IGTL to provide it the connectivity facility and IGTL has agreed to provide same. Some of the terms noted from the agreement are reproduced as below: 1.1 "IGTL" Connectivity" shall mean and include providing Connectivity Facility to enable the Customer to generate and to cater to Outbound PSTN calls within USA. This shall primarily comprise of co-located equipment, set up at USA and IGTL's arrangement with local PSTN carrier, using TI Circuits from such Carriers for PSTN Connectivity within USA. 1.2 "PORT" shall mean a connection on 'IGTL Node', which shall enable outbound calling on PSTN Network at USA, for one Sat of the Customer's Call Center.

It is clarified that one port shall always be reserved for one seat in the Customer's Call Center during a specific Shift of call center Operations.

1.3 "IGTL Node" shall man and include, the suitable hardware co-located within USA along with suitable US and PSTN connectivity arrangements from public and licensed Telecom Service Providers.

Subject to charges and terms and conditions set forth herein IGTL shall provide 'IGTL Connectivity' to the Customer and the Customer shall avail 'IGTL Connectivity' for the number of Ports and shifts as set out in 'Exhibit A'. It is clarified that the Customer can avail more number of ports in multiple of 60, and the same shall be provided by IGTL subject to availability at a additional pro-rata prices.

1. IGTL hall endeavor to provide IGTL Connectivity in accordance with the Service Level Agreement, stated in Exhibit B. Provided further, IGTL shall not be liable for any malfunction or defect in equipment and/or software not supplied or serviced by IGTL.

2. In case of discontinuation of Connectivity Facility due to non working of/faults in CRM Software installed on the equipments in 'IGTL Node', IGTL shall immediately inform customer about such faults and make the equipment available to Customer or Customer's Software Vendor.

1. The Customer shall arrange for 'Customer's Circuit' before Ready for Commercial Date.

2. The customer shall, tough out the tenure of this Agreement, ensure that the all the equipment, 'Customer's Circuit' and CRM software loaded on equipments in 'IGTL Node', necessary for using IGTL Connectivity, are in working condition.

3. The Customer shall either itself or through its Campaign Provider, completes the relevant formalities under various US/India Laws which shall enable the Customer to carry out Call Center Business using IGTL Connectivity.

4. The Customer shall comply with all laws, rules, and Licenses (Indian as well as US) as applicable for the IGTL Connectivity.

From above, it is clear that IGTL was having exclusive right over equipments and allowing assessee to make use of it. Those equipments are commercial or scientific equipments. The Hon'ble ITAT, Delhi (C-Bench) in the case of Asia Satellite Telecommunications Co. Ltd. (ITA Nos. 166/Del/2001 and 861/Del/2001 dt. 01.11.2001) had occasion to examine the scope and applicability of Section 9(1)(vi) of the Act. The Hon'ble Tribunal, in that case, interpreted the provisions in an elaborate manner. While explaining the import of the word 'use', the Hon'ble Tribunal held that it would be unfair to restrict the meaning of the word 'use' to only physical use'. The plain construction of the word 'use' in the Tribunal's considered opinion refers to deriving advantage out of an item by employing the same for a set purpose.

Therefore, the physical contact with the item used is neither necessary nor important for the purpose of invoking the provisions of Section 9(1)(vi) of the Act. Further, in respect of the items referred to in Clause (iii) of Explanation 2. such a patent invention, model formula and process are intellectual properties which cannot be used by taking their possession physically. The only way of using them is by taking advantage from them. In fact, they cannot be used in any other manner except by taking advantage from them. The Hon'ble Tribunal observed that using such properties actually referred to taking advantage out of them and since the appellant used the facility available in USA belonging to he non-resident recipient, the consideration paid for the use of such properties would be covered within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) so as to be treated as royalty. Similar is the position with respect to such Clause (iva) of the said Explanation.

15. After insertion of Clause (iva) to Explanation 2 in Section 9(1)(vi) w.e.f. 1.4.2002 meaning of 'Royalty' is very wide. There are two basic conditions for application of that definitions, first is that equipment should be any industrial, commercial or scientific equipment and second is that 'use or right to use' of those equipments. In the case under consideration MUX and ancillary equipments are undoubtedly commercial equipments. The same are scientific equipment also. Thus this first condition is satisfied. In respect of second condition, we find that IGTL allowed assessee to use or given right to use MUX and ancillary equipments in USA so that the assessee get connectivity facility, which facilitate assessee to establish outbound calls to clients/people in USA. Thus the second condition is also satisfied. We, therefore, find that payment made by the assessee to the ITGL USA party is Royalty within the meaning given in Clause (iva) of Explanation 2 of Section 9(1)(vi)of the Act.

16. The judgments of Bangalore Bench cited by the learned A.R. ate distinguishable on facts. In Wipro Ltd. v. Income Tax Officer (supra) is in respect of technical services as per Section 9(1)(vii) and not a case of 'Royalty' as per Section 9(1)(vi) of the Act. Further the Bangalore Bench had no occasion to consider Clause (iva) inserted to Explanation 2 of Section 9(i)(vi) of the Act as same is inserted w.e.f.

1.4.2002 as the assessment years involved in that case were Asst. Years 1999-2000 to 2001-02. Similar is the position of the decision in the case of Wipro Ltd. v. Income Tax Officer (supra) wherein above inserted Clause has not been considered. In case of Software Technology Parks of India v. Income-tax Officer (supra), the decision of Bangalore Bench in the case of Wipro Ltd. v. Income-tax Officer 80 TTJ (Bang) 191 has been followed.

17. The argument of learned A.R. that entire activity relating to availing facilities took place in USA and at no stage such activities were conducted in India does not help the assessee after insertion of Clause (iva) to Explanation 2 of Section 9(1)(vi) of the Act. The business activities done outside India of recipient party have no permanent establishment in India, such argument have no force in view of the insertion of the above Clause (iva) to Explanation 2 of Section 9(i)(vi) of the Act.

18. Now we examine the Double Taxation Avoidance Agreement between India and United States of America for the Avoidance of Double Taxation and prevention of fiscal evasion with respect to taxes. So far as the issue under consideration is concerned, i.e. whether impugned payment is subject to tax or not, Article 12 of the said agreement clearly provides that Royalties and fees for included services arising in a contracting State and paid to a resident of other contracting state may be taxed in that other state. However, such royalties and fees for included services may also be faxed in the contracting state in which they are and according to the laws of that Stale but if the beneficial owner of the royalties or fee included services is a resident of the other contracting state, the tax so charged shall not exceed (he rate prescribed in that Article 12. In the said Article 12, the terms 'Royalties' as is defined in Clause 3 is as under: (a) payments of any kind received as a consideration for the use of or the right to use any copy right of a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for ruse in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payment of any kind received as consideration for the use of or the right to use, the industrial commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2 (c) or 3 or Article 8.

19. On considering of above definition in Clause 3(b) of Article 12 of the Double Taxation Avoidance Agreement, we find that payment made by assessee to IGTL for use of MUX is commercial and scientific equipment is 'Royalties'.

20. From above discussion we find that impugned payment is 'Royalty' in accordance with Clause (iva) to explanation 2 of Section 9(1)(vi) which is deemed to accrue or arise in India. All income accrues or arises or is deemed to accrue or arise in India is chargeable under the provisions of this Act. Section 195 provides that any person responsible for paying to non-resident any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force. We find that the impugned transaction under consideration satisfied all the conditions stipulated in section, therefore, the assessee is liable to deduct tax at source from both types of payments for availing connectivity facility and for availing maintenance services as both payments are in the nature of 'Royalty'. We confirm the order of C.I.T.(A) though on different reasons and grounds.

21. The grounds No. 6 & 7 pertaining to deduction of tax at source from ' payments made to TDT. The assessee made payments to True Dial Technologies, Florida i.e. NRI for use of true Dial Software for or 60 simultaneous network connections. The assessee claimed that the Software was purchased. The A.O. treated as 'Royalty' Under Section 9(1)(vi) and under Article 12 of DTAT between India and USA. The A.O.accordingly held that payment made is Royalty and same is liable to deduction of tax at source. The C.I.T. (A) confirmed the action of the A.O.22. We have heard the learned representatives of parties and record perused. The issue to be examined under consideration is whether impugned payment made to TDT is against purchases of software or payment of Royalty. After elaborate discussion on the issue while deciding the first ground we find that what is taxed as royalties is the amount paid as consideration for the use or the right to use and not outright purchase of the right to use as an asset. Royalty is thus consideration for the transfer of all or any right including the granting of a licence in respect of a copyright, patent, trade mark, design and model or secret formula, the use or right to use any industrial, commercial or scientific equipment (Section 9(1)(vi), explanation 2, iv(a)) transfer of the 'right in the property' is not the subject matter. It is the transfer of the 'right in respect of the property'. The two transfers are distinct and have different legal effects. In one right are purchased which enables use of those rights, while in the other the purchase is involved, only the right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject matter of his ownership. It consists of a complex of rights all of which rights are rights in property, being good against all the world and not merely against a specific person and such rights are indeterminate in duration and residuary in character.

That sum may be agreed for the transfer of one right, two rights and so on but not the ownership. Thus, the definition in respect of software etc. does not extend to the outright purchase of the right to use an asset. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and therefore, not royalty. In an outright transfer to be treated as sale/purchase of property as opposed to licence, alienation of all rights in the property is necessary. This distinction has been recognised and given effect to in the following judicial pronouncements.

The term 'royalty' has been defined in the Agreement to mean, inter alia, the payment of any kind including rentals received as a consideration for the use of or the right to use any patent, trade mark design or model, plan, secret formula or process. It is important that, in order that a payment may be treated as royalty for the purposes of Article XIII of the agreement for avoidance of Double Taxation between India and the U.K., the person who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In other words, where the transferor retains the property right in the designs, secret formula, etc. and allows the use of such right, the consideration received for such user is in the nature of royalty. Where, however, there is an outright sale or purchase, the consideration is for the transfer of such designs, secret formula, etc., and cannot be treated as royalty. (relevant headnote) In the case of secret processes, patents, special inventions, when right of exploitation is given by the owner of the inventions, patents etc., to a third party instead of outright sale, then for (he right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be correlated to the extent of exploitation. If is in this sense that licence agreements for the exploitation of patents, inventions, etc. are being entered into in modern commercial world and as part of such agreements, even knowledge derived from his own experience and technical know-how for the most economical and efficient user of the patents, inventions, etc. are parted with by the licensor to the licensee. Payments of this kind are known as royalties. This is also evident from several double taxation avoidance agreements between the Govt. of India and foreign countries such as Sweden in which the term 'Royalty' has been defined. That such payments are royalties is also evident from the definition of the word 'Royalty' in Section 9(1)(vi), Explanation 2, which was subsequently introduced by the Finance Act, 1976, with effect form June 1, 1976) (Relevant head note) 23. In OECD commentary it is stated that the character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OCED member countries has established that all but one protects rights in computer programs either explicitly or implicitly under copy right law. Although the term 'computer software' is commonly used to describe both the program in which the intellectual property rights (copy right) subsist and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the program and software which incorporates a copy of the copyrighted program.

Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a program to the sale of a product which is subject to restrictions on the use to which it is on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the case of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software. Various countries have given different treatment of royalties despite OECD recommendation. Indian DTAAs already contained provisions for taxing equipment rental as royalties, but domestic law did not have specific provisions till 2002-03. The Finance Act 2001 inserted Clause (iv)(a) in Sections 9(t)(vi), Explanation 2 to bring about a result diametrically opposite to the OCED recommendations. The said Clause is reproduced as below: (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB; 24. Where the domestic law is clear, unambiguous and does not suffer from any void or gap, the spirit or intention of international convention, under no circumstances, can override the express provisions of domestic law.

25. The Apex Court in the case of Tata Consultancy Services v. State of A.P. 271 ITR 401 (SC) held that notwithstanding the fact that computer software is intellectual property, whether it is conveyed in diskettes, magnetic tapes of C.D. Roms, whether canned or unmanned, whether it comes as part of the computer or independently, whether it is branded or unbranded, tangible or intangible, it is a commodity capable of being transmitted, transformed, delivered, stored, processed etc.

therefore it is "goods" liable to sales-tax. The above judgement is in respect of A.P. sales-tax Act. By the expedient of "deemed fiction" or "inclusive definition" Parliament and state Legislatures are competent to give a specific statute only. Such definition cannot be imported in different statutes which define the same transactions differently.

Royalty has specifically defined in Income-tax provisions, 9(1)(vi) Explanation 2 (iva). Therefore, same is only required to be considered for the purposes of income-tax. The decision in the case of Sonata Software Ltd. v. ITO 6 SOT 700 (Bangalore) is distinguishable on facts as in that case Clause (iva) top Explanation 2 to Section 9(1)(vi) inserted by the Finance Act 2001 w.e.f. 2002-03 has not been considered.

26. With the above background of discussion now we examine the facts of the case under consideration, we find that in the impugned transactions of payment to TDT was for the use of 'True Dial; Software' and not for purchases, as evident from following Clauses of terms and conditions of the agreement: Whereas, Licensee desires to become an authorised user of the Licensor's True Dial Software which is described on Exhibit A (the software) for 60 simultaneous net work connections (the "Connections") and Whereas, subject to the terms and conditions set forth in this Agreement, Licensor desires to grant Licensee a limited, contingent, right to use the Software; and Whereas, the Licensor owns the Software: and all copyrights, trade secrets, know-how and other intellectual property rights underlying the Software, including all copies of the source code; and Whereas, Licensee and Contact Management Solutions, Inc. ("CMS") have entered into that certain Agreement of even date herewith pursuant to which CMS has agreed to use its commercially " reasonable efforts to deliver to Licensee 10,800 telemarketing operator hours per month; Now, Therefore, in consideration of the mutual promises herein contained, the parties hereto agree as follows: 1. License, Subject to the terms and conditions set forth in this Agreement, Licensor hereby grants Licensee a nonexclusive license to use and execute the Software (the "License"). The License granted hereunder is limited to 60 simultaneous network connections (the "Connections") to the Software and may be increased upon the prior written agreement of Licensee and Licensor.

2. End-User Materials. Licensor shall provide Licensee with end-user manuals describing the use and operation of the Software (the "End-User Materials"). The End-User Materials are being provided solely to support Licensee's authorised use of the Software.

Licensee may copy of distribute the End-User Materials but only for its internal use with employees and agents who agree to the terms and conditions set forth herein.

3. Term of License. The term ("Term") of the License shall commence as of the License Commencement Date (as hereinafter defined) and shall continue thereafter for so long as Licensee continues to comply with the terms and conditions set forth herein. The License shall immediately terminate upon termination of this License Agreement. Upon termination or expiration of the License, Licensee shall immediately (a) cease and desist any further use of the Software and (b) return the Software, End-User Materials and any other materials relating to the Software to Licensor.

10. Proprietary Protection: Licensor shall have sole and exclusive ownership of all right, title, and interest in and to the Software and User Materials, all copies thereof, and all modifications and enhancements thereto made by it (including ownership of all copyrights and other intellectual property rights pertaining thereto), subject only to the right and license expressly granted to Licensee herein. This agreement does not provide Licensee with title or ownership of or to the Software or End User Materials, but only a right of limited use.

11. Limitations on Use, Etc. Licensee may not use, copy, modify, or distribute the Software (electronically or otherwise), or any copy, adaptation, transcription, or merged portion thereof. Licensee may not reverse assemble, reverse compile, or otherwise translate the Software, Licensee's license may not be transferred, leased.

Assigned, or sublicensed without Licensor's prior written consent, except for a transfer or the Software in its entirety to a successor in interest of Licensee's entire business who assumes the obligations of this Agreement. Licensee may not install the Software anywhere but the Equipment without Licensor's prior written consent, provided that Licensee authorises Licensor to enter Licensee's premises in order to inspect the Software and Equipment during regular business hours top verify compliance with the terms of this Agreement.

27. From above terms and conditions we find that the said payment was not for transfer of absolute assignment and ownership of 'True Dial Software'. The transaction clearly falls under the definition of 'Royalty' as defined in Section 9(1)(vi) Explanation 2 (iva). The assessee acquired only right to use of 'True Dial Software'. It is 'Royalty' and royalty payment to NRI is deemed to accrue and arises in India and therefore, payment is subject to tax deducted at sources. We, therefore, confirm the orders of the lower authorities.


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