Agfa Healthcare India P. Ltd., Thane V. Deputy Commissioner of Income-tax,

ITA 2466/PUN/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7717 (ITAT-PUNE)
• Duration Of Justice: 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 12-07-2017
• Assessment Year: 2014-2015
• Appeal Filed On: 21-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMITRA BANERJI
• Keywords: Double taxation relief; Commercial expediency; Reason to believe
• Section: 133(6); 201(1)

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NOS.2465 AND 2466/PUN/2016 [ [ / ASSESSMENT YEARS : 2013-14 AND 2014-15 AGFA HEALTHCARE INDIA PRIVATE LIMITED, UNIT NO.402, 4 TH FLOOR, NITCO BIZ PARK, PLOT NO.C/19, ROAD NO.16, WAGLE INDUSTRIAL ESTATE, THAE (W) 400 604. PAN : AAGCA3797D. . / APPELLANT V/S THE DY. COMMISSIONER OF INCOME TAX, (INTERNATIONAL TAXATION) CIRCLE I, PUNE B.O. BHAVAN, SECTOR 17, PLOT NO.1, PUNE SATARA ROAD, PUNE 411009. . / RESPONDENT ASSESSEE BY : SHRI KETAN VED. REVENUE BY : SMT. SUMITRA BANERJI. / ORDER PER ANIL CHATURVEDI, AM : THESE TWO APPEALS FILED BY ASSESSEE ARE EMANATING OUT OF A CONSOLIDATED ORDER OF COMMISSIONER OF INCOME-TAX (A) - 13, PUNE DT.23.08.2016 FOR A.YS. 2013-14 AND 2014-15, RESPECTIVELY. 2. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT THOUGH BOTH THE APPEALS OF THE ASSESSEE ARE AGAINST THE ORDER OF LD. CIT(A) FOR TWO DIFFERENT ASSESSMENT YEARS BUT SINCE THE ISSUES INVOLVED IN BOTH THE YEARS ARE INTER-CONNECTED, HIS ARGUMENTS WILL ALSO BE COMMON AND THEREFORE BOTH THE APPEALS CAN BE HEARD AND DISPOSED / DATE OF HEARING : 12.07.2017 / DATE OF PRONOUNCEMENT: 23.08.2017 2 OF TOGETHER. LD. D.R. DID NOT OBJECT TO THE AFORESAID SUBMISSION OF LD.A.R. WE THEREFORE FOR THE SAKE OF CONVENIENCE PROCEED TO DISPOSE OF BOTH THE APPEALS BY A CONSOLIDATED ORDER, BUT HOWEVER, PROCEED WITH NARRATING THE FACTS IN ITA NO.2465/PUN/2016 FOR ASSESSMENT YEAR 2013-14. 3. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER :- 3.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF PROVIDING IT ENABLED CLINICAL WORKFLOW AND DIAGNOSTIC IMAGE MANAGEMENT SOLUTIONS AND STATE OF THE ART SYSTEMS FOR CAPTURING AND PROCESSING IMAGES IN HOSPITALS AND HEALTHCARE FACILITIES. A NOTICE U/S 133(6) OF THE ACT WAS ISSUED TO ASSESSEE SEEKING DETAILS OF FOREIGN REMITTANCES MADE BY IT SINCE 01.04.2007. ON THE ANALYSIS OF THE INFORMATION FURNISHED BY THE ASSESSEE, IT WAS FOUND THAT DURING THE YEARS UNDER CONSIDERATION I.E., F.Y. 2012-13 AND 2013-14, THE ASSESSEE HAD PAID AMOUNTS TO NON-RESIDENTS OF CANADA, BELGIUM AND USA FOR USE OR RIGHT TO USE A COMPUTER SOFTWARE WITHOUT DEDUCTION OF TAX AT SOURCE (TDS). AO WAS OF THE VIEW THAT THE PAYMENTS MADE TO NON-RESIDENTS PARTAKE THE NATURE OF ROYALTY AS PER THE PROVISIONS OF THE ACT AS WELL AS ACCORDING TO DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND THOSE COUNTRIES. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THE ASSESSEE SHOULD NOT BE TREATED AS ASSESSEE IN DEFAULT AS PER PROVISIONS OF SECTION 201(1) OF THE ACT. THE ASSESSEE MADE DETAILED SUBMISSIONS WHEREIN INTER-ALIA IT WAS CONTENDED THAT IT HAD OBTAINED ONLY A NON-EXCLUSIVE RIGHT TO USE THE SOFTWARE AND THE TITLE AND FULL OWNERSHIP OF THE SOFTWARE CONTINUED TO REMAIN WITH THE SOFTWARE VENDOR., THERE WAS NO TRANSFER OF ANY RIGHT OF 3 EXCLUSIVE USE THAT AMOUNTS TO ROYALTY AND THAT ASSESSEE WAS NOT LIABLE TO DEDUCT TAX FOR THE PURCHASE OF SOFTWARE LICENSES. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE AO. HE HELD THAT THE PAYMENTS MADE BY THE ASSESSEE TO THE NON- RESIDENTS WERE LIABLE TO BE TAXED AS ROYALTY WITHIN THE MEANING OF SECTION 9(1)(VI) OF THE ACT AS WELL AS ARTICLE 12 UNDER DTAA BETWEEN INDIA AND AUSTRALIA / CANADA / BELGUIM. ACCORDINGLY THE ASSESSEE WAS TREATED AS ASSESSEE IN DEFAULT U/S 201(1) OF THE ACT FOR NON-DEDUCTION OF TDS. HE ALSO NOTED THAT ON IDENTICAL FACTS IN ASSESSEES OWN CASE FOR A.Y. 2008-09 THE PAYMENTS MADE BY THE ASSESSEE WERE CONSIDERED TO BE ROYALTY. HE WAS OF THE VIEW THAT THE PROVISIONS OF SEC.9(1)(VI) WERE APPLICABLE AND SINCE ASSESSEE HAD NOT DEDUCTED THE TAX, HE HAD COMMITTED DEFAULT IN TERMS OF SEC.201(1) AND 201(1A) OF THE ACT AND ASSESSEE WAS IN DEFAULT AS PER THE PROVISIONS OF THE 201 OF THE ACT. HE THEREFORE COMPUTED LIABILITY ON ACCOUNT OF TAX AND INTEREST AT RS.3,87,49,776 FOR A.Y. 2013-14 AND RS.1,51,77,701/- FOR A.Y. 2014-15. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO BY A CONSOLIDATED ORDER DT.23.08.2016 IN APPEAL NO.(PN/CIT(A)- 13/DCIT(INT TAX)-1/31 AND32/2015-16) DISMISSED THE APPEAL OF THE ASSESSEE BY HOLDING AS UNDER : 2.2.2 THE LEARNED AO, THE FACTS OF THE CASE BEING SAME HAS RELIED ON THE ORDER PASSED IN THIS CASE FOR AY 2008-09, AY 2009-10, AY 2010-11 AND AY 2011-12 FOR RAISING THE DEMAND OF TAX AND INTEREST IN THIS YEAR. 2.2.3 I HAVE REPRODUCED THE ARGUMENTS OF THE LEARNED AO AND OF THE APPELLANT IN DETAIL IN MY ORDER NO 77, 91, 92 DATED 31.12.2013 FOR THE AYS 2008-09, 2009-10 AND 2010-11 AS WELL AS IN THE APPELLATE ORDER NO 464 AND 465 DATED 22.05.2014 FOR AYS 2011-12 AND 2012-13. THE APPELLANT HAS FURNISHED THE ARGUMENTS VIDE ITS LETTER DATED 18.08.2016. THE APPELLANTS ARGUMENTS ARE THE SAME AS ADVANCED BY IT IN THE AYS 2008-09, 2009-10, 2010-11 2011-12 AND 2012-13 EXCEPT FOR THE INCLUSION OF THE LATEST DECISION CITED IN ITS FAVOR WHICH WERE NOT AVAILABLE TO IT IN THE EARLIER YEARS. I DO NOT REPRODUCE HERE THE ARGUMENTS OF THE LEARNED AO AS WELL AS OF THE APPELLANT BECAUSE THEY ARE THE SAME AS THEY WERE ADVANCED IN THE 4 EARLIER YEARS. 2.2.4 THE APPELLANT PRAYED THAT IN VIEW OF THE ABOVE FACTS AND ARGUMENTS, THE DECISION OF THE LEARNED AO TO TAX THESE PAYMENTS IS UNWARRANTED AND NOT BASED ON LAW. THE DEMAND SHOULD BE DELETED. 2.2.5 I HAVE CONSIDERED THE FACTS AND ARGUMENTS OF THE APPELLANT ON MERITS OF THE LEARNED AOS DECISION. THE APPELLANT HAS REQUESTED BEFORE ME THAT THE HONORABLE ITAT HAS ALREADY HEARD THE MATTER ON 19.05.2016 THEREFORE; MY APPELLATE ORDER MAY BE DEFERRED. I HAVE CONSIDERED THE APPELLANTS PRAYER. IN MY VIEW, BEING A SUBORDINATE AUTHORITY TO THE HONORABLE ITAT, I AM BOUND BY ITS LATEST DECISION ON THIS ISSUE. I HAVE NO REASON TO BELIEVE THAT THE HONORABLE ITAT NOW INTENDS TO DEVIATE FROM THE LATEST ORDER PASSED BY ITS CO-ORDINATE BENCH IN THE CASE OF CUMMINS INC AND TAKE THE VIEW IN THE APPELLANTS FAVOR. THEREFORE, I DECIDE TO FOLLOW THE HONORABLE ITATS EXISTING ORDER, WHICH I HAVE FOLLOWED IN THE APPELLANTS CASE IN THE EARLIER YEARS AS WELL. 2.2.6 AS STATED, I HAVE PASSED THE APPELLATE ORDER NO 77, 91, 92 DATED 31.12.2013 FOR THE AYS 2008-09, 2009-10 AND 2010-11 AS WELL AS APPELLATE ORDER NO 464 AND 465 DATED 22.05.2014 FOR AYS 2011-12 AND 2012-13 IN THE APPELLANTS CASE. AS THE APPELLANTS ARGUMENTS ARE THE SAME FOR THESE AYS 2008-09, 2009-10, 2010-11, 2011-12 AND 2012-13 AS WELL, I FOLLOW MY DECISION TO DECIDE THE DISPUTE IN FAVOR OF THE REVENUE. ACCORDINGLY, I HOLD THAT THE APPELLANT WAS REQUIRED TO DEDUCT TAX ON THE PAYMENTS MADE BY IT. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) CIRCLE I, PUNE [DCIT] OF TREATING THE PAYMENT FOR PURCHASE OF SOFTWARE OF RS. 26,31,80,774 AS ROYALTY. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE DCIT OF TREATING THE APPELLANT AS AN ASSESSEE-IN-DEFAULT UNDER SECTION 201(1) AND LEVYING INTEREST UNDER SECTION 201(1A) IN RELATION TO DEDUCT OF TAX AT SOURCE FROM SOFTWARE PAYMENTS. 3. 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. 4. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE APPELLANT CONTENTION THAT THERE IS NO TRANSFER OF COPYRIGHT IN THE SOFTWARE BUT IT IS THE TRANSFER OF COPYRIGHTED ARTICLE, WHICH IS NOT TAXABLE AS ROYALTY IN TERMS OF THE TAX TREATIES BETWEEN INDIA AND BELGIUM/CANADA/US. 5. THE LEARNED CIT(A) ERRED IN DECIDING THE MATTER BY RELYING ON THE DECISION OF THE HON'BLE PUNE TRIBUNAL IN THE CASE OF CUMISN INC, WHICH IS NOT APPLICABLE TO THE FACTS OF THE APPELLANT. 6. THE LEARNED CIT(A) ERRED IN PASSING AN ORDER WITHOUT GRANTING THE APPELLANT AN OPPORTUNITY OF PERSONAL HEARING. 5 4. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT THOUGH ASSESSEE HAS RAISED VARIOUS GROUNDS BUT ALL THE GROUNDS ARE INTER- CONNECTED. HE REITERATED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES AND FURTHER SUBMITTED THAT THERE IS NO DISPUTE ABOUT THE FACTS IN THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THAT OF EARLIER YEARS. HE SUBMITTED THAT IN ASSESSEES OWN CASE FOR A.Y. 2008-09 TO 2012-13, ON IDENTICAL ISSUE, THE MATTER WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE CO-ORDINATE BENCH OF THE TRIBUNAL VIDE ORDER DT.31.05.2017. HE POINTED TO THE RELEVANT FINDINGS OF THE HONBLE TRIBUNAL. HE THUS SUBMITTED THAT IN VIEW OF DECISION OF TRIBUNAL, THE ORDER OF LD.CIT(A) BE SET ASIDE. LD.D.R. ON THE OTHER HAND, SUPPORTED THE ORDER OF LOWER AUTHORITIES. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS ABOUT TREATING THE ASSESSEE AS ASSESSEE IN DEFAULT ON ACCOUNT OF NON-DEDUCTION OF TDS ON THE PAYMENTS MADE TO NON-RESIDENTS. WE FIND THAT IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN A.Y. 2008-09 AND THE ISSUE WAS DECIDED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL (VIDE ORDER DT.31.05.2017) BY OBSERVING AS UNDER : 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 THE 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 6 BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD CAPITAL GAINS) FOR (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (II) THE IMPARTING OF ANY INFORMATION CONCERNING THE WORKING OF, OR THE USE OF, A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (III) THE USE OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL ; (V) THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB; (VI) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS 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 CONNECTION 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 CONCERNED 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 ROYALTY 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. 20. THE CASE OF THE REVENUE IS THAT THE ASSESSEE HAS MADE PAYMENT FOR ACQUIRING THE RIGHT TO USE SOFTWARE. THE AUTHORITIES 7 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, THEREFORE, 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 DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GALATEA LTD. VS. DEPUTY COMMISSIONER 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. AND 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 WITHIN 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 HAVE CAREFULLY ANALYZED THE FACTS OF THE CASE AND ARGUMENTS MADE BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS COUNTER ARGUMENTS 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 IN 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 COMPLETE DETAILS HAVE BEEN GIVEN BY THE ASSESSEE IN THE PAPER BOOK AT PAGE222 AND 224. OUR ATTENTION WAS ALSO DRAWN ON CERTIFICATE FROM THE ASSESSEE ENCLOSED AT PAGE225 OF THE PAPER BOOK CERTIFYING THAT SOFTWARE SUPPLIED BY THE ASSESSEE TO END USER WAS FOR INTEGRATION 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 NONEXCLUSIVE, NONTRANSFERABLE 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 8 AND CREATING A THREE DIMENSIONAL IMAGE OF THESE FEATURES OF ROUGH DIAMOND. CLAUSE 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 DISCOVER 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 DOWN 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 MACHINE 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 PAGE49 IS REPRODUCED HEREUNDER FOR THE SAKE OF READY REFERENCE: 10.2 SARIN INDIA ACKNOWLEDGES 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 LEARNING 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 BE 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 FUNCTIONING 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, SINCE 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 GIVEN 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 PROVIDED 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 9 TRANSACTION SHALL NOT BE ALTERED BECAUSE OF THESE TWO FEATURES ONLY. THE BREAKUP 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 EMAIL FOR VARIOUS SECURITY REASONS AND TO ENABLE THE CUSTOMER TO HAVE 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 CONVENIENCE 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 OPERATING 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 DECISIONS 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 SOFTWARE 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 : 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 IT 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 SUBMISSION 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. 10 SINCE, THERE WAS NO PAYMENT OF ROYALTY, THERE IS NO QUESTION OF DEDUCTING 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. 6. BEFORE US, REVENUE, HAS NOT PLACED ANY MATERIAL ON RECORD TO CONTROVERT THE SUBMISSIONS OF LD.A.R., NOR HAS POINTED OUT ANY DISTINGUISHING FEATURE IN THE FACTS OF THE PRESENT CASE AND THAT OF THE FACTS IN A.Y. 2008-09. WE THEREFORE, RESPECTFULLY FOLLOWING THE SAME REASONING AS GIVEN BY THE CO-ORDINATE BENCH OF THE TRIBUNAL WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR A.Y. 2008-09 TO 2012- 13 AND FOR SIMILAR REASONS, HOLD THAT IN THE PAYMENT MADE BY THE ASSESSEE FOR PURCHASE OF EQUIPMENT, THERE WAS NO ELEMENT OF ROYALTY AND THEREFORE THE QUESTION OF DEDUCTION OF WITHHOLDING TAX BY ASSESSEE UNDER THE PROVISIONS OF SEC.195 OF THE ACT DOES NOT ARISE. WE THEREFORE SET ASIDE THE ORDER PASSED BY AO U/S. 201(1) AND 201(1A) OF THE ACT. THUS, THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.2465/PUN/2016 IS ALLOWED. 8. AS FAR AS APPEAL IN ITA NO.2466/PUN/2016 IS CONCERNED, AS THE FACTS OF THE CASE BEING IDENTICAL TO THE FACTS AND ISSUE OF THE CASE IN ITA NO.2465/PUN/2016, WE, THEREFORE, FOR THE REASONS STATED HEREIN WHILE DISPOSING OF THE APPEAL IN ITA NO.2465/PUN/2016 AND FOR SIMILAR REASONS, ALLOW THE GROUNDS OF APPEAL OF ASSESSEE. THUS, THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 11 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.2466/PUN/2016 IS ALLOWED. 10. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON 23 RD AUGUST, 2017. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 23 RD AUGUST, 2017. YAMINI / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT (IT-TP), PUNE 4. THE CIT(A)-13, PUNE. 5. , , / DR, ITAT, B PUNE; 6. [ / GUARD FILE. / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE