Agfa Healthcare India Private Limited, Thane V. Deputy Director of Income-tax,

ITA 216/PUN/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9404 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 03-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S B MOREY
• Keywords: Double taxation relief; Principle of natural justice; Retrospective amendment; Commercial expediency
• Section: 133(6); 201(1); 27; 6; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUNE , , , BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO S. 216 TO 218 , 1361 & 1362 /PUN/201 4 / ASSESSMENT YEAR S : 20 0 8 - 09 TO 201 2 - 13 AGFA HEALTHCARE INDIA PRIVATE LIMITED, TECHNOSOFT KNOWLEDGE GATEWAY, 2 ND FLOOR, B - 14, ROAD NO. 1, WAGLE INDUSTRIAL ESTATE, THANE (W) 400604 PAN : AAGCA3797D ....... / APPELLANT / V S. THE DEPUTY DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION) I, PUNE, THIRD FLOOR, B.O. BHAVAN, SECTOR 17, PLOT NO. 1, PUNE SATARA ROAD, PUNE 411009 / RESPONDENT . / ITA NO S. 444 TO 446 , 1572 & 1573 /PUN/2014 / ASSESSMENT YEAR S : 2008 - 09 TO 2012 - 13 THE DEPUTY DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION) I, PUNE ....... / APPELLANT /VS. AGFA HEALTHCARE INDIA PRIVATE LIMITED, TECHNOSOFT KNOWLEDGE GATEWAY, 2 ND FLOOR, B - 14, ROAD NO. 1, WAGLE INDUSTRIAL ESTATE, THANE (W) 400604 PAN : AAGCA3797D / RESPONDENT ASSESSEE BY : SHRI GIRISH DAVE REVENUE BY : SHRI S.B. MOREY / DATE OF HEARING : 1 3 - 04 - 2017 / DATE OF PRONOUNCEMENT : 31 - 0 5 - 2017 2 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 / ORDER PER VIKAS AWASTHY, JM : TH ESE CROSS APPEALS FOR THE FIVE ASSESSMENT YEARS I.E. ASSESSMENT YEARS 2008 - 09 TO 2012 - 13 HAVE BEEN FILED BY THE ASSESSEE AND THE DEPARTMENT. THE ASSESSEE IN ITA NOS. 216, 217 & 218/PUN/2014 FOR THE ASSESSMENT YEARS 2008 - 09, 2009 - 10 AND 2010 - 11, RESPECTIVELY HAS ASSAILED THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - IT/TP, PUNE DATED 31 - 12 - 2013 COMMON FOR THE AS SESSMENT YEARS 2008 - 09, 2009 - 10 AND 2010 - 11. THE DEPARTMENT HAS FILED CROSS APPEALS AGAINST THE SAME ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IN ITA NOS. 444, 445 & 446/PUN/2014. THE ASSESSEE IN ITA NOS. 1361 & 1362/PUN/2014 FOR THE ASSESSMENT YEARS 2011 - 12 AND 2012 - 13 HAS ASSAILED THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - IT/TP, PUNE DATED 22 - 05 - 2014 COMMON FOR ASSESSMENT YEARS 2011 - 12 AND 2012 - 13. THE DEPARTMENT HAS FILED CROSS APPEALS AGAINST THE SAME ORDER OF COMMISSIONER OF INCOME TAX ( APPEALS) IN ITA NOS. 1572 & 1573/PUN/2014 . SINCE, THE ISSUE RAISED IN ALL THE RESPECTIVE APPEALS BY THE ASSESSEE AND DEPARTMENT ARE COMMON, THEREFORE, THESE APPEALS ARE TAKEN UP TOGETHER FOR ADJUDICATION AND ARE DECIDED VIDE THIS COMMON ORDER. 2. THE F ACTS OF THE CASE AS EMANATING FROM RECORD S ARE: THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING IT ENABLED DIAGNOSTIC IMAGE MANAGEMENT SOLUTIONS, HEALTHCARE IMAGING EQUIPMENT AND CONSUMABLES LIKE X RAY FILM S INCLUDING DIGITAL RADIOGRAPHY, COMPUTED RADIOGRAPHY, ETC. THE IMAGING EQUIPMENT SUPPLIED BY THE ASSESSEE REQUIRES SPECIFIC SOFTWARE TO ACTIVATE/RUN THE EQUIPMENT. THE SOFTWARE S 3 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 THAT RUN THE EQUIPMENTS ARE PRE - INSTALLED ON THE MACHINES. THE ASSESSING OF FICER IN PROCEEDINGS INITIATED U/S. 201(1) AND 201(1A) O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) HELD THAT DURING THE FINANCIAL YEAR S UNDER CONSIDERATION THE ASSESSEE HA S PAID AMOUNTS TO NON - RESIDENT S (VENDORS) SITUATED AT AUSTRALI A, CANADA AND BELGIUM FOR ACQUIRING RIGHT TO USE COMPUTER SOFTWARE , WITHOUT DEDUCTION OF TAX AT SOURCE. THE CONSIDERATION RECEIVED BY THE NON - RESIDENT PARTAKE THE CHARACTER OF RO YALTY WITHIN THE MEANING OF SECTION 9(I)(VI) OF THE ACT, AS WELL AS UNDER A RTICLE 12 OF THE DOUBLE TAX AVOIDANCE AGREEMENTS (DTAA) BETWEEN INDIA AND AUSTRALIA / CANADA / BELGIUM. THE ASSESSING OFFICER VIDE ORDERS PASSED U/S. 201(1) AND 201(1A) FOR THE ASSESSMENT YEARS UNDER APPEAL TREATED THE ASSESSEE AS ASSESSEE IN DEFAULT UNDER THE PROVISIONS OF SECTION 201(1) AND (201(1A) OF THE ACT. THE ASSESSING OFFICER HELD THAT , THE PAYMENTS RECEIVED BY THE OVERSEAS VENDORS OF THE EQUIPMENTS FROM THE ASSESSEE IN LIEU OF GRANTING RIGHT TO USE COMPUTER SOFTWARE IS LIABLE TO BE TAXED AS R OYALTY WITHIN THE MEANING OF SECTION 9(1)(VI) OF THE ACT , AS WELL AS ARTICLE 12 OF DTAA, THEREFORE, THE PROVISIONS OF SECTION 19 5 ARE ATTRACTED. SINCE, THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE ON THE PAYMENT OF SOFTWARE, THEREFORE, THE ASSESSEE IS TREATED AS ASSESSEE IN DEFAULT UNDER THE PROVISIONS OF SECTION 201(1) AND (201(1A) OF THE ACT . THE ASSESSING OFFICER COMPUTED TAX LIABILITY AND INTEREST FOR THE IMPUGNED ASSESSMENT YEARS AS UNDER : F.Y. AMOUNT P AID GROSS UP AMOUNT TDS * INTEREST U/S . 201(1A) 2007 - 08 RS.2,96,46,044/ - RS.3,34,34,132/ - RS.37,88,087/ - RS.21,97,091/ - 2008 - 09 RS.10,60,96,150/ - RS.11,85,96,833/ - RS.1,25,00,682/ - RS.66,99,439/ - 2009 - 10 RS.11,30,78,329/ - RS.12,64,21,501/ - RS.1,33,43,172/ - RS.57,59,994/ - 2010 - 11 RS.15,81,33,983/ - RS.17,83,39,893/ - RS.1,88,32,693/ - RS.56,28,800/ - 2011 - 12 RS.17,83,74,911/ - RS.20,11,67,149/ - RS.2,12,43,251/ - RS.37,13,910/ - * TDS @ 11.33% FOR F.Y. 2007 - 08 * TDS @ 10.56% FOR F.YS. 2008 - 09 TO 2011 - 12 4 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 2.1 AGAINST THE ORDER S OF ASSESSING OFFICER PASSED U/S. 201(1) AND 201(1A) OF THE ACT FOR THE RESPECTIVE ASSESSMENT YEARS, THE ASSESSEE FILED APPEALS BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE IMPUGNED ORDER UPHELD THE FINDI NGS OF ASSESSING OFFICER BY HOLDING THAT THE PAYMENTS MADE BY THE ASSESSEE FOR ACQUIRING SOFTWARE ARE IN THE NATURE OF ROYALTY AS DEFINED UNDER THE PROVISIONS OF ACT , AS WELL AS DTAA WITH THE RESPECTIVE COUNTRIES. HOWEVER, THE COMMISSIONER OF INCOME TAX ( APPEALS) MODIFIED THE ORDER OF ASSESSING OFFICER BY DIRECTING NOT TO APPLY THE PROVISIONS OF SECTION 195A AND RESTRICTING THE TAX RATE AT 10%. THE COMMISSIONER OF INCOME TAX (APPEALS) DIRECTED THE ASSESSING OFFICER NOT TO LEVY EDUCATION CESS AND SURCHARGE AS THE TOTAL TAX RATE CANNOT EXCEED THE TAX RATE PROVID ED IN DTAA. THE COMMISSIONER OF INCOME TAX (APPEALS) FURTHER DIRECTED THE ASSESSING OFFICER NOT TO LEVY SURCHARGE AND CESS ON PAYMENT MADE TO FOREIGN COMPANIES WHOSE INCOME DOES NOT EXCEED ` 1 CRORE. AGAINST THESE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) THE ASSESSEE AND THE DEPARTMENT ARE IN APPEAL BEFORE THE TRIBUNAL. 3. THE ASSESSEE HAS ASSAILED THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IN ASSESSMENT YEAR 2008 - 09 BY RAISING FOLLOWING GROUNDS OF APPEAL : THE APPELLANT OBJECTS TO THE ORDER DATED 31 DECEMBER 2013 PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - IT/TP, PUNE, ['CIT(A)'] FOR THE ASSESSMENT YEAR 2008 - 09 ON THE FOLLOWING AMONG O THER GROUNDS: 1. THE LEARNED CIT(A) ERRED IN NOT HOLDING THAT THE ORDER PASSED BY THE DEPUTY DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION) - I , PUNE ['DDIT'] IS CONTRARY TO LAW AND BARRED BY LIMITATION. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE AC TION OF THE D DIT OF TREATING THE PAYMENT FOR PURCHASE OF SOFTWARE OF RS . 2,96,46,044 AS ROYALTY. 5 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE D DIT OF TREATING THE APPELLANT AS AN ASSESSEE - IN - DEFAULT UNDER SECTION 201 (1) AND LEVYING INTEREST UNDER SECTION 201( 1 A) IN RELATION TO DEDUCTION OF TAX AT SOURCE FROM SOFTWARE PAYMENTS. 4. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE PURCHASE OF SOFTWARE IS INEXTRICABLY LINKED TO THE PURCHASE OF EQUIPMENT AND THAT THE EQUIPMENT AND SOFTWARE PUT TOGETHER CONSTITUTE ONE SINGLE PRODUCT. 5. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT DID NOT SUBMIT DOCUMENTARY EVIDENCE TO PROVE THAT SOFTWARE IS PART AND PARCEL OF PURCHASE OF EQUIPMENT. 6. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE APPELLANT'S CONTENTION THAT THERE IS NO TRANSFER OF COPYRIGHT IN THE SOFTWARE BUT IT IS THE TRANSFER OF A COPYRIGHTED ARTICLE, WHICH IS NOT TAXABLE AS ROYALTY IN TERMS OF THE TAX TREATIES BETWEEN INDIA AND BELGIUM/CANADA / AUSTRALIA. 7. THE LEARNED CIT (A) ERRED IN OBSERVING THAT MOST PROBABLY THE APPELLANT HAS CHOSEN NOT TO FURNISH THE SOFTWARE LICENSE AGREEMENT. HE ERRED IN NOT APPRECIATING THAT THERE WAS NO SOFTWARE LICENSE AGREEMENT ENTERED INTO BY THE APPELLANT WITH AGFA HEALTHCARE NV, BELGIUM. 8. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE APPELLANT CANNOT BE HELD TO BE AN ASSESSEE - IN - DEFAULT FOR NON - DEDUCTION OF TAX AT SOURCE BY VIRTUE OF A RETROSPECTIVE AMENDMENT. 9. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE SUBMISSIONS MADE BY THE APPELLANT IN THE CORRECT PERSPECTIVE. 10. THE LEARNED CIT(A) ERRED IN NOT PROVIDING A COPY OF THE REMAND REPORT ISSUED BY THE DDIT TO THE APPELLANT. 11. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER. 12. THE APPELLANT RE SERVES THE RIGHT TO AMEND, ALTER OR ADD TO THE ABOVE GROUNDS OF APPEAL . EXCEPT FOR GROUND NO. 1 , IDENTICAL GROUNDS HAVE BEEN RAISED BY THE ASSESSEE IN APPEALS FOR ASSESSMENT YEARS 2009 - 10 TO 2012 - 13. THE ISSUE RELATING TO ORDER BEING TIME BARRED HAS BEEN RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2008 - 09 ONLY. 4. THE DEPARTMENT IN ITS APPEAL FOR ASSESSMENT YEAR 2008 - 09 HAS RAISED FOLLOWING GROUNDS OF APPEAL : 6 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 1. ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, THE LD. CIT(A) WAS NOT CORRECT IN DELETI NG THE GROSSING UP U/S. 195A OF THE IT ACT, 1961 ON ACCOUNT OF AMOUNTS PAID TO FOREIGN COMPANIES UNDER THE HEAD OF ROYALTIES WITHIN THE MEANING OF SECTION 9(1)(VI) OF THE ACT AS WELL AS ARTICLE 12 OF THE DTAA BETWEEN INDIA AND AUSTRALIA/BELGIUM/CANADA. 2. ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, THE LD. CIT(A) WAS NOT CORRECT IN HOLDING THAT SINCE THE ASSESSEE DID NOT PRODUCE ANY AGREEMENT REGARDING TO GROSSING UP / NON GROSSING UP OF THE AMOUNTS LIABLE FOR DEDUCTION U/S. 195 THE A O WAS WRONG IN GROSSI NG UP THE AMOUNTS PAID. 3. THE LD CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE HAD NOT DEDUCTED TDS U/S . 195 FROM THE PAYMENT OF ROYALTY WHICH CLEARLY SHOWS THAT THE ENTIRE PAYMENT WAS MADE TO THE AE AND NO RECOVERY ON ACCOUNT OF TDS LIABILITY U/S. 195 HAS BEEN MADE BY THE ASSESSEE FROM THE AE AND HENCE IT TRANSPIRES THAT THE TDS LIABILITY IS BORNE BY THE AS SESSEE. 4. THE APPELLANT CRAVES LEAVE TO ADD TO OR MODIF Y ANY OF THE GROUNDS OF APPEAL . IDENTICAL GROUNDS HAVE BEEN RAISED BY THE DEPARTMENT IN THE OTHER ASSESSMENT YEARS UNDER APPEAL BEFORE THE TRIBUNAL. 5. SHRI GIRISH DAVE APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT ITA NO. 216/PUN/2014 FOR THE ASSESSMENT YEAR 2008 - 09 BE TREATED AS LEAD CASE AND THEREFORE, HE WOULD BE NARRATING THE FACTS THEREFROM . E XCEPT FOR THE VARIATION IN QUANTUM OF DEFAULT U/S. 201(1) AND INTEREST AMOUNTS CALCULATED U/S. 2 01(1A) OF THE ACT , THE FACTS AND GROUNDS RAISED IN THE APPEALS ARE IDENTICAL. THE LD. AR CONTENDED THAT THE ASSESSEE IS SUPPLYING IMAGING EQUIPMENTS TO HOSPITAL S AND VARIOUS DIAGNOSTIC CENTERS. THE IMAGING EQUIPMENTS /MACHINES REQUIRE SOFTWARE TO ACTIVAT E AND RUN THE EQUIPMENT S . THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT AND IS AN INSEPARABLE PART OF IMAGING EQUIPMENTS. WI THOUT SOFTWARE EQUIPMENT IS USELESS , I.E. THE IMAGING EQUIPMENT CANNOT WORK WITHOUT THE SOFTWARE. THE SOFTWARE LICENSES ARE ALWAYS OB TAINED BY THE CUSTOMERS AT THE TIME OF PURCHASE OF 7 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 EQUIPMENT , EXCEPT IN CASE OF SOFTWARE S THAT ARE PURCHASED FROM THIRD PARTIES. WHEN THE EQUIPMENT IS INSTALLED AT THE CUSTOMERS PREMISES, THE SOFTWARE IS ACTIVATED BY USING CODE PROVIDED BY THE ORIGINAL E QUIPMENT MANUFACTURER (OEM). IN SOME CASES O N THE SPECIFIC REQUEST OF THE CUSTOMERS , ADDITIONAL FEATURES IN THE EQUIPMENT ARE ADDED . THE ASSESSEE WOULD PURCHASE ADDITIONAL SOFTWARE LICENSES FROM THIRD PARTY SOFTWARE VENDORS FOR ADDITIONAL SOFTWARES. THE ASSESSEE OBTAINS ONLY A NON - EXCLUSIVE RIGHT TO USE SOFTWARE EMBEDDED IN THE EQUIPMENT. THE TITLE AND FULL OWNERSHIP OF THE SOFTWARE CONTINUES TO REMAIN WITH THE SOFTWARE VENDOR I.E. THE AGFA GROUP ENTITIES OR THE THIRD PARTY VENDOR S AS THE CASE MAY BE. THE PURCHASE OF SOFTWARE FROM AGFA GROUP ENTITIES IS INEXTRICABLY LINKED TO THE PURCHASE OF THE EQUIPMENT. 5.1 THE LD. AR CONTENDED THAT A CCORDING TO THE PROVISIONS OF SECTION 90(2) OF THE ACT , THE SOFTWARE VENDORS HAVE AN OPTION TO BE GOVERNED BY THE PRO VISIONS OF DTAA IF THEY ARE MORE BENEFICIAL TO THEM. THE SOFTWARE VENDORS IN THE CASE OF ASSESSEE ARE RESIDENTS OF BELGIUM, CANADA AND AUSTRALIA. THEY ARE ENTITLED TO BE GOVERNED BY THE BENEFICIAL PROVISIONS OF THE DTAA BETWEEN INDIA AND THEIR RESPECTIVE COUNTRIES. THE ASSESSEE MADE PAYMENT FOR PURCHASE OF SOFTWARE TO THE NON - RESIDENT SOFTWARE VENDORS WITHOUT DEDUCTING TAX AT SOURCE IN ACCORDANCE WITH THE PROVISIONS OF DTAA. THE DEPARTMENT HAS ERRED IN TREATING THE SOFTWARE SEPARATELY AND NOT AS PART OF THE EQUIPMENT . THE DEPARTMENT FURTHER ERRED IN TREATING THE PAYMENT MADE TOWARDS THE SOFTWARE AS R OYALTY . 5.2 THE LD. AR SUBMITTED THAT THE ISSUE IN PRESENT SET OF APPEALS BY THE ASSESSEE IS ; WHETHER THE SOFTWARE IS EMB EDDED IN THE EQUIPMENT OR NOT ? THE ASSESSEE HAS TIME AND AGAIN EXPLAINED BEFORE THE ASSESSING 8 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) WITH THE SUPPORT OF VARIOUS SET OF DOCUMENTS THAT THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT AND IS PART AND PARCEL OF THE EQUIPMENT . THE SOFT WARE OF ANY OTHER BRAND CANNOT BE USED IN EQUIPMENT MANUFACTURED BY AGFA TO INITIALIZE THE EQUIPMENT. THE SOFTWARE IMBEDDED IN THE IMAGING MACHINES IS MACHINE SPECIFIC AND CUSTOMER SPECIFIC. 5.3 THE LD. AR CONTENDED THAT O NE OF THE REASON TO REJECT THE C ONTENTIONS OF THE ASSESSEE BY ASSESSING OFFICER IS THAT THE ASSESSEE HAS FAILED TO FURNISH REQUISITE INFORMATION. THE LD. AR POINTED THAT FIRST NOTICE U/S. 133(6) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 05 - 03 - 2010. THE SAME IS AT PAGE 23 OF THE PAPER BO OK - I. IN RESPONSE TO THE NOTICE THE ASSESSEE GAVE DETAILED REPLY TO THE ASSESSING OFFICER IN THE PRESCRIBED FORMAT . THE REPLY OF THE ASSESSEE IS AT PAGES 24 TO 28 OF THE PAPER BOOK - I. THEREAFTER, THE DEPARTMENT W ENT INTO SLUMBER AND NO ACTION WHATSOEVER WAS TAKEN AGAINST THE ASSESSEE IN VIEW OF THE REPLY FILED. SUB SEQUENTLY, AFTER THE LAPSE OF MORE THAN TWO YEARS THE ASSESSEE RECEIVED NOTICE U/S. 201(1)/201(1A) OF THE ACT FOR FINANCIAL YEARS 2007 - 08 TO 2011 - 12 DATED 07 - 09 - 2012 SEEKING THE SAME INFORMATI ON IN THE SAME FORMAT AS WAS SOUGHT VIDE NOTICE DATED 05 - 03 - 2010. THEREAFTER, ON 09 - 10 - 2012 THE ASSESSEE RECEIVED ANOTHER NOTICE U/S. 201(1) AND 201(1A) TO FURNISH THE REASONS FOR NON - DEDUCTION OF TAX AT SOURCE U/S. 195 FOR PURCHASE OF SOFTWARE. THE ASS ESSEE VIDE REPLY DATED 17 - 10 - 2012 AT PAGE S 32 TO 46 OF THE PAPER BOOK - I FURNISHED THE REQUISITE INFORMATION IN THE PRESCRIBED FORMAT . A LONG WITH THE INFORMATION , THE ASSESSEE IN ANNEXURE B TO THE REPLY GAVE THE DETAILS OF THE TRANSACTIONS ENTERED INTO WIT H ASSOCIATES. THE LD. AR POINTED THAT IN ANNEXURE B THE ASSESSEE HAD ALSO GIVEN VARIOUS CASE LAWS WHEREIN THE TRIBUNAL HAS OBSERVED THAT THE PAYMENTS FOR 9 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 HARDWARE AND SOFTWARE MADE IN LUMP SUM , NO SEPARATE CONSIDERATION IS TO BE ATTRIBUTED TOWARDS SOFTWAR E AS ROYALTY. THE LD. AR EXPLAINED THAT THE ASSESSEE IS A DISTRIBUTOR. THE TRANSACTIONS OF THE ASSESSEE WITH THE SUPPLIER OF THE EQUIPMENT ARE ON PRINCIPLE TO PRINCIPLE BASIS. THE LD. AR POINTED THAT DURING THE FIRST APPELLATE PROCEEDINGS THE COMMIS SIONER OF INCOME TAX (APPEALS) SOUGHT REMAND REPORT. THE ASSESSEE AGAIN EXPLAINED ALL THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH RESPECT TO EQUIPMENT AND SOFTWARE TO THE ASSESSING OFFICER DURING THE REMAND PROCEEDINGS. THE LD. AR REFERRED TO THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE DURING THE FIRST APPELLATE PROCEEDINGS AT PAGE 257 OF THE PAPER BOOK - I . THE LD. AR FURTHER REFERRED TO THE INVOICES AT PAGES 47 TO 228 OF THE PAPER BOOK - I FURNISHED BEFORE THE ASSESSING OFFICER. THE LD. AR ALSO R EFERRED TO THE TRAILS O F E - MAIL EXCHANGE D BETWEEN THE ASSESSEE AND ASSESSING OFFICER AT PAGES 229 AND 230 OF THE PAPER BOOK - I. THE LD. AR SUBMITTED THAT VARIOUS INVOICES PLACED ON RECORD AT PAGES 231 TO 236 OF THE PAPER BOOK WERE ALSO SENT TO THE ASSESSIN G OFFICER THROUGH E - MAIL. THE LD. AR POINTED THAT VIDE COMMUNICATION DATED 21 - 01 - 2013 AT PAGE 238 OF THE PAPER BOOK , THE ASSESSEE PRAYED AGAINST GROSSING UP OF TAX IN THE LIGHT OF D ISTRIBUTION A GREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND THE VENDORS OF THE EQUIPMENT . THE ASSESSEE HAS BEEN FURNISHING REQUISITE INFORMATION AS AND WHEN SOUGHT THROUGHOUT WITHOUT FAIL . THE ASSESSEE HAS PARTICIPATED AND HAS CO - OPERATED WITH THE ASSESSING OFFICER AND THE COMMISSIONER OF INCOME TAX (APPEALS). THEREFORE, THE OBSERVATION OF THE ASSESSING OFFICER THAT THE ASSESSEE HAS FAILED TO FURNISH REQUISITE INFORMATION IS UNWARRANTED. 10 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 5.4 THE LD. AR FURTHER REFERRED TO THE CERTIFICATE FROM AGFA AT PAGE 615 OF THE PAPER BOOK - II TO BUTTRESS HIS SUBMISSIONS THAT THE SOFTWARE IS IMBEDDED IN THE MACHINES. THE LD. AR CONTENDED THAT THE ASSESSING OFFICER FILED HIS REMAND REPORT ON 07 - 12 - 2013. TH E COMMISSIONER OF INCOME TAX (APPEALS) PASSED THE ORDER COMMON FOR ASSESSMENT YEARS 2008 - 09, 2009 - 10 AND 2010 - 11 ON 31 - 12 - 2013. BEFORE PASSING OF THE IMPUGNED ORDER THE ASSESSEE WAS NOT PROVIDED WITH THE COPY OF REMAND REPORT. THE ASSESSEE ON 29 - 01 - 2014 REQUESTED FOR THE COPY OF REMAND REPORT. THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE COMMUNICATION DATED 05 - 03 - 2014 AT PAGE 863 OF THE PAPER BOOK - II INFORMED THE ASSESSEE THAT REMAND REPORT WAS NOT USED AGAINST THE ASSESSEE IN APP ELLATE PROCEEDINGS , T HE REFORE, THE SAME WAS NOT FORWARDED TO THE ASSESSEE. THE LD. AR ASSERTED THAT, W HETHER REMAND REPORT WAS USED AGAINST THE ASSESSEE OR NOT IT SHOULD HAVE BEEN MADE AVAILABLE TO THE ASSESSEE. THE PRINCIPLE OF NATURAL JUSTICE DEMAND THAT ANY DOCUMENT WHICH P ERTAINS TO ASSESSEE AND IS LIKELY TO BE USED AGAINST HIM SHOULD BE SUPPLIED TO THE ASSESSEE. 5. 5 THE LD. AR SUBMITTED THAT THE TRANSACTION RELATING TO SUPPLY OF SOFTWARE ARE NOT COVERED UNDER THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT. EVEN THE DEFI NITION OF ROYALTY IN DTAA IS RESTRICTED. IT IS A WELL SETTLED LAW THAT PROVISIONS OF TREATY OVER RIDES THE ACT AND WHENEVER THE PROVISIONS OF THE TREATY ARE BENEFICIAL TO THE ASSESSEE , THE PROVISIONS OF TREATY WILL PREVAIL. 5. 6 FURTHER REFERRING TO THE FINDINGS OF ASSESSING OFFICER THE LD. AR REMARKED THEM AS PERVERSE AND BASED ON SURMISES AND CONJECTURES. THE LD. AR CONTENDED THAT THE ASSESSING OFFICER IN PARA 6.4 OF ASSESSMENT ORDER HAS OBSERVED THAT THE SOURCE CODE OR THE OBJECT 11 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 CODE OF THE SOFTW ARE HAS BEEN PROTECTED UNDER THE C OPYRIGHT ACT AND THE SOFTWARE CAN EVEN QUALIFY AS SECRET FORMULA OR SECRET PROCESS , T HEREFORE, PAYMENT FOR GRANTING THE SOFTWARE LICENSES COMES WITHIN THE MEANING OF ROYALTY . THE LD. AR ASSERTED THAT SOURCE CODE IS NOT AVAILABLE WITH THE ASSESSEE, THEREFORE, THE FINDINGS OF ASSESSING OFFICER ON THIS ISSUE IN PARA 6.4 ARE WRONG. THE LD. AR FURTHER REFERR ED TO SOME OF THE OBSERVATIONS OF THE ASSESSING OFFICER AT PAGES 38 AND 44 OF THE ASSESSMENT ORDER AS FACTUALLY INCORRE CT. THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH DIFFERENT NON - RESIDENT SUPPLIER S OF SOFTWARE LICENSES. SUCH OBSERVATIONS OF THE ASSESSING OFFICER ARE WRONG. THE LD. AR FURTHER REFERRED TO THE OBSERVATION S OF THE A SSESSING OFFICER IN PARA 9.6 , WHEREIN THE ASSESSING OFFICER HAS MENTIONED THAT THE SOFTWARE IS DOWNLOADED FROM I NTERNET. THE LD. AR POINTED THAT SOFTWARE IS IMBEDDED IN THE EQUIPMENT AND IS NOT DOWNLOADED FROM INTERNET . IT IS ACTIVATION CODE WHICH IS OBT AINED FROM THE VENDORS THROUGH E - MAIL WHICH IS DOWNLOADED AND IS USED FOR RUNNING THE MACHINE A FTER INS TALLATION OF SAME AT CUSTOMERS PLACE. 5. 7 THE LD. AR FURTHER REFERRING TO THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) SUBMITTED THAT THE COM MISSIONER OF INCOME TAX (APPEALS) HAS OBSERVED THAT THE ASSESSEE HAS FAILED TO PROVIDE AGREEMENT WITH SOFTWARE VENDORS. THE LD. AR CONTENDED THAT THE ASSESSEE HAS ENTERED INTO ONLY ONE DISTRIBUTION AGREEMENT I.E. AT PAGE 246 OF THE PAPER BOOK - I. EXCEPT F OR THE DISTRIBUTION AGREEMENT THERE IS NO OTHER SEPARATE AGREEMENT WITH THE VENDORS FOR SUPPLY OF SOFTWARE. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS REITERATED THE FINDINGS OF ASSESSING OFFICER WITH RESPECT TO AVAILABILITY OF SOURCE CODE . THE SAID FINDINGS ARE FACTUALLY INCORRECT. THE LD. AR SUBMITTED THAT IN THE ENTIRE ORDER THE COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT DEALT 12 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 WITH THE ISSUE, WHETHER THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT OR NOT ? THE COMMISSIONER OF INCOME TAX (APPEALS) IN T HE IMPUGNED ORDER HAS DISCUSSED ABOUT THE TAXABILITY OF THE PAYMENT MADE FOR PURCHASE OF SOFTWARE AS ROYALTY . THE ENTIRE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IS M O NOLOG UE. 5. 8 THE LD. AR IN SUPPORT OF HIS SUBMISSIONS PLACED RELIANCE ON THE FOLLOWING DECISIONS : I . COMMISSIONER OF INCOME TAX VS. ZTE CORPORATION, 392 ITR 80 (DELHI); II . HITT HOLLAND INSTITUTE OF TRAFFIC TECHNOLOGY B.V. VS. DEPUTY DIRECTOR OF INCOME TAX, 78 TAXMANN.C OM 101 (KOLKATA - TRIB.); III . GALATEA LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, 157 ITD 938 (MUMBAI - TRIB.); 5. 9 THE LD. AR SUBMITTED THAT ONE OF THE GROUND RAISED BY THE ASSESSEE IN THE APPEAL FOR ASSESSMENT YEAR 2008 - 09 IS THAT ORDER PASSED U/S. 201(1) AND ( 1A) SUFFERS FROM LIMITATION. THE LD. AR CONTENDED THAT THE ASSESSING OFFICER INITIATED PROCEEDINGS U/S. 201 AFTER MORE THAN FOUR YEARS. THE FINANCIAL Y EAR INVOLVED IS 2007 - 08, ACCORDINGLY THE PERIOD OF FOUR YEARS EXPIRES ON 31 - 03 - 2012. THE ASSESSING OFF ICER INITIATED PROCEEDINGS U/S. 201 FOR THE FIRST TIME ON 07 - 09 - 2012, THAT IS BEYOND THE PERIOD OF FOUR YEARS, THUS THE ORDER PASSED BY ASSESSING OFFICER U/S. 201(1) AND 201(1A) IS LIABLE TO BE SET ASIDE ON THE GROUND OF LIMITATION ALONE. IN SUPPORT OF H IS SUBMISSIONS THE LD. AR PLACED RELIANCE ON THE DECISION OF MUMBAI - SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, 122 ITD 216 (MUMBAI) (SB). 13 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 6. ON THE OTHER HAND SHRI S.B. MOREY REPRESENTIN G THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING THE ADDITIONS U/S. 201(1) AND 201(1A) OF THE ACT. THE LD. DR SUBMITTED THAT THE FIRST GROUND RAISED IN THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2008 - 09 RELATES TO TIME BARRING OF THE ORDER PASSED U/S. 201(1) AND 201(1A) OF THE ACT. THE LD. DR REFERR ED TO THE PROVISIONS OF SECTION 201(1) AND 201(1A) OF THE ACT AND SUBMITTED THAT AS PER THE AMENDED PROVISIONS , THE ORDER HAS TO BE PASSED WITHIN THE PERIOD OF 6 YEARS. THE CONTENTION OF THE ASSESSEE THAT REPEATED NOTICES WERE SENT TO EXTEN D THE TIME LIMIT IS IRRELEVANT. NOTICE U/S. 133(6) OF THE ACT WAS SENT TO THE ASSESSEE ON 05 - 03 - 2010. THE SUBSEQUENT NOTICES ISSUED ON 07 - 09 - 2012 AND 09 - 10 - 2012 WERE ISSUED U/S. 201(1) AND 201(1A) AND WERE IN CONTINUATION TO THE EARLIER NOTICE ISSUED U/S. 133(6) OF THE ACT. THEREFORE, THE CONTENTION OF THE ASSESSEE THAT THE SUBSEQUENT NOTICES WERE ISSUED TO EXTEN D TIME LIMIT I S WITHOUT ANY BASIS. 6.1 ON MERITS THE LD. DR SUBMITTED THAT THE MACHINES SUPPLIED BY THE ASSESSEE ARE HIGHLY SOPHISTICATED AND CUSTOMER SPECIFIC. THE SOFTWARE USED IN THE IMAGING EQUIPMENT AND THE EQUIPMENTS ARE SEPARATELY IMPORTED AND HAVE BEEN SEPAR ATE LY INVOICE D . HOW BILLING IS DONE BY THE ASSESSEE TO ULTIMATE CUSTOMER IS NOT RELEVANT. TO DETERMINE, W HETHER THE SOFTWARE AND EQUIPMENT ARE INSEPARABLE OR NOT , IS TO BE SEEN FROM THE BILLING MADE BY THE VENDOR S OF THE EQUIPMENT TO THE ASSESSEE. T HE L D. DR REFERRED TO THE INVOICES AT PAGES 3 TO 7 PLACED ON RECORD BY THE LD. AR OF THE ASSESSEE AT THE TIME OF MAKING SUBMISSIONS TO EXPLAIN THE BILLING OF EQUIPMENT AND THE SOFTWARE. THE LD. DR POINTED THAT INVOICE DATED 04 - 01 - 2008 (AT PAGE 6) WOULD SHOW T HAT SOFTWARES ARE SEPARATELY BILLED. IN THE SAID INVOICE EXCEPT FOR THE 14 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 SOFTWARE, NO OTHER ITEM HAS BEEN INCLUDED. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS NOT PLACED ON RECORD ANY AGREEMENT/LICENSES FOR US E OF SOFTWARE. NO SOFTWARE IS SOLD WITHOUT AG REEMENT. THE LD. DR VEHEMENTLY PLACED RELIANCE ON THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF CUMMINS INC. VS. DEPUTY DIRECTOR OF INCOME TAX REPORTED AS 38 TAXMANN.COM 286. 6.2 REJECTING THE CERTIFICATE AT PAGE 615 OF THE PAPER BOOK ISSUED BY THE AGFA HEALTH CARE NV, BELGIUM THE LD. DR SUBMITTED THAT THE CERTIFICATE ISSUED BY THE VENDOR THAT THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT IS A SELF SERVING DOCUMENT. THEREFORE, NO RELI ANCE SHOULD BE PLACED ON THE SAID DOCUMENT. THE LD. DR FURTHER POINTED THAT IF THE SOFTWARE IS NOT SUBJECTED TO THE CUSTOM/IMPORT DUTY IT IS NOT BECAUSE THE SOFTWARE IS IMBEDDED IN THE EQUIPMENT, BUT FOR THE FACT THAT THE SOFTWARE IS FREELY IMPORTABLE. TO SUPPORT HIS CONTENTIONS, THE LD. DR REFERRED TO INVOICE AT PAGE 6 OF THE SHORT PAPER BOOK FILED DURING HEARING OF APPEALS. 6.3 THE LD. DR FURTHER SUBMITTED THAT THE ALLEGATION OF THE ASSESSEE THAT WHILE PASSING THE ORDER COMMISSIONER OF INCOME TAX (APPEALS) REFERRED TO THE REMAND REPORT SOUGHT DURING THE FIRST APPELLATE PROCEEDINGS IS WITHOUT ANY BASIS. THE OBSERVATIONS OF THE COMMISSIONER OF INCOME TAX (APPEALS) WITH RESPECT TO SOURCE CODE ARE NOT TAKEN FROM THE REMAND REPORT BUT REFERS TO THE O BSERVATIONS MADE BY THE ASSESSING OFFICER IN PARA 6.4 AT PAGE 17 OF THE ORDER PASSED U/S. 201(1) AND 201(1A) OF THE ACT. THE LD. DR PRAYED FOR DISMISSING THE APPEALS OF THE ASSESSEE AND CONFIRMING THE FINDINGS OF ASSESSING OFFICER. 15 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 6.4 IN RESPECT OF APPEA LS FILED BY THE DEPARTMENT THE LD. DR SUBMITTED THAT THE DEPARTMENT HAS PRIMARILY ASSAILED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING THE GROSSING UP OF THE AMOUNTS PAID TO FOREIGN COMPANIES UNDER THE HEAD ROYALTY WITHIN THE MEANING OF SECTION 9(1)(VI) OF THE ACT AND ARTICLE 12 OF THE DTAA BETWEEN INDIA AND AUSTRALIA/BELGIUM/CANADA. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE U/S. 195 AND THE PAYMENT S MADE TOWARDS THE R OYALTY FOR USE OF SOFTWARE WAS MADE TO AE WITHOUT DEDUCTING WITHHOLDING TAX. THE LD. DR FURTHER CONTENDED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN COMING TO THE CONCLUSION THAT SINCE, THE ASSESSEE HAS NOT PRODUCED A NY AGREEMENT REGARDING GROSSING UP/NON - GROSSING UP OF THE AMOUNTS , T HE ASSESSING OFFICER WAS WRONG IN GROSSING UP THE AMOUNTS PAID. 7. CONTROVERTING THE SUBMISSIONS ADVANCED BY THE LD. DR, THE LD. AR SUBMITTED THAT A PERUSAL OF PRODUCT DESCRIPTION BOOKL ET AT PAGE 394 OF THE PAPER BOOK CLEARLY SHOWS THAT THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT AND IS INEXTRICABLY LINKED TO THE EQUIPMENT. THE LD. AR REFERRING TO T ECHNICAL BACKGROUND ON SOFTWARE D EVELOPMENT AT PAGE 418 OF THE PAPER BOOK SUBMITTED THAT NX SYSTEMS I.E. THE SOFTWARE ARE PRODUCED ON STANDARD PLATFORM WHICH MEANS SPECIFIC HARDWARE AND SPECIFIC OPERATING SYSTEM. NX SOFTWARE IS NOT ACTIVATED TILL THE TIME , T HE EQUIPMENT REACHES THE CONSUMER. THE PRODUCTION PROCESS EXPLAINED IN THE PRODUCT D ESC RIPTION MANUAL CLEARLY MENTIONS THAT EACH EQUIPMENT IS LOADED WITH NX SOFTWARE BUT THE SAME IS NOT ACTIVATED. 8. THE LD. A R FURTHER REFERRING TO THE DETAILS OF SOFTWARE AT PAGES 407 AND 408 OF THE PAPER BOOK SUBMITTED THAT THE NX SOFTWARE WHICH IS 16 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 PRE - LOADED IN THE EQUIPMENT HAS DIFFERENT VERSIONS. THE BASIC SOFTWARE IS ACTIVATED AT THE TIME OF INSTALLATION OF EQUIPMENT. THE ADVANCED FEATURES OF THE SOFTWARE ARE ACTIVATED ON THE DEMAND AND REQUIREMENT OF EACH END USER. THE LD. A R FURTHER REFERRED TO PAGE 442 OF THE PAPER BOOK AND SUBMITTED THAT THE LICENSING PROCESS IS EXPLAIN ED IN PARAS 11 AND 12 OF P RODUCT D ESCRIPTION HANDBOOK . THE DETAILS ARE GIVEN FOR OBTAINING THE LICENSES IN PARA 11 AND THE AVAILABILITY OF THE LICENSES FOR DIFFERENT PRODUCTS/SOFTWARE DEPENDING UPON THE REQUIREMENT OF CONSUMER IS GIVEN IN PARA 12. A PERUSAL OF THE DETAIL S GIVEN IN PARAS 11 AND 12 WOULD MAKE IT CLEAR THAT THERE IS NO SEPARATE LICENSING AGREEMENT FOR USE OF SOFTWARE. THE SOFTWARE IS PART OF EQUIPMENT , THEREFORE, IN THE PRODUCT DESCRIPTION HANDBOOK THE COMPLETE DESCRIPTION OF EQUIPMENT/MACHINE AND THE SOFTWARE IS GIVEN. THE LD. AR SUBMITTED THAT IN CASE THE APPEAL S OF THE ASSESSEE ARE ALLOWED THE APPEALS FILED BY THE DEPARTMENT WOULD BECOME REDUNDANT. 9. W E HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW . WE HAVE ALSO CONSIDERED THE VARIOUS DOCUMENTS AND DECISIONS ON WHICH BOTH SIDES HAVE PLACED RELIANCE . 10. THE PRIMARY ISSUE S EMERGING FROM THE GROUNDS RAISED IN APPEALS ASSAILING THE ORDER OF FIRST APPELLATE AUTHORITY ARE : I . WHETHER THE SOFTWARE INSTALLED IN THE IMAGING EQUIPMENT IS INTEGRAL PART OF THE EQUIPMENT ? II . WHETHER THE ASSESSEE WAS LIABLE TO DEDUCT TAX U/S. 195 ON T HE PAYMENTS MADE FOR SOFTWARE? III . WHETHER THE PAYMENTS MADE FOR SOFTWARE WERE IN THE NATURE OF ROYALTY? 17 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 11. THE ASSESSING OFFICER AND THE COMMISSIONER OF INCOME TAX (APPEALS) HAVE HELD THAT THE COMPUTER SOFTWARE INSTALLED IN IMAGING EQUIPMENT IS SEPARATE A ND INDEPENDENT PRODUCT. THE VENDOR OF THE SOFTWARE HAS ASSIGNED RIGHT TO USE SOFTWARE, FURTHER THE SOFTWARE IS INVOICE D SEPARATELY THE PAYMENT MADE FOR ACQUIRING SOFTWARE IS IN THE NATURE OF ROYALTY . SINCE, THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE WHILE MAKING PAYMENT FOR SOFTWARE , THE ASSESSEE HAS VIOLATED THE PROVISIONS OF THE ACT AND AS SUCH IS BEING TREATED AS ASSESSEE - IN - DEFAULT U/S. 201(1) . CONSEQUENTLY, I NTEREST HAS ALSO BEEN CHARGED UNDER THE PROVISIONS OF SECTION 201(1A) OF THE ACT. 12. BEFORE PROCEEDING FURTHER IT WOULD BE RELEVANT TO RECAPITULATE FACTS IN BRIEF. THE ASSESSEE IS ENGAGED IN PROVIDING HEALTH CARE IMAGING EQUIPMENTS TO HOSPITALS AND VARIOUS DIAGNOSTIC CENTRES. THE ASSESSEE IS A LOCAL DISTRIBUTION OF AGFA BRAND IMAGING EQU IPMENTS, ACCESSORIES, CONSUMABLES , ETC. THE ASSESSEE IS PROCURING THESE IMAGING EQUIPMENTS FROM VENDORS LOCATED IN AUSTRALIA, CANADA AND BELGIUM. THE IMAGING EQUIPMENT S REQUIRE SPECIFIC SOFTWARE /OPERATING SYSTEM SO AS TO MAKE THE MACHINES WORKABLE. THE CONTENTIONS OF THE ASSESSEE ARE THAT THE IMAGING EQUIPMENT IS PRE LOADED WITH THE SOFTWARE AND IS ACTIVATED WITH THE ACTIVATION KEY /CODE AT THE TIME OF INSTALLATION OF EQUIPMENT AT THE CUSTOMERS PREMISES. THE SOFTWARE INSTALLED IN THE EQUIPMENT IS MACHIN E SPECIFIC AND CUSTOMER SPECIFIC. THERE ARE VARI ANTS OF SOFTWARE PROVIDED ALONG WITH THE MACHINES WHICH ARE ACTIVATED DEPENDING UPON THE NEED AND REQUIREMENTS OF THE CUSTOMERS. THE SOFTWARE SUPPLIED ALONG WITH THE MACHINES CANNOT BE USED IN THE IMAGING M ACHINES OF ANY OTHER B RAND . SIMILARLY, THE IMAGING MACHINES SUPPLIED BY THE ASSESSEE CANNOT BE PUT TO USE WITHOUT THE SOFTWARE / OPERATING SYSTEM DEVELOPED FOR AGFA B RAND MACHINES. IN OTHER WORDS, THE MACHINES 18 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 AND SOFTWARE USED TO ACTIVATE/INITIALIZE THE M ACHINES ARE USELESS WITHOUT EACH OTHER. THE MACHINE IS SOFTWARE DEPENDENT. THE MACHINE AND THE SOFTWARE ARE INEXTRICABLE LINKED TO EACH OTHER. 13. ACCORDING TO THE REVENUE , THE SOFTWARE USED IN THE MACHINES IS INDEPENDENT OF THE MACHINES AS IT HAS BEEN INVOICED SEPARATELY . THERE SHOULD BE SEPARATE LICENSING AGREEMENT FOR SUCH SOFTWARE. THE ASSESSEE HAS ACQUIRED RIGHT TO USE SOFTWARE. FOR ACQUIRING SUCH RIGHTS THE PAYMENT MADE BY ASSESSEE IS IN THE NATURE OF ROYALTY AND HENCE TAXABLE UNDER THE PROVISIONS OF THE ACT. 14. ON THE CONTRARY, THE CASE OF ASSESSEE IS THAT THERE IS NO SEPARATE AGREEMENT FOR SOFTWARE INSTALLED IN THE MACHINES. THE ONLY AGREEMENT IS DISTRIBUTIO N AGREEMENT WHICH IS AT PAGE 246 OF THE PAPER BOOK. A PERUSAL OF THE SAID AGREEMENT REVEAL THAT IT IS AN AGREEMENT BETWEEN AGFA HEALTH CARE NV, BELGIUM AND THE ASSESSEE. THE OVERSEAS COMPANY HAS APPOINTED ASSESSEE AS IT IS LOCAL SALES ORGANIZATION (LSO). THE COVENANTS OF THE SAID AGREEMENT LIST OUT THE DETAILS OF COMMISSION TO BE PAID TO THE ASSESSEE, O BLIGATIONS OF AGFA HEALTHCARE NV, O BLIGATION S OF ASSESSEE COMPANY AS LSO, T ERMS OF SALES, TRADEMARKS, D URATION AND T ERMINATION OF THE AGREEMENT, C ONFIDENTIALITY U NDERTAKING, J URISDICTION IN THE CASE OF DISPUTES , ETC. A CLOSE SCRUTINY OF THE AGREEMENT REVEAL THAT THERE IS DEFINITION CL AUSE WHEREIN THE PRODUCTS IN WHICH THE ASSESSEE WOULD BE DEALING IS DEFINED. THE SAME IS REPRODUCED HERE - IN - BELOW : THE PRODUCTS : ALL EQUIPMENT, ACCESSORIES AND CONSUMABLES AVAILABLE FOR SALE, SUBJECT AT ALL TIMES HOWEVER TO AVAILABILITY, TO THE RIGHT OF AGFA HE TO DELETE ANY SUCH EQUIPMENT, ACCESSORIES OR CONSUMABLES FROM THE SCOPE OF THIS DA. 19 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 A PERUSAL OF THE DEFINITION OF THE PRODUCTS REVEAL THAT IT INCLUDES ALL EQUIPMENTS, ACCESSORIES, AND CONSUMABLES. NEITHER THE DEFINITION OF THE PRODUCT MAKES ANY REFERENCE TO THE SOFTWARE, NOR ANY OTHER COVENANT OF THE AGREEMENT SPELL OUT ANY CONDITION REGARDING SOFTWARE. THE ENTIRE AGREEMENT USES THE EXPRESSION THE PRODUCT. OSTENSIBLY THERE IS NO REFERENCE OF SOFTWARE SEPARATELY AS THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT AND IS PART AND PARCEL OF THE ENTIRE IMAGING UNIT. THE CASE OF THE ASSESSEE IS THAT EQUIPMENT INCLUDES SOFTWARE AS IT IS INSEPARABLE PART OF THE EQUIPMENT . THE SOFTWARE IS REQUIRED TO RUN THE MACHINE. WE FIND MERIT IN THIS CONTENTION OF THE ASSESSEE . 15. THE SOFTWARE USED IN THE IMAGING EQUIPMENT TO ACTIVATE/INITIALIZE THE MA CHINES IS NX SOFTWARE . THE OBJECTION OF THE REVENUE IS THAT THE ASSESSEE HAS FAILED TO PRODUCE LICENSING AGREEMENT FOR SOFTWARE AS ALL THE SOFTWARES ARE SUBJECT TO LICENSING AGREEMENT. THE LICENSING PROCESS OF THE SAID SOFTWARE HAS BEEN GIVEN IN THE P R ODUCT D ESCRIPTION HANDBOOK /MANUAL AT PAGES 394 TO 472 OF THE PAPER BOOK. THE SAID HANDBOOK /MANUAL GIVES THE DESCRIPTION OF THE SOFTWARE INCLUDING TECHNICAL BACKGROUND, PRODUCTION PROCESS , SOFTWARE SERVICE FUNCTION/TOOLS , ACTIVATION PROCESS , LICENSING PROC ESS , ETC. THE ASSESSEE HAS ALSO PLACED ON RECORD COPY OF ANOTHER HANDBOOK /MANUAL AT PAGES 521 TO 583 OF PAPER BOOK WHICH GIVES DETAILED INFORMATION REGARDING INSTALLATION AND CONFIGURATION OF NX SOFTWARE , STEP BY STEP GUIDE FOR INSTALLATION AND CONFIGURAT ION OF NX SOFTWARE AND ALSO GIVES THE DETAIL S AS TO HOW TO LOAD LICENSES AND ACTIVATE THE SOFTWARE. A PERUSAL OF THE DOCUMENTS ON RECORD CLEARLY ESTABLISHES THAT THE SOFTWARE IS EQUIPMENT PACIFIC AND HAS BEEN DEVELOPED FOR AGFA BRAND IMAGING EQUIPMENTS. THUS, IT CAN BE SAFELY CONSTRUED THAT NX SOFTWARE DEVELOPED FOR AGFA B RAND IMAGING EQUIPMENTS CANNOT BE OPERATED OR PUT TO USE WITH THE 20 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 IMAGING EQUIPMENT OF ANY OTHER BRAND AND VICE VERSA. THUS, FROM THE PERUSAL OF DOCUMENTS ON RECORD IT IS EVIDENT THAT N O SEPARATE LICENSING AGREEMENT IS WARRANTED IN RESPECT OF NX SOFTWARE INSTALLED IN THE MACHINE. 16. ONE OF THE REASONS FOR THE DEPARTMENT TO HOLD THAT THE SOFTWARE IS INDEPENDENT OF THE MACHINE IS THAT THE SOFTWARE IS SEPARATELY INVOICED. WE DO NOT FIND MERIT IN THE SUBMISSIONS OF THE DEPARTMENT. IT IS AN UNDISPUTED FACT THAT VARIANTS OF NX SOFTWARE HAVE BEEN INVOICED SEPARATELY , AT THE SAME TIME WE FIND THAT THERE ARE CERTAIN OTHER COMPONENTS OF THE IMAGING EQUIPMEN T THAT HAVE BEEN INVOICED SEPARATELY. THE LD. AR HAS PLACED ON RECORD INVOICES ISSUED BY AGFA HEALTHCARE NV, BELGIUM IN THE NAME OF ASSESSEE AT PAGES 3 TO 7 OF THE SHORT PAPER BOOK FILED AT THE TIME OF MAKING SUBMISSIONS. AT PAGES 3 AND 4 IS THE INVOICE DATED 21 - 09 - 2007 . A PERUSAL OF SAID INVOICE SHOW THAT FO U R DIFFERENT ITEMS HAVE BEEN INVOICED TO THE ASSESSEE. THE LD. AR HAS STATED AT THE BAR THAT THESE FOUR ITEMS ARE VA RIOUS COMPONENTS OF IMAGING EQUIPMENTS. ON PAGE 5 OF THE SAID PAPER BOOK IS ANOTH ER INVOICE DATED 10 - 10 - 2007 GIVING DESCRIPTION OF THE ITEM INVOICED WITH ITEM CODE ETC. , PURPORTEDLY ANOTHER COMPONENT OF IMAGING EQUIPMENT. AT PAGE 6 IS THE INVOICE DATED 04 - 01 - 2008 GIVING T HE LIST OF SOFTWARES I.E. NX OPTIVIEW, NX PRECISION TOOLS AND NX PREMIUM - SP BILLED TO THE ASSESSEE. AT PAGE 7 IS INVOICE DATED 17 - 10 - 2007 WITH RESPECT TO ANOTHER COMPONENT I.E. DIGITIZER, OF IMAGING EQUIPMENT . ALTHOUGH VARIOUS PARTS OF THE IMAGING EQUIPMENTS ARE INVOICED SEPARATELY BUT THAT WOULD NOT MEAN THAT THESE COMPONENTS ARE INDEPENDENT OF THE EACH OTHER. THESE COMPONENTS COLLECTIVELY CONSTITUTE IMAGING EQUIPMENT AFTER THEY ARE ASSEMBLED. SEPARATE INVOICING OF SOFTWARE WOULD NOT CHANGE THE FUNDAMENTAL STRUCTURE OF THE EQUIPMENT AND ITS 21 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 OPERATING SYSTEM. THUS, WE ARE OF THE CONSIDERED VIEW THAT SEPARATE BILLING OF SOFTWARE WILL NOT ALTER THE FACT THAT THE SOFTWARE IS INSEPARABLE PART OF IMAGING EQUIPMENTS. 17. AFTER THE IMAGING EQUIPMENT IS INSTALLED AT THE PREMISES OF THE CUSTOMERS , T HE SOFTWARE IS ACTIVATED WITH THE CODE/PRODUCT KEY TO INITIALIZE THE EQUIPMENT AND TO MAKE IT FUNCTIONAL. ONCE, THE PRODUCT KEY IS PUNCHED INTO THE SYSTEM , AFTER VERIFICATION OF HARDWARE , LICENSE DETAILS OF THE SOFTWARE AND THE CUSTOMER THE EQUIPMENT IS ACTIVATED AND IS READY TO USE AS PER THE REQUIREMENTS OF THE END USER. 18. NOW, THE NEXT QUESTION WHICH ARISES FOR CONSIDERATION IS, WHETHER THE PART OF PAYMENTS MADE FOR PURCHASE OF EQUIPMENT WOULD ALSO INCLUDE PAYMENT FOR ROYALTY IN RESPECT OF SOFTWARE RECEIVED ALONG WITH T HE EQUIPMENT. IN THE INSTANT CASE, THE AUTHORITIES BELOW HAVE FASTEN THE TAX LIABILITY ON THE ASSESSEE ON THE PRESUMPTION THAT THE PAYMENT TOWARDS THE ACQUISITION OF SOFTWARE IS IN THE NATURE OF ROYALTY. SINCE, THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE ON SUCH PAYMENT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 195 OF THE ACT. THE TERM ROYALTY HAS BEEN DEFINED IN EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT. THE SAME IS REPRODUCED HERE - IN - BELOW : EXPLANATION 2. FOR THE PURPOSES OF THIS CLAUSE, ROYALTY MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDIN G 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 LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; ( II ) (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 OR SIMILAR PROPERTY ; 22 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 ( III ) (III) THE USE OF ANY PATENT, INVEN TION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; ( IV ) (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL ; ( V ) [(IVA) THE USE OR RIGHT TO USE ANY INDUSTRI AL, COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB;] ( VI ) (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILM S OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS ; OR ( VII ) (VI) THE RENDERING OF ANY SERVICES IN CON NECTION WITH THE ACTIVITIES REFERRED TO IN SUB - CLAUSES (I) TO 76[(IV), (IVA) AND] (V). 19. THE ASSESSEE DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL HAD TRANSACTION WITH VENDORS OF AGFA EQUIPMENTS FROM AUSTRALIA, CANADA AND BELGIUM. THE PROVISIONS OF ROYALTY AND FEE FOR TECHNICAL SERVICE IN DTAA BETWEEN INDIA AND ABOVE SAID COUNTRIES IS CONCERN ED IS ON SAME LINES. THE TERM ROYALTY HAS BEEN DEFINED IN ARTICLE 12(3)(A) OF DTAA BETWEEN INDIA AND BELGIUM . THE SAME IS REPRODUCED HERE - IN - UNDER : 3. 1[(A) THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLANT, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE.] A PERUSAL OF THE DEFINITION OF R OYALT Y AS DEFINED UNDER THE ACT IS EXHAUSTIVE AS COMPARED TO THE DEFINITION OF ROYALTIES UNDER ARTICLE 12(3)(A) OF THE DTAA. IT IS A WELL SETTLED LAW THAT WHERE THE PROVISIONS OF DTAA FAVOUR THE ASSESSEE, THE PROVISIONS OF DTAA WOULD OVERRIDE THE PROVISIONS OF THE ACT. 23 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 20. THE CASE OF THE REVENUE IS THAT THE ASSESSEE HAS MADE P AYMENT FOR ACQUIRING THE RIGHT TO USE SOFTWARE. THE AUTHORITIES BELOW HAVE ALSO MADE OBSERVATIONS IN THEIR RESPECTIVE ORDERS ABOUT THE SOURCE CODE OF THE SOFTWARE AND HAVE FURTHER STRETCHED THE SOFTWARES TO EQUATE IT WITH SECRET FORMULA OR SECRET PROCESS, SO AS TO BRING THE TRANSACTION WITH RESPECT TO PURCHASE OF SOFTWARE IN THE PRESENT CASE WITHIN THE AMBIT OF ROYALTY. WE HAVE ALREADY HELD THAT THE SOFTWARE IS EMBEDDED IN THE EQUIPMENT AND IS INEXTRICABLE LINKED TO THE WORKING OF IMAGING EQUIPMENT, TH EREFORE, PAYMENT FOR SOFTWARE CANNOT BE SEPARATED FROM CONSOLIDATED PAYMENT OF EQUIPMENT. NEVERTHELESS, TO PUT THIS ISSUE IN CLEAR PROSPECTIVE WE WOULD TAKE TO REFER TO THE DECI SION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GALATEA LTD. VS. DEPUTY CO MMISSIONER OF INCOME TAX (SUPRA) WHEREIN SIMILAR ISSUE WAS RAISED. THE TRIBUNAL AFTER CONSIDERING THE FACTS OF THE CASE AND CATENA OF JUDGMENTS HELD THAT WHERE SOFTWARE IS PART OF EQUIPMENT THERE IS NO QUESTION FOR SEGREGATING THE PAYMENT FOR SOFTWARE. A ND SUCH PAYMENTS DO NOT FALL WITHIN THE AMBIT OF ROYALTY. THE RELEVANT EXTRACT OF THE DECISION OF TRIBUNAL IS REPRODUCED HERE - IN - UNDER : 16. THE FIRST PART OF THE ARGUMENT MADE BY THE LD. COUNSEL FOR THE ASSESSEE IS THAT THE IMPUGNED CONSIDERATION WAS RECEIVED ON ACCOUNT OF SALE OF MACHINE ALONG WITH REQUISITE SOFTWARE WHICH FORMED INTEGRAL PART OF MACHINES SOLD BY IT TO THE CUSTOMERS. THE WHOLE DISPUTE AROSE MERELY BECAUSE VALUE OF SOFTWARE WAS SEPARATELY MENTIONED. BUT, THERE WAS NO SEPARATE TRANSACTION OF SALE OF SOFTWARE AND, THEREFORE, IT WAS PREDOMINANTLY TRANSACTION OF SALE OF MACHINE AND, THEREFORE, IT COULD NOT HAVE BEEN BROUGHT WIT HIN THE DEFINITION OF ROYALTY AS ENVISAGED IN SECTION 9(1)(VI) OF THE ACT AND, THEREFORE, IN THE ABSENCE OF THERE BEING ANY P.E. OF THE ASSESSEE IN INDIA, THE INCOME ARISING FROM SALE OF MACHINE COULD NOT HAVE BEEN TAXED IN ITS HANDS IN INDIA. 17. WE H AVE CAREFULLY ANALYZED THE FACTS OF THE CASE AND ARGUMENTS MADE BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS COUNTER ARGUMENTS 24 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 MADE BY THE LD. DEPARTMENTAL REPRESENTATIVE. THE UNDISPUTED FACTS BEFORE US ARE THAT NONE OF THE CUSTOMERS HAVE PURCHASED ONLY MACHINE OR ONLY SOFTWARE. THERE WAS NO CUSTOMER WHO PURCHASED ONLY SOFTWARE. LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION ON VARIOUS PAGES OF THE PAPER BOOK TO ESTABLISH THAT THE MACHINE SOLD BY THE ASSESSEE COULD NOT BE MADE OPERATIONAL OR FUNCTIONAL I N THE ABSENCE OF OPERATING SOFTWARE ALONG WITH THE APPLICATION SOFTWARE. THESE FACTS WERE NOT CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE DURING THE COURSE OF HEARING IN RESPONSE TO A SPECIFIC QUERY PUT TO HIM BY THE BENCH. IT IS NOTED THAT COMPLET E DETAILS HAVE BEEN GIVEN BY THE ASSESSEE IN THE PAPER BOOK AT PAGE 222 AND 224. OUR ATTENTION WAS ALSO DRAWN ON CERTIFICATE FROM THE ASSESSEE ENCLOSED AT PAGE 225 OF THE PAPER BOOK CERTIFYING THAT SOFTWARE SUPPLIED BY THE ASSESSEE TO END USER WAS FOR INTE GRATION WITH THE MACHINE SUPPLIED BY THE ASSESSEE AND THAT THIS SOFTWARE HAD NO OTHER INDEPENDENT USE AS SUCH, EXCEPT TO ENABLE SUCH MACHINE TO FUNCTION. WE HAVE ALSO GONE THROUGH THE END USER LICENSE AGREEMENT (EULA) ENTERED INTO BY THE ASSESSEE WITH THE CUSTOMERS WHEREIN THERE ARE VARIOUS CLAUSES WHICH INDICATE THAT THE SOFTWARE SUPPLIED BY THE ASSESSEE WAS MEANT ONLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING THE SAID MACHINE FUNCTIONAL. CLAUSE 2.1 OF THE AGREEMENT PROVIDES THAT CUSTOMER IS GRANTED NON EX CLUSIVE, NON TRANSFERABLE LIMITED LICENSE TO USE THE SOFTWARE AND RELATED KNOWHOW ON THE MACHINE FOR THE SOLE PURPOSE OF SCANNING THE INTERNAL / EXTERNAL FEATURE OF ROUGH DIAMOND AND CREATING A THREE DIMENSIONAL IMAGE OF THESE FEATURES OF ROUGH DIAMOND. CL AUSE 2.2 OF THE AGREEMENT PUTS CERTAIN RESTRICTIONS UPON THE CUSTOMERS FOR ANY OTHER USE OF THE SOFTWARE IN ANY OTHER MACHINE. THIS CLAUSE RESTRAINS THE CUSTOMER FROM DUPLICATING THE SOFTWARE OR MAKING ANY COPIES, MODIFICATIONS, ISOLATING THE SOFTWARE AND MAKING IT AVAILABLE AS A STANDALONE DATA BASE OR PRODUCT, REMOVING ANY PRODUCT IDENTIFICATION, COPYRIGHT OR OTHER PROPRIETARY NOTICE FROM THE SOFTWARE OR DECOMPILING, DISASSEMBLING, REVERSE ENGINEERING, OR MAKING ANY OTHER ATTEMPT TO RECONSTRUCT OR DISCOVE R THE SOURCE CODE, ETC. THIS CLAUSE CLEARLY LAYS DOWN THAT CUSTOMER SHALL NOT REPRODUCE THE SOFTWARE OR ANY OF THE DOCUMENTATION PROVIDED IN CONNECTION WITH THE SOFTWARE OR RELATED KNOWHOW. IT IS FURTHER NOTED THAT CLAUSE 6.2 OF THE SAID AGREEMENT LAYS DOW N THAT THE ASSESSEE IS AND SHALL REMAIN SOLE AND EXCLUSIVE OWNER OF THE RIGHT, TITLE AND INTEREST IN THE SOFTWARE AND RELATED KNOW. THIS SOFTWARE CANNOT BE USED BY THE CUSTOMER EXCEPT FOR THE OPERATION OF THE MACHINE. IT IS FURTHER NOTED BY US THAT THE MAC HINE WAS EQUIPPED WITH REQUISITE SECURITY CONTROLS AND HARDWARE LOCKS TO STOP ANY TYPE OF MISUSE OF SOFTWARE. CLAUSE 10.2 OF ONE OF THE AGREEMENT AVAILABLE AT PAGE 49 IS REPRODUCED HEREUNDER FOR THE SAKE OF READY REFERENCE: 25 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 10.2 SARIN INDIA ACKNOWLEDGE S THAT GALATEA MAY USE SOFTWARE AND/OR HARDWARE LOCKS OR OTHER PROTECTIVE MECHANISMS TO REGULATE THE USE OF SOFTWARE. SARIN INDIA SHALL NOT EVADE OR OVERRIDE SUCH SOFTWARE/HARDWARE LOCKS OR PROTECTIVE DEVICES AND SHALL IMMEDIATELY INFORM GALATEA UPON LEARN ING THAT ANY USER HAS DEFEATED SUCH DEVICES. SARIN INDIA AGREES TO COOPERATE FULLY WITH GALATEA IN ITS EFFORTS TO PROTECT SOFTWARE FROM UNLAWFUL OR UNAUTHORIZED USE. 18. FROM THE AFORESAID FACTS AND FEATURES OF THE TRANSACTIONS ANALYSED BY US, IT COULD B E CONCLUDED THAT THE CUSTOMER WAS NOT INTERESTED IN THE HARDWARE ALONE OR IN THE SOFTWARE ALONE. HE WAS INTERESTED IN THE SYSTEM AS A WHOLE AND FUNCTIONING OF THE MACHINE. OPERATING SOFTWARE ENABLE THE MACHINE TO RUN AND THE APPLICATION OF SOFTWARE MADE FU NCTIONING OF THE MACHINE POSSIBLE. IT IS AN UNDISPUTED FACT THAT THE SOFTWARE WHICH WAS LOADED ONTO THE HARDWARE DID NOT HAVE ANY INDEPENDENT EXISTENCE AS SUCH. THE SOFTWARE SUPPLIED WAS OSTENSIBLY AND UNDISPUTEDLY AN INTEGRAL PART OF THE HARDWARE. NOW, SI NCE THE HARDWARE AND SOFTWARE CONSTITUTED ONE INTEGRATED SYSTEM, PART OF THE PAYMENT THEREOF CANNOT BE EARMARKED TOWARDS SALE OF HARDWARE AND THE OTHER PART TOWARDS ROYALTY FOR USE OF SOFTWARE AS SUCH. THUS, IN OUR CONSIDERED VIEW, THE DOMINANT CHARACTER AND ESSENCE OF THE TRANSACTION WAS SALE OF MACHINE BY THE ASSESSEE. THE SOFTWARE, INDEPENDENTLY, HAD NO VALUE FOR THE CUSTOMER. HE WAS CONCERNED WITH AS ONLY THE FUNCTIONING OF THE MACHINE AND BENEFITS OF USE PROVIDED BY MACHINE. 19. THE ONLY ARGUMENT G IVEN BY THE LD. DEPARTMENTAL REPRESENTATIVE TO COUNTER THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IN THIS CASE, PAYMENT WAS MADE SEPARATELY FOR THE SOFTWARE AT THE TIME OF SALE OF MACHINE AS WELL AS SUBSEQUENTLY AND THAT SOFTWARE WAS PROV IDED BY E MAIL AND, THEREFORE, SEPARATE TREATMENT SHOULD BE GIVEN TO THE SOFTWARE. IN OUR CONSIDERED OPINION, ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE WOULD NOT BE SUSTAINABLE UNDER THE LAW. THE DOMINANT AND FUNDAMENTAL CHARACTER OF THE TRANSACTION SHALL NOT BE ALTERED BECAUSE OF THESE TWO FEATURES ONLY. THE BREAK UP OF INVOICE VALUE OF HARDWARE AND SOFTWARE MAY BE AS A RESULT OF SOME OTHER LEGAL REQUIREMENT OR AS A MATTER OF CONVENIENCE OR AN AGREEMENT BETWEEN BUYER AND SELLER. IT HAS BEEN SUBMITTED THAT SEPARATE VALUES WERE GIVEN FOR THE PURPOSE OF PROPER ASSESSMENT OF CUSTOM DUTY TO BE LEVIED AT THE TIME OF IMPORTS OF THE MACHINES. FURTHER, SOFTWARE HAS BEEN SUPPLIED SEPARATELY BY E MAIL FOR VARIOUS SECURITY REASONS AND TO ENABLE THE 26 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 CUSTOMER TO HA VE THE BENEFITS OF UPDATED TECHNOLOGIES. SIMILARLY, SEPARATE PAYMENTS HAVE BEEN MADE AT THE TIME OF SALE AND SUBSEQUENTLY BY CUSTOMER AS A MATTER OF TERMS BETWEEN BOTH THE PARTIES KEEPING IN VIEW VARIOUS FACTORS SUCH AS FINANCIAL AND ADMINISTRATIVE CONVENI ENCE AND COMMERCIAL EXPEDIENCY. THE DOMINANT AND ESSENTIAL CHARACTER OF THE TRANSACTION WAS SALE OF MACHINE BY THE ASSESSEE AND PURCHASE OF THE SAME BY THE CUSTOMER, AND IT SHALL REMAIN THE SAME WITH OR WITHOUT THESE TWO FEATURES. 21. THE KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF HITT HOLLAND INSTITUTE OF TRAFFIC TECHNOLOGY B.V. VS. DEPUTY DIRECTOR OF INCOME TAX (SUPRA) WHILE DEALING WITH SOMEWHAT SIMILAR ISSUE HAS HELD THAT WHERE SOFTWARE IS IMBEDDED IN EQUIPMENT SUPPLIED FOR MERE PURPOSE OF OPERATI NG EQUIPMENT, IT IS NOT A CASE GIVING INDEPENDENT RIGHT TO USE SOFTWARE, AMOUNT PAID FOR SUPPLY OF SOFTWARE IS NOT TAXABLE IN INDIA AS ROYALTY U/S. 9(1)(VI) OF THE ACT. 22. THUS, IN VIEW OF THE FACTS OF THE CASE, DOCUMENTS ON RECORD AND THE VARIOUS DECI SIONS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE SOFTWARE IS IMBEDDED IN THE IMAGING EQUIPMENT AND INSEPARABLE PART OF HARDWARE. THE SOFTWARE WITHOUT THE EQUIPMENT AND THE EQUIPMENT WITHOUT THE SOFTWARE CANNOT PUT TO USE INDEPENDENTLY. THE S OFTWARE AND THE MACHINE IS CUSTOMER SPECIFIC AND IS LICENSED TO THE END USER . UNDER SUCH CIRCUMSTANCES THERE IS NO QUESTION OF SEGREGATING ANY PART OF CONSIDERATION PAID FOR EQUIPMENT AND THE SOFTWARE. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE IN APPEALS ARE ALLOWED. OUR VIEW IS FURTHER FORTIFIED BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. ZTE CORPORATION (SUPRA) HAS HELD : 27 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 22. . THE SUPPLIES MADE (OF THE SOFTWARE) ENABLED THE USE OF THE HARDWARE SOLD. IT WAS NOT DISPUTED THAT WITHOUT THE SOFTWARE, HARDWARE USE WAS NOT POSSIBLE. THE MERE FACT THAT SEPARATE INVOICING WAS DONE FOR PURCHASE AND OTHER TRANSACTIONS DID NOT IMPLY THAT I T WAS ROYALTY PAYMENT. IN SUCH CASES, THE NOMENCLATURE (OF LICENSE OR SOME OTHER FEE) IS INDETERMINATE OF THE TRUE NATURE. NOR IS THE CIRCUMSTANCE THAT UPDATES OF THE SOFTWARE ARE ROUTINELY GIVEN TO THE ASSESSEE'S CUSTOMERS. THESE FACTS DO NOT DETRACT FROM THE NATURE OF THE TRANSACTION, WHICH WAS SUPPLY OF SOFTWARE, IN THE NATURE OF ARTICLES OR GOODS. THIS COURT IS ALSO NOT PERSUADED WITH THE SUBMISSION THAT THE PAYMENTS, IF NOT ROYALTY, AMOUNTED TO PAYMENTS FOR THE USE OF MACHINERY OR EQUIPMENT. SUCH A SUB MISSION WAS NEVER ADVANCED BEFORE ANY OF THE LOWER TAX AUTHORITIES; MOREOVER, EVEN IN ERICSON (SUPRA), A SIMILAR PROVISION EXISTED IN THE DTAA BETWEEN INDIA AND SWEDEN. 23. THUS, IN VIEW OF THE FACTS OF THE CASE AND THE CASE LAWS DISCUSSED ABOVE WE HOLD THAT IN THE PAYMENT MADE FOR PURCHASE OF IMAGING EQUIPMENT THERE IS NO ELEMENT OF PAYMENT OF ROYALTY. SINCE, THERE WAS NO PAYMENT OF ROYALTY, THERE IS NO QUESTION OF DEDUCT ING WITHHOLDING TAX BY THE ASSESSEE UNDER THE PROVISIONS OF SECTION 195 OF THE ACT. AS A COROLLARY TO OUR ABOVE FINDINGS THE PROCEEDINGS U/S. 201(1) AND (1A) ARE LIABLE TO BE QUASHED. 24. THE FIRST QUESTION ARISING IN THE APPEAL OF ASSESSEE IS ANSWERED I N AFFIRMATIVE. THE QUESTION NOS. (II) AND (III) ARE ANSWERED IN NEGATIVE. AS A RESULT , THE GROUNDS RAISED IN THE APPEALS BY THE ASSESSEE ARE ALLOWED. 2 5 . THE ASSESSEE IN APPEAL FOR THE ASSESSMENT YEAR 2008 - 09 HAS RAISED THE ISSUE OF TIME BARRIN G OF THE ORDER PASSED U/S. 201(1) AND (1A) OF THE ACT. SINCE, THE APPEAL OF THE ASSESSEE IS ALLOWED ON MERITS, THE ISSUE RAISED IN THE APPEAL AS GROUND NO. 1 FOR THE ASSESSMENT YEAR 2008 - 09 HAS BECOME ACADEMIC AND HENCE, IS NOT DEALT WITH. 28 ITA NO S. 216 TO 218, 1361, 1362, 444 TO 446, 1572 & 1573/PUN/2014 2 6 . AS THE APPEALS OF THE ASSESSEE HAVE BEEN ALLOWED AND THE IMPUGNED ORDERS ARE SET ASIDE THE GROUNDS RAISED IN THE APPEAL FILED BY THE DEPARTMENT ARE LIABLE TO BE DISMISSED. 2 7 . IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2008 - 09 IS PARTLY ALLOWED , THE APPEALS OF THE ASSESSEE FOR ASSESSMENT YEARS 2009 - 10 TO 2012 - 13 ARE ALLOWED AND ALL THE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 31 ST DAY OF MAY, 201 7 . SD/ - SD/ - ( / ANIL CHATURVEDI ) ( / VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 31 ST MAY, 2017 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - IT/TP, PUNE 4. THE DIT(TP/IT), PUNE 5. , , , / DR, ITAT, B BENCH, PUNE. 6. / GUARD FILE / / // TRUE COPY// / BY ORDER, / ASSISTANT REGISTRAR , , / ITAT, PUNE