DDIT (IT)-1(1), MUMBAI V. M/S. ALCATEL USA INTERNATIONAL MARKETING INC.(NOW KNOWN AS ALCATEL- LUCENT USA INC.), MUMBAI

ITA 3728/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1288 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 09-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDER SINGH
• Keywords: Business income; Double taxation relief

Judgement Text

1 I TA NO 3728/MUM/2009 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI R S PADVEK AR, JM ITA NO. 3728/MUM/2009 (ASST YEAR 2004-05 ) THE DY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)1(1) MUMBAI VS ALCATEL USA INTERNA TIONAL MKTG INC. (NOW KNOWN AS ALCATEL LUCENT USA INC) C/O S R BATLIBOI & CO CAS 18 TH FLOOR - EXPRESS TOWERS NARIMAN POINT MUMBAI (APPELLANT) (RESPONDENT) PAN AAECA4907H ASSESSEE BY: SHRI KA NCHAN KAUSHAL/MR DHANESH BAFNA REVENUE BY: SHRI N ARENDER SINGH O R D E R PER R S PADVEKAR: IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE IMP UGNED ORDER OF THE LD CIT(A)-XXXI, MUMBAI FOR THE ASSESSMENT YEAR 2004 -05 DATED 25.3.2009. 2 THE ONLY ISSUE ARISES FROM THE GROUNDS TAKEN BY T HE REVENUE IS WHETHER THE LD CIT(A) ERRED IN HOLDING THAT THE PA. Y.MENT OF RS.16,72,61,927/- RECEIVED BY THE ASSESSEE COMPANY WAS ON ACCOUNT OF SALE OF COPYRIGHT ARTICLE AND DOES NOT AMOUNT TO ROYALTY WITHIN THE MEANING OF ARTICLE 12(3) OF THE DTAA BETWEEN INDIA AND USA. 3 THE FACTS WHICH REVEAL FROM THE RECORDS ARE THAT THE ASSESSEE COMPANY IS INCORPORATED IN USA AND ALSO A TAX RESID ENT OF USA. THE ASSESSEE MARKETS AND SELLS ALCATEL PRODUCTS TO CUST OMERS OUTSIDE USA. THE ASSESSEE HAS SUPPLIED SOFTWARE UNDER THE SUBSCRIBER DATA NOTE (SDN) NETWORK SOFTWARE AGREEMENT TO RELIANCE INFOCOMM LTD (RIL) WHICH IS USED FOR THE PURPOSE OF TELECOMMUNICATION NETWORK OF RIL . FOR THE SUPPLY OF THE SAID SOFTWARE, THE ASSESSEE COMPANY RECEIVED THE GR OSS CONSIDERATION OF 2 I TA NO 3728/MUM/2009 RS.16,72,61,927/-. THE SOFTWARE SUPPLIED BY THE AS SESSEE COMPANY TO RIL I.E SDN CREATES A DATABASE TO STORE SUBSCRIBER PROF ILES AND OTHER INFORMATION, E.G CUSTOMER PHONE NUMBER, CALLING PLA N, ETC AND MAKE THIS INFORMATION AVAILABLE TO DIFFERENT NETWORK ELEMENT REQUESTING IT. 3.1 THE ASSESSEE CONTENDED BEFORE THE A.O. THAT THE CONSIDERATION RECEIVED FOR THE SUPPLY OF SOFTWARE FROM RIL WAS NO T TAXABLE IN INDIA AS THE SAME WAS IN THE NATURE OF BUSINESS PROFIT AND NOT R OYALTY AND AS THE ASSESSEE IS THE TAX RESIDENT OF USA; IN VIEW OF THE DTAA BETWEEN INDIA AND USA, THE SAME CANNOT BE TAXED. THE ASSESSEE ALSO R ELIED ON THE AGREEMENT ENTERED INTO WITH RIL. 3.2 AS PER PARA 42.1 OF THE SAID AGREEMENT, THERE I S A LICENSE CLAUSE WHICH READS AS UNDER: HERE IT IS MENTIONED THAT THE ASSESSEE GRANTS A PE RPETUAL, IRREVOCABLE, NON-EXCLUSIVE, UNRESTRICTED (WITHIN RELIANCES NETW ORK) RIGHT TO RELIANCE FOR THE USE OF SOFTWARE. OTHER PARAS, WHICH ARE REFERRED BY THE A.O. READ AS UNDER: PARA 6.4 TITLE TO THE COPYRIGHT IN SOFTWARE REMA INS WITH THE ASSESSEE. PARA 42.3 RELIANCE SHALL NOT TRANSFER, ASSIGN, SUBLICENSE OR OUTSOURCE THE LICENSE WITHOUT THE WRITTEN PERMISSIO N OF THE ASSESSEE EXCEPT WHERE IT IS REQUIRED FOR ITS OWN NETWORK. 42.7 RELIANCE SHALL NOT USE THE SOFTWARE FOR (I) CO MMERCIAL TIME SHARING WITH NON-AFFILIATE THIRD PARTIES (II) RENTAL, LEASE AND SUB-LICENSING TO NON- AFFILIATE THIRD PARTIES (III) SERVICE-BUREAU PURPOS ES. 4 THE SUM AND SUBSTANCE OF THE CONTROVERSY IS IN RE SPECT OF NATURE OF THE PA.Y.MENT RECEIVED BY THE ASSESSEE FOR PROVIDIN G SOFTWARE TO RIL, WHETHER THE SAME IS ROYALTY OR IT IS CONSIDERATI ON TOWARDS SALE OF THE SOFTWARE. 5 THE A.O. RELIED ON THE ASSESSMENT ORDER FOR A.Y. 2003-04, IN WHICH IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE A.O. AND THE CLAIM OF THE ASSESSEE WAS REJECTED THAT IT WAS BUSINESS INCOME A ND NOT ROYALTY. WHEN THE ISSUE REACHED BEFORE THE TRIBUNAL FOR THE A.Y. 2003-04 IN APPEAL BEING 3 I TA NO 3728/MUM/2009 ITA NO.2031/MUM/07, THE TRIBUNAL CONFIRMED THE ORDE R OF THE LD CIT(A) IN WHICH IT WAS HELD THAT THE AMOUNT RECEIVED FOR ALLO WING USE OF THE SOFTWARE CANNOT BE TREATED AS ROYALTY EITHER UNDER I. T. A CT OR DTAA. THE OPERATIVE PART OF THE ORDER OF THE TRIBUNAL READS AS UNDER: WE HAVE HEARD THE LD DR AS WELL AS THE LD COUNSEL APPEARING ON BEHALF OF THE ASSESSEE AND CAREFULLY PERUSED THE RECORD. A DMITTEDLY, THE ISSUE STANDS SQUARELY COVERED BY THE DECISION OF THE ITAT , DELHI (SPECIAL BENCH) IN THE CA OF MOTOROLA INC. ERICSSON RADIO SY STEMS AB AND NOKIA CORPORATION VS DCIT 96 TTJ 1 (2005 TIOL -103 ITAT D EL SB). LD DR MADE A FEEBLE ATTEMPT TO PLACE RELIANCE UPON THE DE CISION OF THE APEX COURT IN THE CASE OF TATA CONSULTANCY SERVICES 271 ITR 407. (2004 TIOL -87-SC-CT-LB TO SUBMIT THAT SOFTWARE FALLS WIT HIN THE DEFINITION OF GOODS AND HENCE THERE WAS TRANSFER OF RIGHTS IN T HE SOFTWARE AND THUS THE A.O. WAS JUSTIFIED IN CONSIDERING THE RECEIPT A S ROYALTY PAYMENT TOWARDS TRANSFER OF THE GOODS. LD COUNSEL HOWEVER, PLACED RELIANCE UPON THE DECISION OF ITAT DELHI BENCH, N THE CASE O F INFRASOFT LTD VS ADIT ITA NO.47/DEL/2008 DATED 19 DECEMBER, 2008 (29 TIOL-21-ITAT DEL) TO SUBMIT THAT THE DECISION OF THE APEX COURT HAS LIMITED APPLICATION AND THE PRINCIPLE THEREIN CANNOT BE APPLIED TO THE PECULIAR FACTS OF THE INSTANT CASE IN AS MUCH AS THE AMOUNT RECEIVED BY T HE ASSESSEE UNDER THE LICENSE AGREEMENT WAS IN LIEU OF ALLOWING THE U SE OF SOFTWARE AND THUS IT CANNOT BE TERMED AS A ROYALTY EITHER UNDER THE INCOME TAX ACT OR UNDER DTAA. IN THE LIGHT OF THE DECISIONS CITED BY THE LD COUNSEL APPEARING ON BEHALF OF THE ASSESSEE AND IN THE ABSE NCE OF ANY CONTRARY VIEW TAKEN ON THIS ISSUE, WE DO NOT FIND ANY INFIRM ITY IN THE ORDER PASSED BY THE LD CIT(A) AND ACCORDINGLY REJECT GROU ND NO.1 OF THE REVENUE. 6 IN THE ASSESSMENT YEAR 2004-05, THE LD CIT(A) HAS DEALT WITH THE ISSUE IN DETAIL IN HIS ORDER AND AFTER EXAMINING THE RELE VANT CLAUSES OF THE AGREEMENT BETWEEN THE ASSESSEE AND RIL AS WELL AS T HE PROVISIONS OF THE I T ACT AND DTAA BETWEEN INDIA AND U.SA., HELD THAT PA YMENT RECEIVED BY THE 4 I TA NO 3728/MUM/2009 ASSESSEE COMPANY IS TOWARDS THE SALE OF COPYRIGHT A RTICLE AND DOES NOT AMOUNT TO ROYALTY WITHIN THE MEANING OF ARTICLE 12 (3) OF THE DTAA BETWEEN INDIA AND USA. IN OUR OPINION, THERE IS NO DIFFERE NCE IN THE FACTS AND MATERIAL HERE BEFORE US AND ACCORDINGLY, WE FOLLOW THE ORDER OF THE TRIBUNAL FOR A.Y. 2003-04 (SUPRA) AND AGREE WITH THE FINDING S OF THE LD CIT(A). 7 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THE 25 TH , DAY OF JUNE 2010. SD/- SD/- ( J SUDHAKAR REDDY ) ACCOUNTANT MEMBER (R S PADVEKAR ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 25 TH , JUNE 2010 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI