DCIT, New Delhi V. M/s. Alcatel Lucent Portugal SA, New Delhi

ITA 3410/DEL/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2168 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2003-2004
• Appeal Filed On: 28-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: SHAGUN MAHAJAN
• Keywords: Double taxation relief; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.AS. NO.3410/DEL/2015 ASSESSMENT YEARS: 2003-04 DCIT, CIRCLE-1(1)(1), NEW DELHI. VS. ALCATEL LUCENT PORTUGAL SA, C/O PWC, 11A, VISHNU DIGAMBER MARG, SUCHETA BHAWAN, NEW DELHI. TAN/PAN: AADCA 1677R (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SURENDER PAL, SR.D.R. RESPONDENT BY: SHRI SHAGUN MAHAJAN, CA DATE OF HEARING: 28 08 2018 DATE OF PRONOUNCEMENT: 31 08 2018 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE IMPUGNED ORDER DATED 18.03.2015, PASSED BY COMMISSIONER OF INCOME TAX (APPEALS)-XLII, NEW DELH I FOR THE QUANTUM OF ASSESSMENT PASSED U/S.147 R.W.S. 144C(1) FOR THE ASSESSMENT YEAR 2003-04. IN THE GROUNDS OF APPEAL, THE REVENUE HAS CHALLENGED THE ORDER OF THE LD. CIT (A) HOLDING THAT ROYALTY INCOME OF THE ASSESSEE IS A BUSINESS I NCOME. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE, ALCATE L LUCENT PORTUGAL SA, IS A NON RESIDENT COMPANY INCORPORATED UNDER THE LAWS OF PORTUGAL. THE ASSESSEE IS ONE OF THE AL CATEL I.T.A. NO.3410/DEL/2015 2 LUCENT ENTITY WHICH HAD SUPPLIED TELECOM EQUIPMENT COMPRISING OF BOTH HARDWARE AND SOFTWARE TO CUSTOME RS IN INDIA DURING THE PERIOD UNDER CONSIDERATION. IT HAD OPENED A PROJECT OFFICE IN INDIA WITH THE APPROVAL OF RESERV E BANK OF INDIA WITH EFFECT FROM 27.06.2001 FOR EXECUTING LOC AL PORTION OF CONTRACT AWARDED TO IT BY DELHI METRO RAIL CORPO RATION ON 09.03.2001. THE ASSESSEE HAS FILED ITS RETURN OF IN COME ON 02.12.2013 DECLARING TOTAL INCOME OF RS.48,63,110/- . THEREAFTER, IN FEBRUARY 2009, A SURVEY WAS CONDUCTE D AT THE PREMISES OF THE ALACATEL-LUCENT INDIA LTD. AND BASE D ON SUCH SURVEY; NOTICE U/S.148 WAS ISSUED FOR REOPENING THE SAID ASSESSMENT. THE ASSESSEES CASE BEFORE THE ASSESSIN G OFFICER WAS THAT NO INCOME HAD ACCRUED OR RECEIVED BY THE A SSESSEE IN RESPECT OF OFF-SHORE SUPPLIES WHICH CAN BE SAID TO BE TAXABLE IN INDIA AS IT WAS MADE FROM OUTSIDE INDIA. LEARNED ASSESSING OFFICER HELD THAT ASSESSEE HAS A PE IN IN DIA AND 3.75% OF THE TOTAL EQUIPMENT SUPPLIES ARE ATTRIBUTA BLE TO THE PE IN INDIA. FURTHER, ON THE ISSUE OF TAXABILITY OF SOFTWARE COMPONENT IN TELECOM EQUIPMENTS SUPPLIES WHICH HAS BEEN TREATED AS ROYALTY BY THE ASSESSING OFFICER, THE ASSESSING OFFICER HAS RELIED UPON BY THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2006-07 IN THE CASE OF ALCATEL-LUCE NT FRANCE WHEREIN IT HAS BEEN HELD THAT SOFTWARE COMPO NENT OF THE TELECOM EQUIPMENT IS SUPPLIED AS TAXABILITY IN ROYALTIES. 3. LD. CIT (A) HAS REVERSED THE SAID FINDINGS BY OB SERVING AND HOLDING AS UNDER: 10.1 I HAVE CONSIDERED THE SUBMISSION MADE BY THE I.T.A. NO.3410/DEL/2015 3 APPELLANT. THE LD. AO WHILE RELYING UPON THE ASSESS MENT ORDER DATED 23.03.2010 IN THE CASE OF ALCATEL LUCENT FRAN CE FOR AY 2006-07 HELD THAT SOFTWARE COMPONENT OF THE TELECOM EQUIPMENT SUPPLIED IS TAXABLE AS ROYALTIES. IT HAS BEEN SEE N THAT SAID ORDER HAS BEEN ADJUDICATED IN FAVOUR OF THE APPELLA NT BY CIT(A) AND HONBLE ITAT. ACCORDINGLY, I HOLD THAT CONSIDER ATION FOR EMBEDDED SOFTWARE COMPONENT IN TELECOM EQUIPMENT SU PPLIES IS NOT IN NATURE OF ROYALTIES. 10.2 FURTHER/IT HAS BEEN HELD BY CIT (A) IN APPELLATE OR DER IN CASE OF ALCATEL LUCENT FRANCE, IN ACCORDANCE WITH T HE RULING OF HON'BLE DELHI HIGH COURT IN THE CASE OF ERICSSON AB , THAT THE CONSIDERATION RECEIVED BY THE APPELLANT FOR THE SUP PLY OF EMBEDDED SOFTWARE WAS TO BE TREATED AS CONSIDERATIO N RECEIVED FOR SUPPLY OF GOODS AND THEREFORE TAXABLE AS BUSINE SS INCOME & NOT AS ROYALTY. IT IS UNDISPUTED THAT THE APPELLANT HAS PE IN INDIA. IT HAS BEEN HELD IN PARA 7.2 SUPRA THAT NET PROFIT CHARGEABLE TO TAX AS ATTRIBUTABLE TO PE IN INDIA IS @ 3.75% OF THE HARDWARE SALES. THEREFORE, AO IS DIRECTED TO TAX TH E TOTAL CONSIDERATION RECEIVED BY THE APPELLANT FOR INTEGRA TED SUPPLY OF HARDWARE AND SOFTWARE ON THE SAME BASIS AS ADOPTED FOR HARDWARE SALES. THE GROUND OF APPEAL IS DISPOSED OF F ACCORDING. 4. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT, N OW THIS ISSUE STANDS COVERED BY THE JUDGMENT OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09 WHICH HAS ALSO BEEN AFFIRMED BY THE HON'BLE DELHI HIGH CO URT, SINCE REPORTED IN (2015) 372 ITR 476 . I.T.A. NO.3410/DEL/2015 4 5. LEARNED DEPARTMENT REPRESENTATIVE ALSO ADMITTED THAT THE ISSUE STANDS COVERED BY THE JUDGMENT OF HON'BLE DELHI HIGH COURT. 6. AFTER CONSIDERING THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER AS WELL AS THE ARGUMENT PLACED BY TH E LEARNED COUNSEL, WE FIND THAT THE ONLY ISSUE RAISED BEFORE US IS, WHETHER THE ROYALTY INCOME CAN BE TAXED AS BUSI NESS INCOME OR NOT. IN ASSESSEES OWN CASE FOR THE EARLI ER YEARS THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE ON SIMILAR SET OF FACTS BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ALCATEL LUCENT CANADA, AFTER OBSERVING AND HOLD ING AS UNDER: 5. WE HAVE NOTICED, AT THE OUTSET, THAT THE ITAT H AD RELIED UPON THE RULING OF THIS COURT IN DIRECTOR OF INCOME TAX V. ERICSSON A.B . (2012) 343 ITR 470 WHEREIN IDENTICAL ARGUMENT WITH RESPECT TO WHETHER CONSIDERATION PAID TOWARDS SUPPLY OF SOFTWARE ALONG WITH HARDWARE - RATHER SOFTWARE EMBE DDED IN THE HARDWARE AMOUNTED TO ROYALTY. AFTER NOTICING SE VERAL CONTENTIONS OF THE REVENUE, THIS COURT HELD IN ERIC SSON A.B. (SUPRA) AS FOLLOWS:- '54. IT IS DIFFICULT TO ACCEPT THE AFORESAID SUBMIS SIONS IN THE FACTS OF THE PRESENT CASE. WE HAVE ALREADY HELD ABO VE THAT THE ASSESSEE DID NOT HAVE ANY BUSINESS CONNECTION IN IN DIA. WE HAVE ALSO HELD THAT THE SUPPLY OF EQUIPMENT IN QUES TION WAS IN THE NATURE OF SUPPLY OF GOODS. THEREFORE, THIS ISSU E IS TO BE EXAMINED KEEPING IN VIEW THESE FINDINGS. MOREOVER, ANOTHER FINDING OF FACT IS RECORDED BY THE TRIBUNAL THAT TH E CELLULAR I.T.A. NO.3410/DEL/2015 5 OPERATOR DID NOT ACQUIRE ANY OF THE COPYRIGHTS REFE RRED TO IN SECTION 14 (B) OF THE COPYRIGHT ACT ,1957. 55. ONCE WE PROCEED ON THE BASIS OF AFORESAID FACTU AL FINDINGS, IT IS DIFFICULT TO HOLD THAT PAYMENT MADE TO THE AS SESSEE WAS IN THE NATURE OF ROYALTY EITHER UNDER THE INCOME-TAX ACT OR UNDER THE DTAA. WE HAVE TO KEEP IN MIND WHAT WAS SOLD BY THE ASSESSEE TO THE INDIAN CUSTOMERS WAS A GSM WHICH CO NSISTED BOTH OF THE HARDWARE AS WELL AS THE SOFTWARE, THERE FORE, THE ITA 119/2015 & CONN. PAGE 10 TRIBUNAL IS RIGHT IN HOLDI NG THAT IT WAS NOT PERMISSIBLE FOR THE REVENUE TO ASSESS THE S AME UNDER TWO DIFFERENT ARTICLES. THE SOFTWARE THAT WAS LOADE D ON THE HARDWARE DID NOT HAVE ANY INDEPENDENT EXISTENCE. TH E SOFTWARE SUPPLY IS AN INTEGRAL PART OF THE GSM MOBI LE TELEPHONE SYSTEM AND IS USED BY THE CELLULAR OPERATOR FOR PRO VIDING THE CELLULAR SERVICES TO ITS CUSTOMERS. THERE COULD NOT BE ANY INDEPENDENT USE OF SUCH SOFTWARE. THE SOFTWARE IS E MBODIED IN THE SYSTEM AND THE REVENUE ACCEPTS THAT IT COULD NO T BE USED INDEPENDENTLY. THIS SOFTWARE MERELY FACILITATES THE FUNCTIONING OF THE EQUIPMENT AND IS AN INTEGRAL PART THEREOF. O N THESE FACTS, IT WOULD BE USEFUL TO REFER TO THE JUDGMENT OF THE SUPREME COURT IN TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PR ADESH (2004) 271 ITR 401 (SC), WHEREIN THE APEX COURT HEL D THAT SOFTWARE WHICH IS INCORPORATED ON A MEDIA WOULD BE GOODS AND, THEREFORE, LIABLE TO SALES TAX. FOLLOWING DISC USSION IN THIS BEHALF IS REQUIRED TO BE NOTED:- 'IN OUR VIEW, THE TERM 'GOODS' AS USED IN ARTICLE 3 66(12) OF THE CONSTITUTION OF INDIA AND AS DEFINED UNDER THE SAID ACT ARE VERY WIDE AND INCLUDE ALL TYPES OF MOVABLE PROPERTIES, W HETHER I.T.A. NO.3410/DEL/2015 6 THOSE PROPERTIES BE TANGIBLE OR INTANGIBLE. WE ARE IN COMPLETE AGREEMENT WITH THE OBSERVATIONS MADE BY THIS COURT IN ASSOCIATED CEMENT COMPANIES LTD. (SUPRA). A SOFTWAR E PROGRAMME MAY CONSIST OF VARIOUS COMMANDS WHICH ENA BLE THE COMPUTER TO PERFORM A DESIGNATED TASK. THE COPYRIGH T IN THAT PROGRAMME MAY REMAIN WITH THE ORIGINATOR OF THE PRO GRAMME. BUT THE MOMENT COPIES ARE MADE AND MARKETED, IT BEC OMES GOODS, WHICH ARE SUSCEPTIBLE TO SALES TAX. EVEN INTELLECTUAL PROPERTY, ONCE IT IS PUT ON TO A MEDIA, WHETHER IT BE IN THE FORM OF BOOKS OR CANVAS (IN CASE OF PA INTING) OR COMPUTER DISCS OR CASSETTES, AND MARKETED WOULD BEC OME 'GOODS'. WE SEE NO ITA 119/2015 & CONN. PAGE 11 DIF FERENCE BETWEEN A SALE OF A SOFTWARE PROGRAMME ON A CD/FLOP PY DISC FROM A SALE OF MUSIC ON A CASSETTE/CD OR A SALE OF A FILM ON A VIDEO CASSETTE/CD. IN ALL SUCH CASES, THE INTELLECT UAL PROPERTY HAS BEEN INCORPORATED ON A MEDIA FOR PURPOSES OF TR ANSFER. SALE IS NOT JUST OF THE MEDIA WHICH BY ITSELF HAS VERY L ITTLE VALUE. THE SOFTWARE AND THE MEDIA CANNOT BE SPLIT UP. WHAT THE BUYER PURCHASES AND PAYS FOR IS NOT THE DISC OR THE CD. A S IN THE CASE OF PAINTINGS OR BOOKS OR MUSIC OR FILMS THE BUYER I S PURCHASING THE INTELLECTUAL PROPERTY AND NOT THE MEDIA I.E. TH E PAPER OR CASSETTE OR DISC OR CD. THUS A TRANSACTION SALE OF COMPUTER SOFTWARE IS CLEARLY A SALE OF 'GOODS' WITHIN THE ME ANING OF THE TERM AS DEFINED IN THE SAID ACT. THE TERM 'ALL MATE RIALS, ARTICLES AND COMMODITIES' INCLUDES BOTH TANGIBLE AND INTANGIBLE/INCORPOREAL PROPERTY WHICH IS CAPABLE OF ABSTRACTION, CONSUMPTION AND USE AND WHICH CAN BE TRANSMITTED, TRANSFERRED, DELIVERED, STORED, POSSESSED ETC. THE SOFTWARE PROGRAMMES HAVE ALL THESE ATTRIBUTES... I.T.A. NO.3410/DEL/2015 7 IN ADVENT SYSTEMS LTD. V. UNISYS CORPN, (925 F. 2D 670 (3RD CIR. 1991)), RELIED ON BY MR. SORABJEE, THE COURT W AS CONCERNED WITH INTERPRETATION OF UNIFORM CIVIL CODE WHICH 'AP PLIED TO TRANSACTIONS IN GOODS'. THE GOODS THEREIN WERE DEFI NED AS 'ALL THINGS (INCLUDING SPECIALLY MANUFACTURED GOODS) WHI CH ARE MOVEABLE AT THE TIME OF THE IDENTIFICATION FOR SALE '. IT WAS HELD : 'COMPUTER PROGRAMS ARE THE PRODUCT OF AN INTELLECTU AL PROCESS, BUT ONCE IMPLANTED IN A MEDIUM ARE WIDELY DISTRIBUT ED TO COMPUTER OWNERS. AN ANALOGY CAN BE DRAWN TO A COMPA CT DISC RECORDING OF ITA 119/2015 & CONN. PAGE 12 AN ORCHES TRAL RENDITION. THE MUSIC IS PRODUCED BY THE ARTISTRY OF MUSICIANS AND IN ITSELF IS NOT A 'GOOD,' BUT WHEN TRANSFERRED TO A LASER- READABLE DISC BECOMES A READILY MERCHANTABLE COMMOD ITY. SIMILARLY, WHEN A PROFESSOR DELIVERS A LECTURE, IT IS NOT A GOOD, BUT, WHEN TRANSCRIBED AS A BOOK, IT BECOMES A GOOD. THAT A COMPUTER PROGRAM MAY BE COPYRIGHTABLE AS INTELLECTU AL PROPERTY DOES NOT ALTER THE FACT THAT ONCE IN THE FORM OF A FLOPPY DISC OR OTHER MEDIUM, THE PROGRAM IS TANGIBLE, MOVEABLE AND AVAILABLE IN THE MARKETPLACE. THE FACT THAT SOME PROGRAMS MAY BE TAILORED FOR SPECIFIC PURPOSES NEED NOT ALTER THEIR STATUS AS 'GOODS' BECAUSE THE CODE DEFINITION INCLUDES 'SPECI ALLY MANUFACTURED GOODS.' 56. A FORTIORARI WHEN THE ASSESSEE SUPPLIES THE SOF TWARE WHICH IS INCORPORATED ON A CD, IT HAS SUPPLIED TANGIBLE P ROPERTY AND THE PAYMENT MADE BY THE CELLULAR OPERATOR FOR ACQUI RING SUCH PROPERTY CANNOT BE REGARDED AS A PAYMENT BY WAY OF ROYALTY.' I.T.A. NO.3410/DEL/2015 8 6. THIS COURT ALSO NOTICED THAT THE ITAT HAD IN ADD ITION RELIED UPON OTHER JUDGMENT OF THIS COURT I.E. DIRECTOR OF INCOME TAX V. M/S. NOKIA NETWORKS , (2013) 358 ITR 259 (DELHI). 7. IN VIEW OF THIS SETTLED POSITION, THIS COURT IS OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES. THE APP EAL IS ACCORDINGLY DISMISSED. 7. THUS, RESPECTFULLY FOLLOWING THE AFORESAID JUDGME NT OF THE HON'BLE HIGH COURT, WE ARE DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE AND CONSEQUENTLY THE GROUND RAISED BY THE REVENUE IS DISMISSED. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST, 2018. SD/- SD/- [PRASHANT MAHARISHI] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 31 ST AUGUST, 2018 PKK: