M/s Kalki Communication Technologies Limited, Bangalore V. ITO, Bangalore

ITA 1401/BANG/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89894 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 08-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 10-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR SHANKAR PRASAD
• Assessee Lawyers: NARENDRA JAIN
• Keywords: Business income; Double taxation relief; Question of law
• Section: 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH C, BANGALORE BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NOS.1401 TO 1403(B)/2013 (ASSESSMENT YEARS : 2009-10,2010-11 & 2011-12) M/S KALKI COMMUNICATION TECHNOLOGIES LTD NO.147, 2 ND FLOOR, 5 TH MAIN ROAD, HSR LAYOUT, SECTOR-7, BANGALORE-560 012 APPELLANT VS THE INCOME-TAX OFFICER, INTERNATIONAL TAXATION, WARD-1(2), BANGALORE RESPONDENT ASSESSEE BY : SHRI NARENDRA JAIN, CA REVENUE BY : SHRI DR. SHANKAR PRASAD, JCIT DATE OF HEARING : 08-04-2015 DATE OF PRONOUNCEMENT : 15-04 -2015 O R D E R PER SHRI VIJAY PAL RAO, JM: THESE THREE APPEALS BY THE ASSESSEE ARE DIRECTED A GAINST THREE SEPARATE ORDERS OF THE CIT(A) PASSED U/S 201(1) AND 201(1A) OF THE IT ACT, 1961 FOR THE ASSESSMENT YEARS 2009-10, 2010-11 & 20 1-12. 2. THE ASSESSEE HAS RAISED COMMON GROUNDS IN ALL T HE THREE APPEALS. THE GROUNDS RAISED FOR THE AY: 2009-10 ARE AS UNDER ; ITA NOS.1401-1403(BANG)2013 2 1.THE ORDER OF THE LD.CIT(A)-IV TO THE EXTENT PRE JUDICIAL TO THE ASSESSEE IS BAD IN LAW. 2. THE LD.AO HAS ERRED IN PASSING THE ORDER WITHOU T CONSIDERING ALL THE SUBMISSIONS AND/OR WITHOUT APPRECIATING PROPERLY THE FACTS AND CIRCUMSTANCES O F THE CASE AND THE LAW APPLICABLE. THE LD. CIT(A)-IV HAS ERRED IN CONFIRMING THE ACTION OF THE AO. 3. THE LD.AO AND CIT(A)-IV HAVE ERRED IN NOT APPRECIATING THAT; I) THE QPPELLANT WAS DISTRIBUTOR OF COMPUTER SOFTW ARE LICENSES AND THE IMPUGNED PAYMENTS CONSTITUTING PAY MENTS FOR THE PURPOSE OF COPYRIGHTED ARTICLE OR PRODUCT WERE NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE UNDER THE PRO VISIONS OF THE ACT AS WELL AS UNDER INDIA- USA DTAA OR INDIA- SINGAPORE DTAA. II) EVEN IN CASES WERE PURCHASE IS FOR SELF USE OR FOR INSTALLATION IN HARDWARE, THE APPELLANT HAS ONLY PU RCHASED COPYRIGHTED ARTICLE, WHICH WERE NOT LIABLE FOR DED UCTION OF TAX AT SOURCE UNDER THE PROVISIONS OF THE A/CT AS W ELL AS UNDER INDIA USA DTAA OR INDIA-SINGAPORE DTAA; AND III) THE PAYMENT FOR COMPUTER SOFTWARE LICENSES WA S NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE U/S 195 OF TH E ACT, AS THE SAID PAYMENTS DO NOT COMPRISE OF INCOME CHARGEA BLE TO TAX IN INDIA. 4. THE LD.AO AND CIT(A)-IV HAVE ERRED IN CONCLUDIN G THAT;- ITA NOS.1401-1403(BANG)2013 3 I) THE PAYMENT MADE BY THE APPELLANT IS TAXABLE ROYALTY BOTH UNDER THE ACT AD INDIA-USA DTAA OR I NDIA- SINGAPORE DTAA. II) THE PAYMENT MADE BY THE APPELLANT IS TOWARDS COPYRIGHT IN THE SOFTWARE LICENSE; III) THE PAYMENT MADE FOR TRANSFERABLE RIGHT TO US E END- USER LICENSE AND THEREFORE, IS ROYALTY; IV) THE PAYMENT IS CHARGEABLE TOP TAX IN INDIA AND THEREFORE, THE APPELLANT WAS LIABLE FOR DEDUCTION O F TAX AT SOURCE; AND V) THE APPELLANT IS ASSESSEE IN DEFAULT WITHIN THE MEANING OF SECTION 201(1). 5. THE LD. AO HAS ERRED IN LEVYING A SUM OF RS.1,80,190/- AS INTEREST U/S 201(1A). ON THE FACTS AND CIRCUMSTANCES OF CASE INTEREST IS NOT LEVIABLE. TH E APPELLANT DENIES ITS LIABILITY TO PAY INTEREST. 6. ON AN OVERALL CONSIDERATION OF THE FACTS OF THE CASE, AND THE LAW APPLICABLE, THE DEMAND DETERMINED BY TH E AO AND AS CONFIRMED BY THE CIT(A) BEING NOT CORRECT IS TO BE DELETED. 7. THE INTEREST LEVIED U/S 201(1A) OF THE ACT TO B E DELETED. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUNDS/SUB-GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. ITA NOS.1401-1403(BANG)2013 4 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINE SS OF PROVIDING COMPUTING COMMUNICATION AND CONTROL-SOLUTIONS TO TH E ENERGY AND AUTOMATION INDUSTRY. THE SOLUTIONS ARE STATED TO B E OFFERED IN THE FORM OF SALE OF TRADED SOFTWARE AND IN-HOUSE DEVELOPED PROD UCTS/SOFTWARE. THE ASSESSEE PURCHASES SHRINK-WRAP SOFTWARE FROM VARIOU S NON-RESIDENT VENDORS FOR THE PURPOSE OF DISTRIBUTION AND TRADING OF SOFTWARE TO END USERS. THE COMPUTER SOFTWARE COMES WITH SHRINK-WRAP LICENSE WHICH IS TRANSFERRED TO END USERS. THE END USERS DOWNLOAD T HE SOFTWARE FROM VARIOUS WEBSITE LINKS. THE ASSESSEE ALSO DEVELOPS HARDWARE PRODUCT AND SELL THEN WITH EMBEDDED SHRINK-WRAP SOFTWARE TO VAR IOUS CUSTOMERS. DURING THE YEAR THE ASSESSEE MADE VARIOUS PAYMENTS TO OVERSEE VENDORS WITHOUT DEDUCTION OF TAX AT SOURCE U/S 195 OF THE A CT AND CLAIMED THAT THESE PAYMENTS WERE TOWARDS PURCHASE OF COPYRIGHT A RTICLES AND THEREFORE, THERE WAS NO INCOME CHARGEABLE TO TAX IN THE HANDS OF THE RECIPIENT. THE AO WHILE PASSING THE ORDER U/S 201(1) AND 201!A) OF THE IT ACT DATED 20- 03-2012 HELD THAT THE ASSESSEE IS IN DEFAULT FOR NO N-DEDUCTION OF TAX U/S 195 OF THE IT ACT, 1961 BECAUSE THE PAYMENT MADE BY THE ASSESSEE IS A ROYALTY PAYMENT AND THEREFORE, THE SAME IS TAXABLE IN INDIA. THE ASSESSEE CHALLENGES THE ACTION OF THE AO BEFORE THE CIT(A), BUT COULD NOT SUCCEED. THE CIT(A) HAS CONFIRMED THE ACTION OF THE AO BY FO LLOWING THE JUDGMENT OF ITA NOS.1401-1403(BANG)2013 5 THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V S M/S SAMSUNG ELECTRONICS CO. LTD & OTHERS 245 CTR (KAR.) 481 AS WELL AS THE DECISION OF THIS TRIBUNAL IN THE CASE OF M/S SYNOPSIS INTERNAT IONAL LTD. 4. BEFORE US, LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE PAYMENT IN QUESTION IS NOT A ROYALTY AND THEREFORE, THE SAM E IS NOT TAXABLE IN INDIA AND CONSEQUENTIAL, NO TDS WAS REQUIRED TO BE DEDUC TED AS PER THE PROVISIONS OF THE IT ACT, 1961. IN SUPPORT OF HIS C ONTENTION HE HAS RELIED ON THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT VS M/S WIPRO LTD DATED 25-08-2010 IN ITA NO.507(BANG.)/200 2 AND SUBMITTED THAT IN AN IDENTICAL CASE, THE HONBLE HIGH COURT H AS HELD THAT THE PAYMENTS WERE NOT ROYALTY. THUS, THE LEARNED AR SUB MITTED THAT THE DIVISION BENCH OF THE HONBLE HIGH COURT HAS DIFFER ED FROM THE VIEW TAKEN IN THE CASE OF M/S SAMSUNG ELECTRONICS CO. LTD (SUP RA) AND THEREFORE, SAME VIEW HAS TO BE TAKEN IN FAVOUR OF THE ASSESSEE BY THIS TRIBUNAL. 5. ON THE OTHER HAND, LEARNED DR HAS RELIED ON THE ORDER OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE HONBLE HI GH COURT HAS REPEATEDLY TAKEN THIS VIEW IN THE CASE OF M/S SAMSU NG ELECTRONICS CO. LTD (SUPRA) AS WELL AS IN THE CASE OF /S SYNOPSIS INTER NATIONAL LTD. (SUPRA) VIDE ORDER DATED 03-08-2010. THIS HE HAS RELIED UPON TH E ORDER OF THE AUTHORITIES BELOW AS WELL AS THE DECISION OF HBLE HIGH COURT IN THE CASE OF ITA NOS.1401-1403(BANG)2013 6 M/S SAMSUNG ELECTRONICS CO. LTD.(SUPRA) AND CIT VS M/S SYNOPSIS INTERNATIONAL LTD (SUPRA) 28 TAXMAN.COM.62. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSION AS WELL AS THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE FIND THAT THE ISSUE OF PAYMENT OF ROYALTY IN THE CASE OF M/S SAMSUNG ELECTRONICS LTD. (SUPRA) HAS BEEN DECIDED BY THE HONBLE HIGH COURT AGAINST THE ASSES SEE AND IN FAVOUR OF THE REVENUE THE LEARNED AR HAS SUBMITTED THAT A DIFFERE NT VIEW HAS BEEN TAKEN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S WIPRO LTD AND THEREFORE, THE JUDGMENT IN THE CASE OF M/S SAMSUNG ELECTRONICS CO.LTD (SUPRA) SHOULD BE TREATED AS PER IN CURIAM, BECAUSE THE EAR LIER DECISION OF THE DIVISION BENCH WAS NOT FOLLOWED WHILE DECIDING THE CASE OF M/S SAMSUNG ELECTRONICS CO. LTD (SUPRA). THERE IS NO DISPUTE THAT THE TRIBUNAL IS BOUND BY THE DECISION OF THE JURISDICTIONAL HIGH CO URT AND IN CASE OF DIFFERENT VIEWS OF THE HONBLE HIGH COURT THE LATES T JUDGMENT OF THE HONBLE HIGH COURT IS BINDING. THEREFORE, THE TRIBUNAL I S NOT A FORUM TO GO INTO THE ISSUE OF DOCTORING OF PER IN CURIAM TO BE APPLI ED BY THE HONBLE HIGH COURT. THIS ASPECT IS ONLY FOR THE CONSIDERATION OF THE HONBLE HIGH COURT AND NOT FOR THIS TRIBUNAL. THE TRIBUNAL HAS TO APP LY THE DOCTORING OF PER IN CURIAM ONLY IN RESPECT OF THE DECISION OF THE TRIB UNAL HAVING DIFFERENT VIEWS, WITHOUT TAKING INTO CONSIDERATION THE EARLIE R DECISION OF THE TRIBUNAL. EVEN OTHERWISE, WE NOTE THAT THE JUDGMENT IN CASE O F M/S SYNOPSIS INTERNATIONAL LTD (SUPRA) IS A ITA NOS.1401-1403(BANG)2013 7 PRIOR JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT ON THIS ISSUE, THEN THE JUDGMENT IN CASE OF M/S WIPRO LTD (SUPRA). FU RTHER, THE ISSUE BEFORE THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F M/S WIPRO LTD (SUPRA) BEING THE LAST SUBSTANTIAL QUESTION AS REPRODUCED I N PARA-37 OF THE JUDGMENT IS AS UNDER; 37. THE LAST SUBSTANTIAL QUESTION OF LAW FAMED I S AS UNDER; WHETHER THE TRIBUNAL IS CORRECT IN ALLOWING EXPEN DITURE ON IMPORTED SOFTWARE WHEN THE EXPENDITURE PER SE IS CAPITAL IN NATURE AND IS NOT ALLOWABLE?. THUS, THE ISSUE BEFORE THE HONBLE JURISDICTIONAL H IGH COURT IN CASE OF M/S WIPRO LTD (SUPRA) WAS REGARDING ALLOWABILITY OF EXP ENDITURE OF IMPORTED SOFTWARE WHETHER CAPITAL IN NATURE OR REVENUE. THERE WAS NO ISSUE BEFORE THE HONBLE HIGH COURT WHETHER THE SAID EXPENDITURE WAS IN THE NATURE OF ROYALTY AND ONLY A PASSING REFERENCE WAS MADE BY TH E HONBLE HIGH COURT THAT THE COMMISSIONER RIGHTLY POINTED OUT THAT IT IS NOT A ROYALTY. IN ANY CASE, WHEN THE PRIOR DECISION IN CASE OF CIT VS M/S SYNOPSIS INTERNATIONAL LTD (SUPRA) AND IN THE LATEST DECISION IN THE CASE OF M/S SAMSUNG ELECTRONICS CO. LTD. (SUPRA) ON THE ISSUE OF PAYMENT BEING ROYALTY THEN THE CONTENTION RAISED BY THE LEA RNED AR IS DEVOID OF ANY MERITS. THE TRIBUNAL IN CASE OF M/S SYNOPSIS INTERNATIONAL LTD. (SUPRA) FOR THE ASSESSMENT YEAR : 2006-07, HAS DECIDED AN IDENTICAL ISSUE AGAINST THE ASSESSEE BY FOLLOWING THE JUDGMENT OF THE ITA NOS.1401-1403(BANG)2013 8 HONBLE HIGH COURT IN CASE OF M/S SAMSUNG ELECTRONI CS CO. LTD (SUPRA). THE CIT(A) HAS REPRODUCED THE RELEVANT FINDING OF T HIS TRIBUNAL IN THE CASE OF M/S SYNOPSIS INTERNATIONAL LTD. IN PARA 4.3 OF T HE IMPUGNED ORDER, AS UNDER; 4.3 A SIMILAR ISSUE ON IDENTICAL FACT WAS EXAMIN ED BY THE BANGALORE BENCH OF THE HONBLE TRIBUNAL IN SYNOPSIS INTERNATIONAL LTD. FOR ASSESSMENT YEAR 20 06-07 WHEREIN IT OBSERVED ON THE FACTS; THE ASSESSEE IS FOREIGN COMPANY INCORPORATED UNDER THE LAWS OF IRELAND AD IS ENGAGED IN THE BUSINESS O F SALE AND MARKETING OF SOFTWARE LICENCES TO CUSTOMERS WHO ARE MAINLY SOFTWARE COMPANIES IN INDIA. ACCORDING TO T HE ASSESSEE, THE SOFTWARE SOLD IN INDIA WAS SHRINK-WRA PPED SOFTWARE AND WERE LIKE ANY OTHER GOODS. THE SALE O F SUCH GOODS SHOULD GIVE RISE TO INCOME FROM BUSINESS BUT, HOWEVER, SINCE THE ASSESSEE DID NOT HAVE ANY PERMAN ENT ESTABLISHMENT (PE) IN INDIA SUCH BUSINESS INCOME WA S NOT TAXABLE. AS PER THE AO, THE CONSIDERATION RECEIVED BY THE ASSESSEE ON SALE OF SHRINK-WRAPPED SOFTWARE IN INDI A WAS NOT AKIN TO SALE OF GOODS, BUT ONLY RIGHT TO USE C OMPUTER SOFTWARE AND THE CONSIDERATION SO RECEIVED FOR GIV ING SUCH A RIGHT TO USE PARTAKES THE CHARACTER OF ROYALT Y WITHIN THE MEANING OF INDIA AND IRELAND. THEREAFTER, THE AO AFTER ANALYZING THE PROVISIONS OF THE ACT, DTAA, MEANING OF THE TERM ROYALTY VIS--VIS THE TRANSACTION, CAME TO T HE CONCLUSION THAT AN AMOUNT OF RS.15,83,59,398/- & RS.17,11,22,166/- RESPECTIVELY, RECEIVED Y THE ASSE SSEE, FROM ITS INDIA CUSTOMERS IN RESPECT OF LICENCES GRA NTED BY ITA NOS.1401-1403(BANG)2013 9 THE ASSESSEE COMPANY TO ITS INDIA CUSTOMERS, TO USE ITS COMPUTER SOFTWARE, WAS TO BE BROUGHT TO TAX AS ROY ALTY WITHIN THE MEANING OF SECTION 9(1)(VI) OF THE ACT AS WELL AS ARTICLE-12 OF THE DTAA BETWEEN INDIA AND IRELAND. HELD; IT IS NOT IN DISPUTE BEFORE US THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE HONBLE KARNATAKA HIGH C OURT IN THE CASE OF CIT VS M/S SAMSUNG ELECTRONICS CO. L TD & OTHERS 245 CTR (KAR.) 481 HAS HELD THAT PAYMENT TO NON- RESIDENT FOREIGN SOFTWARE SUPPLIERS FOR PURCHASE OF SHRINK WRAPPED SOFTWARE WAS IN THE NATURE OF ROYALTY. THE HONBLE COURT HELD THAT WHAT IS GRANTED UNDER THE L ICENSE IS ONLY A LICENSE TO USE THE SOFTWARE FOR INTERNAL BUSINESS WITHOUT HAVING ANY RIGHT FOR MAKING ANY ALTERATION OR REVERSE ENGINEERING OR CREATING SUB-LICENSE WHILE T HE COPYRIGHT CONTINUES TO BE WITH THE NON-RESIDENT AS PER THE AGREEMENT. THAT EVEN AS PER THE AGREEMENTS ENTERED INTO WITH OTHER DISTRIBUTORS AS ALSO THE END USER LICENS E AGREEMENT, EXCEPT AS EXPRESSLY SET FORTH IN THE AGR EEMENT, THE DISTRIBUTOR CANNOT RENT, LEASE, LOAN, SELL OR O THERWISE DISTRIBUTE THE SOFTWARE, DOCUMENTATION IN WHOLE OR IN PART. THUS, LICENSE IS GRANTED FOR MAKING USE OF THE COPY RIGHT IN RESPECT OF SHRINK-WRAPPED SOFTWARE/OFF-THE SHELF SO FTWARE UNDER THE RESPECTIVE AGREEMENTS WHICH AUTHORIZES THE END-USER I.E CUSTOMER TO MAKE USE OF THE COPYRIGHT IN THE SAID SOFTWARE. HENCE, THE CONTENTION OF THE ASSE SSEE THAT THERE IS ON TRANSFER OF COPYRIGHT OR ANY PART THERE OF UNDER ITA NOS.1401-1403(BANG)2013 10 THE AGREEMENTS ENTERED INTO BY THE ASSESSEE WITH TH E NON- RESIDENT WAS HELD TO BE NOT ACCEPTABLE. THE HONBL E COURT FURTHER HELD THAT FOR THE LICENSE GRANTED TO THE AS SESSEE TO MAKE COPY OF THE SOFTWARE INTO THE HARD DISK OF THE DESIGNATED COMPUTER AND TO TAKE A COPY FOR BACK UP PURPOSES, THE END USER HAS NO OTHER RIGHT AND THE S AID BACK UP WOULD HAVE CONSTITUTED AN INFRINGEMENT OF COPYRIGHT. THAT RIGHT TO MAKE COPY OF THE SOFTWARE ITSELF IS A PART OF COPYRIGHT. IT WAS FURTHER HELD THAT WHAT IS TRANSFERRED IS THE RIGHT TO USE THE SOFTWARE, AN EX CLUSIVE RIGHT WHICH THE OWNER OF THE COPYRIGHT I.E THE SUPP LIER OWNS. THUS, THE AMOUNT PAID TO THE NON-RESIDENT SU PPLIER TOWARDS THE SUPPLY TO SHRINK-WRAPPED SOFTWARE OR OF F THE SHELF SOFTWARE IS NOT THE PRICE OF CD ALONE OR SOFT WARE ALONE FOR THE LICENSE BUT A COMBINATION OF ALL. TH EREFORE, THE PAYMENTS CONSTITUTE ROYALTY WITHIN THE MEANIN G OF ART.12(3) OF THE INDO-US DTAA AND ALSO AS PER THE PROVISIONS OF SEC.9(1)(VI) AS THE DEFINITION OF RO YALTY UNDER SEEC.9(1)(VI) IS BROADER THAN THAT UNDER THE DTAA. CONSEQUENTLY, ASSESSEE WAS UNDER OBLIGATION TO DEDU CT TAX AT SOURCE UNDER SEC.195 FROM THE AMOUNT PAID TO THE FOREIGN SOFTWARE SUPPLIERS. 7. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AND THE JUDGMENT OF THE HONBLE HIGH COURT IN THE CASE OF M /S SAMSUNG ELECTRONICS CO. LTD. (SUPRA) AS WELL AS IN THE CASE OF M/S SYNOPSIS ITA NOS.1401-1403(BANG)2013 11 INTERNATIONAL LTD. (SUPRA), WE DO NOT FIND ANY REAS ON TO INTERFERE WITH THE IMPUGNED ORDER OF THE LEARNED CIT(A). 8. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 15 TH APRIL, 2015. SD/- SD/- (PRAMOD KUMAR) (VIJAY PAL R AO) ACCOUNTANT MEMBER JUDICIAL MEMBER D A T E D : 15-04-2015 PLACE: BANGALORE AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE