Qualcomm India Private Limited, Hyderabad V. Asst. DIT, International Taxation-II, Hyderabad

ITA 1664/HYD/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6066 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-06-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 23-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E SUNIL BABU
• Keywords: Double taxation relief; Retrospective amendment
• Section: 133A; 201(1)

Judgement Text

ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS.1664 TO 1667/HYD/2011 (ASSESSMENT YEARS: 2006-07 TO 2009-10) M/S. QUAOLCOMM INDIA PRIVATE LIMITED HYDERABAD PAN:AAACQ 0231 C VS ASSTT. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)- II, HYDERABAD FOR ASSESSEE : SHRI RAVI BHARADWAJ FOR REVENUE: SHRI K.E. SUNIL BABU, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. ALL THE FOUR APPEALS ARE ASSESSEES APPEALS FOR THE A.YS 2006-07 TO 2009-10. IN THE ASSESSEES APPEAL FOR TH E 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 DATE OF HEARING : 09.08.2016 DATE OF PRONOUNCEMENT : 28.10.2016 ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 2 OF 14 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 A LSO 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 ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 3 OF 14 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 CO MPANY I.E. M/S. QUALCOMM INDIA PRIVATE LIMITED IS A SUBSI DIARY OF QUALCOMM INC, SAN DIEGO, USA. QUALCOMM GROUP IS ENG AGED IN THE DESIGN, DEVELOPMENT, MANUFACTURE AND MARKETING OF DIGITAL WIRELESS TELECOMMUNICATION PRODUCTS AND SERVICES BA SED ON ITS CODE DIVISION MULTIPLE ACCESS (CDMS) TECHNOLOGY. QI PL OPERATES THROUGH ITS UNITS IN HYDERABAD, BANGALORE, MUMBAI A ND NEW DELHI AND IS ENGAGED IN PROVIDING THE SOFTWARE DESI GN, DEVELOPMENT AND TESTING SERVICES TO ITS GROUP COMPA NIES. 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 CONDU CTED ON 19.01.2009 IN THE BUSINESS PREMISES OF THE ASSES SEE TO EXAMINE THE ASSESSEES COMPLIANCE OF TDS PROVISION. DURING THE SAID SURVEY, FROM THE LEDGER EXTRACTS OF THE ASSESS EE COMPANY, IT HAS BEEN FOUND THAT QIPL HAS MADE SEVERAL FOREIGN R EMITTANCES WITHOUT DEDUCTING TAX U/S 195 OF THE I.T. ACT. THE AO OBSERVED THAT THE ASSESSEE HAS MADE PAYMENT WITHOUT DEDUCTIN G TAX FOR USE OF SOFTWARE LICENSES TO VARIOUS COMPANIES IN US A, UK, AND GERMANY ETC. IT WAS THE CASE OF THE ASSESSEE THAT T HE PAYMENT IS FOR PURCHASE OF THE COPYRIGHTED ARTICLE AND THEREFO RE, THE DEDUCTION OF TAX AT SOURCE WAS NOT NECESSARY. HOWEV ER, 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 INC OME TAX ACT AND THE DTAA BETWEEN INDIA AND THE VENDOR COUNTRIES . HE, ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 4 OF 14 THEREFORE, HELD THAT THE PAYMENTS ARE IN THE NATURE OF ROYALTY AND TDS WAS REQUIRED TO BE MADE. FURTHER, HE ALSO OBSERV ED THAT ALONG WITH THE LICENSES ARE THE SOFTWARE SUPPORT S ERVICES RENDERED BY THOSE COMPANIES TO THE ASSESSEE AND SIN CE THE PAYMENT FOR THE USE OF THE SOFTWARE ITSELF HAVE BEE N TREATED AS ROYALTY, HE HELD THAT THE PAYMENTS FOR SUPPORT SERV ICES 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. T HEREFORE, 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. AG GRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEA L 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 COPYRIGHTE D 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 N O TRANSFER OF OWNERSHIP OR THE RIGHT TO USE THE COPYRIGHT TO THE ASSESSEE. THEREFORE, IT IS NOT IN THE NATURE OF ROYALTY AND N O TDS WAS LIABLE TO BE MADE. HE ALSO PLACED RELIANCE UPON THE JUDGME NT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF PR. CIT-6 V S. M. TECH INDIA P LTD IN ITA NO.890/2015 DATED 19.01.2016 WHE REIN AFTER CONSIDERING THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF TATA CONSULTANCY SERVICES VS. ANDHRA PRADESH, RE PORTED IN (2004) 271 ITR 401(S.C), IT WAS HELD THAT WHERE PAY MENTS ARE MADE TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPY RIGHTED, THE CONSIDERATION PAID WOULD HAVE TO BE TREATED AS A PA YMENT FOR PURCHASE OF THE PRODUCT, RATHER THAN CONSIDERATION FOR USE OF THE ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 5 OF 14 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 M ATERIAL ON RECORD, WE FIND THAT THE SOFTWARE ALLEGEDLY PURC HASED 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 TH E INVOICES ARE PRODUCED IN THE FORM OF A PAPER BOOK AND A GLANCE T HROUGH THEM SHOWS THAT THE PAYMENTS ARE FOR PURCHASE OF END USE R LICENSE PACKAGES. THE ASSESSEE GETS THE RIGHT TO USE THE PR ODUCT. THUS, IT CAN BE SEEN THAT WHAT THE ASSESSEE HAS BEEN GRANTED IS THE LICENSE TO USE THE SOFTWARE TO TEST WHETHER THE WIR ELESS EQUIPMENTS ARE WORKING ACCORDING TO THE DESIRED SPE CIFICATIONS. THUS, IT CAN BE SEE THAT THE SOFTWARE IS FOR ASSIST ING THE ASSESSEE IN RENDERING ITS SERVICES OF SOFTWARE DEVELOPMENT A ND TESTING SERVICES TO ITS GROUP COMPANIES. THUS, THESE SOFTWA RES ARE, IN A WAY, THE TOOLS USED THE ASSESSEE. BY THE ISSUANCE O F LICENSE TO USE THE SOFTWARE, IT CANNOT BE SAID THAT THE ASSESSEE H AS BEEN GRANTED A RIGHT TO UTILIZE THE COPYRIGHT EMBEDDED IN THE SO FTWARE, BUT IT IS SEEN THAT THE ASSESSEE HAS BEEN GRANTED ONLY A RIGH T TO USE THE SOFTWARE PRODUCT. WE AGREE WITH THE ASSESSEES CONT ENTION THAT THE SOFTWARE PURCHASED BY THE ASSESSEE IS THE COPYR IGHTED ARTICLES AND CANNOT BE CONSTRUED AS THE LICENSE TO USE THE C OPYRIGHT ITSELF. IN VIEW OF THE SAME, WE FIND THAT THIS ISSUE IS COV ERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE DELHI H IGH COURT IN THE CASE OF M.TECH INDIA (P) LTD (CITED SUPRA). THE RELEVANT PARAGRAPHS OF THE SAID DECISION ARE REPRODUCED HERE UNDER FOR READY REFERENCE: ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 6 OF 14 12. IN THE CASES WHERE AN ASSESSEE ACQUIRES THE RIG HT TO USE A SOFTWARE, THE PAYMENT SO MADE WOULD AMOUNT TO ROYALTY. HOWEVE R IN CASES WHERE THE PAYMENTS ARE MADE FOR PURCHASE OF SOFTWARE AS A PRODUCT, THE CONSIDERATION PAID CANNOT BE CONSIDERED TO BE FOR U SE OR THE RIGHT TO USE THE SOFTWARE. IT IS WELL SETTLED THAT WHERE SOFTWAR E 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 PRADE SH 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 S ALES TAX UNDER THE SAID ACT. CLEARLY, THE CONSIDERATION PAID FOR PURCHASE O F GOODS CANNOT BE CONSIDERED AS ROYALTY. THUS, IT IS NECESSARY TO M AKE A DISTINCTION BETWEEN THE CASES WHERE CONSIDERATION IS PAID TO AC QUIRE THE RIGHT TO USE A PATENT OR A COPYRIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIRE PATENTED OR A COPYRIGHTED PRODUCT/MATERIAL. IN CASE S WHERE PAYMENTS ARE MADE TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED, THE CONSIDERATION PAID WOULD HAVE TO BE TREATED AS A PA YMENT FOR PURCHASE OF THE PRODUCT RATHER THAN CONSIDERATION FOR USE OF THE PATENT OR COPYRIGHT. 13. A COORDINATE BENCH OF THIS COURT HAS ALSO EXPRE SSED A SIMILAR VIEW IN THE CASE OF INFRASOFT (SURPA). IN THAT CASE, THE RE VENUE SOUGHT TO TAX THE RECEIPTS ON SALE OF LICENSING OF CERTAIN SOFTWARE A S ROYALTY. THE TRIBUNAL HELD THAT THERE WAS NO TRANSFER OF RIGHTS IN RESPEC T OF THE COPYRIGHT HELD BY THE ASSESSEE IN THE SOFTWARE AND IT WAS A CASE O F 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 O N THE DECISION OF THE KARNATAKA HIGH COURT IN SAMSUNG ELECTRONICS CO. (SU PRA) IS CONCERNED, A ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 7 OF 14 COORDINATE BENCH OF THIS COURT IN INFRASOFT (SUPRA) HAS UNEQUIVOCALLY EXPRESSED ITS VIEW THAT IT WAS NOT IN AGREEMENT WIT H THAT DECISION. THUS, THE SAID DECISION IS OF NO ASSISTANCE TO THE REVENU E IN THIS CASE. 15. IN ANOTHER CASE, DYNAMIC VERTICAL SOFTWARE INDI A 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 TREAT ED AS ROYALTY. 7. IN THE RESULT, ASSESSEES GROUNDS OF APPEAL ARE ALLOWED. 8. THE ADDITIONAL GROUND OF APPEAL IS THAT THE ASSE SSEE CANNOT BE EXPECTED TO HAVE DEDUCTED TAX AT SOURCE I N ANTICIPATION OF THE RETROSPECTIVE AMENDMENT TO THE I.T. ACT AT A LATER DATE. WE FIND THAT NONE OF THE OFFICERS BELOW HAVE APPLIED T HE AMENDED PROVISIONS AND THEREFORE, THIS ADDITIONAL GROUND OF APPEAL IS MISCONSTRUED. IN VIEW OF THE SAME, THE ADDITIONAL G ROUND OF APPEAL IS NOT ADMITTED AND THE ASSESSEES APPEALS A RE ALLOWED. 9. AS REGARDS THE ASSESSEES APPEALS FOR THE A.YS 20 07- 08, 2008-09 AND 2009-10 ARE CONCERNED, COMMON ISSUE S HAVE BEEN RAISED IN ALL THE APPEALS. FOR THE SAKE OF READ Y 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. ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 8 OF 14 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 A SSESSEE HAS MADE REMITTANCE TO VERIZON BUSINESS SERVICES, USA F OR LEASED ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 9 OF 14 CIRCUIT LINE CHARGES WITHOUT DEDUCTION OF TAX AT S OURCE. DURING THE PROCEEDINGS U/S 201(1) AND 201(1A) OF THE ACT, THE AO OBSERVED THAT QUALCOMM INC, USA HAS ENTERED INTO AN AGREEMEN T WITH VERIZON I.E VERIZON BUSINESS SERVICES AGREEMENT O N 10.05.2006 FOR PROVISION OF LEASED CIRCUIT LINE SERVICES AND THIS AGREEMENT CONSISTS OF GENERAL TERMS ALONG WITH TECHNICAL SPEC IFICATIONS OF THESE LINES, THE SERVICE LEVEL, PRICING SCHEDULE AN D REBATES ETC. HE ALSO OBSERVED THAT AS PER CLAUSE (I) OF THE AGREEME NT, VERIZON PROVIDES VICE OVER IP SERVICE, NETWORK ACCESS, PRIV ATE LINE- METRO ACCESS SERVICE, PRIVATE LINE-US PRIVATE LINE SERVIC E, INTERNET DEDICATED SERVICE, GIGE PORT ONLY SERVICES, INTERNE T DEDICATED ETHERNET SERVICE, INTERNET DEDICATED MANAGED SERVIC E, MANAGED WAN SERVICE, PRIVATE IP DOMESTIC, PRIVATE IP- INTER NATIONAL, CUSTOMER PREMISES EQUIPMENT ETC. HE ALSO OBSERVED V ERIZON PROVIDES A NETWORK DESIGN CONSULTANT WHO WILL CREAT E A CUSTOMER DESIGN DOCUMENT (CDD) BASED ON THE STATEMENT OF REQ UIREMENTS (SDR) AGREED TO BY THE CUSTOMER. 11. AFTER GOING THROUGH THE VERIZON BUSINESS SERVI CES 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 EQUIP MENTS 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 CUSTOMERS LOCATIONS AND THIS CONNECTIVITY HELPS IN COMMUNICATING AND EXCHANGE OF DATA AND VOICE SERVICES. FURTHER, HE ALSO WENT THROUGH THE CUSTOMER EQUIPMENT AGREEMENT AND OBSERV ED THAT VERIZON IS PROVIDING HIGHLY TECHNICAL EQUIPMENT, WH ICH IS CUSTOMER SPECIFIC AND EXCEPTIONALLY DESIGNED FOR ASSESSEES REQUIREMENTS. ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 10 OF 14 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 N OT 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 PREFERR ED AN APPEAL BEFORE THE CIT (A) WHO CONFIRMED THE ORDER OF THE A O AND THE ASSESSEE IS IN 2 ND APPEAL BEFORE US. 12. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE REIT ERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUT HORITIES BELOW HAS SUBMITTED THAT THE BUSINESS SERVICE AGREEMENT I S 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 AGREE MENT TO DEMONSTRATE THAT PROVIDING OF THE EQUIPMENTS AT TH E CUSTOMERS PREMISES IS LIMITED TO THE TERRITORY OF THE USA AND NOT ELSEWHERE. THEREFORE, ACCORDING TO HIM, EVEN IF CERTAIN EQUIPM ENT IS PROVIDED BY VERIZON BUSINESS, USA TO THE GROUP COMPANY, IT I S AT USA AND NOT TO THE ASSESSEE COMPANY IN INDIA. IT IS SUBMITT ED 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 SUPPO RT OF HIS CONTENTIONS THAT THE LEASED CIRCUIT LINE CHARGES AR E INTERNET AND BANDWIDTH SERVICES AND PAYMENTS FOR SUCH SERVICES I S NOT ROYALTY, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANC E UPON THE FOLLOWING JUDGMENTS: (A) ASIA SATELLITE TELECOMMUNICATIONS CO. LTD, VS. DIR (2011) 332 ITR 0340. ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 11 OF 14 (B) CIT VS. ESTEL COMMUNICATIONS (P) L:TD (318 ITR 0185) (C) B4U INTERNATIONAL HOLDINGS V. DY.CIT (32 CCH 01 51) (D) INFOSYS TECHNOLOGIES LTD VS. DY.CIT REPORTED IN (2011) 45 SOT 157. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSE SSEE, THE ORDER U/S 201(1) AND 201(1A) HAS TO BE SET ASIDE. THE LEA RNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND ALSO FILED A COPY OF THE STATEMENT OF SHRI SAHET SASHIKA NT THAKOOR, THE MANAGER, IT WITH QIPL, RECORDED DURING THE COURSE O F SURVEY PROCEEDINGS ON 19.01.2009 IN SUPPORT OF THE FINDING S 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 B EING A GROUP COMPANY OF QUALCOMM OF USA, IS ALSO RECEIVING SERVICES FROM VERIZON BUSINESS, USA. FROM THE NATURE OF THE SERVIC ES RENDERED BY VERIZON BUSINESS, IT IS SEEN THAT THESE ARE BASI CALLY INTERNET OR BANDWIDTH SERVICES PROVIDED TO FACILITATE THE ASSES SEE IN DISCHARGE OF ITS OBLIGATIONS TO ITS GROUP COMPANIES I.E. PROV IDING SOFTWARE DESIGN, MANUFACTURE AND TESTING SERVICES TO ITS GRO UP COMPANIES THROUGH THE BANDWIDTH SERVICES PROVIDED BY VERIZON. THE BANDWIDTH SERVICES DEFINITELY REQUIRE CERTAIN SOPHI STICATED EQUIPMENT WHICH HAS TO BE INSTALLED AT THE CUSTOMER S PREMISES. IT IS THE CONTENTION OF THE ASSESSEE THAT THE EQUIPMEN T 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 T HAT THE EQUIPMENT IS TO BE PROVIDED AT THE CUSTOMERS PREMISES IN USA ON LY AND NOT ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 12 OF 14 OUTSIDE USA. THEREFORE, THE UNDERSEA CABLES AND THE ROUTERS ETC, WHICH ARE PART OF THE EQUIPMENT ARE NOT THE CUSTOME RS EQUIPMENT BUT RATHER IT IS THE EQUIPMENT INSTALLED AND USED B Y VERIZON BUSINESS SERVICES, USA FOR RENDERING THEIR SERVICES OF PROVIDING BANDWIDTH OR INTERNET SERVICES TO ITS CUSTOMERS WOR LDWIDE. IT IS STATED THAT THE INTERNET FACILITY TO BE PROVIDED BY VERIZON USA TO ITS CUSTOMERS ACROSS THE WORLD REQUIRES SOPHISTICATED A ND COMPLEX EQUIPMENTS, BUT IT CANNOT BE SAID THAT THE ASSESSEE IS GIVEN AN EXCLUSIVE RIGHT TO USE THOSE EQUIPMENTS FOR WHICH I T IS MAKING THE PAYMENT. FURTHER, WHEN WE GO THROUGH THE STATEMENT O F MR. THAKOOR (REFERRED ABOVE), WE FIND THAT THE ASSESSEE IS ALSO PROVIDED WITH CPE (CUSTOMER PREMISES EQUIPMENT) BY VERIZON T HROUGH 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 PURCH ASE OR TAKE ON RENT/LEASE THE CPE. THE CUSTOMER MAY ALSO PROVIDE I TS OWN CPE IF APPROVED BY VERIZON AND MAINTENANCE IS DONE BY VERI ZON SUBJECT TO THE CUSTOMER PROVIDING THE NECESSARY INFORMATION TO VERIZON. THEREFORE, IT IS CLEAR THAT THE CPE IS NOT PERSONAL IZED/SOPHISTICATED MODIFIED EQUIPMENT FOR SPECIFIC AND EXCLUSIVE USE O F 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 TELECOMMUNICATION S CO. LTD (CITED SUPRA), THE HON'BLE DELHI HIGH COURT WAS CON SIDERING THE CASE OF A LEASE OF TRANSPONDER CAPACITY TO TV CHANN ELS 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 ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 13 OF 14 TRANSMITTING THE SAME, IS AN INSEPARABLE PART OF TH E 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 (CI TED SUPRA), THE HON'BLE DELHI HIGH COURT HAS HELD THAT THE USE OF INTERNET FACILITY MAY REQUIRE SOPHISTICATED EQUIPME NTS, BUT THAT DOES NOT MEAN THAT THE TECHNICAL SERVICES WERE REND ERED BY THE NON-RESIDENT TO THE ASSESSEE AND THERE BEING NO PRI VITY OF CONTRACT BETWEEN THE CUSTOMERS OF THE ASSESSEE AND THE NON R ESIDENTS, THE CONCLUSION AS ARRIVED BY THE TRIBUNAL THAT NO TECHN ICAL SERVICES WERE PROVIDED BY THE NON-RESIDENT TO THE ASSESSEE W ITHIN THE MEANING OF SECTION 9(1)(VII) IS JUSTIFIED. 16. THE COORDINATE BENCH OF THE TRIBUNAL IN THE CAS E OF INFOSYS TECHNOLOGIES LTD (CITED SUPRA) HAS ALSO HEL D THAT THE PAYMENTS TOWARDS THE SERVICE PROVIDERS TO AT&T OR M CI TELECOMMUNICATIONS ARE FOR THE USE OF BANDWIDTH PRO VIDED FOR DOWN LINKING SIGNALS IN THE USA AND ARE NOT IN THE NATURE OF CONSULTANCY OR MANAGERIAL SERVICES NOR IS IT FOR TH E 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 PAYM ENTS MADE TO VERIZON BUSINESS USA FOR PROVIDING INTERNET AND BAN DWIDTH SERVICES AND ALSO PROVIDING CPE TO THE ASSESSEE IS NOT IN THE NATURE OF ROYALTY AND THEREFORE, TDS PROVISIONS ARE NOT AP PLICABLE. ITA NOS 1664 TO 1667 OF 2011 QUAL COMM INDIA P LTD HYDERABAD. PAGE 14 OF 14 18. AS REGARDS THE OTHER GROUND RELATING TO THE PAY MENT MADE FOR PURCHASE OF SOFTWARE AND SOFTWARE SUPPORT SERVICES BEING TREATED AS ROYALTY, WE FIND THAT THESE ISSUES HAVE ARISEN IN THE ASSESSEES APPEAL FOR THE A.Y 2007-08 FOR AND THE DE TAILED 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 GROU ND 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 TH ESE YEARS ALSO. 19. IN THE RESULT, ASSESSEES APPEALS ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER, 2016. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 28 TH OCTOBER, 2016. VINODAN/SPS COPY TO: 1 S.R. BATLIBOI & CO. THE OVAL OFFICE, 18 ILABS CEN TRE, MADHAPUR, HYDERABAD 500081 2 ASSTT. DIRECTOR OF INCOME TAX, INTERNATIONAL TAXA TION-II, 632 C BLOCK 6 TH FLOOR, IT TOWERS, AC GUARD, HYDERABAD 500004 3 CIT (A)-V HYDERABAD 4 DIT INTERNATIONAL TAXATION, HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER