DDIT, New Delhi V. M/s. Eservglobal SA, New Delhi

ITA 557/DEL/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6997 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 30-11-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 30-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: NAGESHWAR RAO ADVS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B, NEW DELHI BEFORE SHRI J. S. REDDY, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO. 557/DEL/2013 (ASSESSMENT YEAR 2006-07) APPELLANT BY : SH. ANIL KUMAR SHARMA, SR. DR. RESPONDENT BY : SH. NAGESHWAR RAO, ADVS DATE OF HEARING : 12.01.2017 DATE OF PRONOUNCEMENT: 19.01.2017 ORDER PER BEENA A. PILLAI, JM: 1. THE PRESENT APPEAL HAS BEEN FILED BY REVENUE AGAIN ST ORDER DATED 25.11.2012 PASSED BY LD. CIT (A) 11 FOR ASSES SMENT YEAR 2006-07 ON THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF TREATING THE RECEIPT OF THE ASSESSEE FROM NORTEL AS ROYALTY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THE RETROSPECT IVE AMENDMENT MADE VIDE FINANCE ACT, 2012 IN SECTION 9( L)(VI) D C IT CIRCLE-1(2), ROOM NO. 410, INTERNATIONAL TAXATION, 4 TH FLOOR, E2 TOWER, CIVIC CENTRE, NEW DELHI (APPELLANT) VS. ESERVGLOBAL SA 221, GROUND FLOOR OKHLA INDUSTRIAL PHASE-III NEW DELHI GIR/PAN : AAACF7202Q (RESPONDENT) ITA NO. 557/DEL/2013 (AY 2006-07) PAGE 2 OF 6 OF THE ACT (I.E. EXPLANATION 4) RELATING TO SOFTWAR E TAXATION AS ROYALTY. 3. THE APPELLANT CRAVES TO ADD, AMEND, MODIFY, OR AL TER ANY GROUNDS OF APPEAL AT THE TIME OR BEFORE THE HEARING OF THE APPEAL. 2. AT THE OUTSET, LD. COUNSEL FOR ASSESSEE SUBMITTED THAT THE ISSUE RELATES TO WHETHER OFFSHORE SUPPLY OF TELECO M EQUIPMENT AND SOFTWARE AND PROVISION OF RELATED SERVICES TO THE C USTOMERS OF NORTEL BY ASSESSEE IS IN THE NATURE OF ROYALTY, AND IS TAXABLE IN INDIA. LD. COUNSEL FOR ASSESSEE SUBMITTED THAT ISSU E STANDS SQUARELY COVERED BY DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DDIT VERSUS ERICSSON AB REPORTED IN 343 ITR 370 . HE SUBMITTED THAT LD. CIT (A) HAS DELETED THE ADDITION MADE BY ASSESSING OFFICER BY RELYING UPON THE JUDGMENTS PAS SED BY HONBLE DELHI HIGH COURT IN THE CASE OF ERICSSON AB (SUPRA) ALONG WITH THE FOLLOWING DECISIONS: GEOFFREY MANNERS VS. CIT REPORTED IN 2 TO 1 ITR 695 GRAPHITE VERSUS CIT REPORTED IN 188 ITR 146 JYOTIKANA VS. CIT REPORTED IN 26 ITR 424 BENOYKUMAR VS. CIT REPORTED IN 24 ITR 70 WHICH HAS B EEN AFFIRMED BY HONBLE SUPREME COURT REPORTED IN 32 ITR 466 3. LD. CIT(A) HAS OBSERVED THAT THE ASSESSEE HAS SUPP LIED SOFTWARE WHICH HAS BEEN SUBSEQUENTLY CONFIGURED INT O THE HARDWARE BY THE ASSESSEE ITSELF. LD. COUNSEL FOR AS SESSEE PLACED HIS RELIANCE UPON THE DECISION OF ERICSSON AB PASSE D BY HONBLE JURISDICTIONAL HIGH COURT. 4. ON THE CONTRARY, LD. DR PLACED HIS RELIANCE UPON T HE ORDER PASSED BY ASSESSING OFFICER. ITA NO. 557/DEL/2013 (AY 2006-07) PAGE 3 OF 6 5. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH T HE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. 6. IT IS OBSERVED FROM THE RECORDS PLACED BEFORE US T HAT THE ASSESSEE HAS ENTERED INTO A CONTRACT WITH NORTEL TO WHOM OFFSHORE SUPPLY OF CVRS SOFTWARE WAS MADE ALONGWITH RELATED MAINTENANCE SERVICES. IT HAS ALSO BEEN SUBMITTED BEFORE THE AUT HORITIES BELOW THAT ASSESSEE DOES NOT PLAY ANY ROLE IN THE PRICE N EGOTIATION AND THAT THE SUPPLY OF SOFTWARE HAS BEEN UNDERTAKEN FRO M OUTSIDE INDIA AND HENCE THE PROFITS FROM SUCH SUPPLIES WOUL D NOT BE TAXABLE AS ROYALTY UNDER THE PROVISIONS OF THE ACT AS WELL AS THE TREATY BETWEEN INDIA AND FRANCE. IT HAS ALSO BEEN BR OUGHT OUT ON RECORD BY THE LD. CIT (A) THAT THE SOFTWARE SUPPLIE D BY THE ASSESSEE IS STANDARD OFF-THE-SHELF SOFTWARE, AND NO COPYRIGHTS ARE ATTACHED TO IT. ON THE BASIS OF THE SUBMISSIONS ADV ANCED BY ASSESSEE LD. CIT (A) HAS DEALT WITH THE ISSUE AS UN DER: DETERMINATION I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT, THE OBSERVATIONS OF THE AO AND THE FACTS OF THE CASE SUB MITTED BEFORE ME. JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF DIREC TOR OF INCOME TAX VS ERICSSON RADIO SYSTEMS AB AND NOKIA NETWORKS OY RENDERED ON SIMILAR FACTS AS THE FACTS B EFORE ME HELD THAT A DISTINCTION HAS TO BE MADE BETWEEN THE A CQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE' AN D THE PAYMENT FOR THE MERE SUPPLY OF COPYRIGHTED ARTICLE C ANNOT BE HELD TO BE 'ROYALTY' IN NATURE. SIMILAR VIEW WAS BEI NG HELD BY MUMBAI ITAT AS REFERRED ABOVE. THOUGH I AGREE THAT THIS VIEW IS HIGHLY CONTENTIOUS AND HAS NOT GAINED AFFIRMATION OF THE APEX COURT, BUT RELIAN CE CAN BE ITA NO. 557/DEL/2013 (AY 2006-07) PAGE 4 OF 6 PLACED ON THE POSITION TAKEN BY THE DELHI HC, BEING THE JURISDICTIONAL COURT. THE DECISION OF A JURISDICTION AL HIGH COURT HAS BINDING FORCE IN THE STATE IN WHICH THE COURT H AS JURISDICTION. THIS HAS BEEN HELD IN THE FOLLOWING DE CISIONS: O GEOFFREY MANNERS VS CIT [221 ITR 695]; O GRAPHITE VS CIT [188 ITR 146] O JYOTIKANA VS CIT [26 ITR 424]; O BENOYKUMAR VS CIT [24 ITR 70] AFFIRMED CIT VS BENOYKUMAR [32 ITR 466 (SC)] IN THIS REGARD, LOOKING AT THE FACTS OF THE APPELLAN T'S CASE AND THE GUIDANCE PROVIDED BY THE DELHI HC AND MUMBAI I TAT IN THE AFORESAID CASES AS WELL AS SPECIAL BENCH IN T HE CASE OF MOTOROLA INC, I AGREE WITH THE CONTENTIONS OF THE A PPELLANT THAT THE PAYMENTS RECEIVED BY IT FROM NORTEL ARE NOT IN R ESPECT USE OF A COPYRIGHT OR SECRET PROCESS AND ACCORDINGLY DO NOT QUALIFY AS ROYALTY. THE SOFTWARE SUPPLIED, BEING A STANDARD OFF-THE SHELF SOFTWARE IS A COPYRIGHTED ARTICLE AND THE PAYM ENTS MADE FOR THE SAME CANNOT BE OFFERED TO TAX AS 'ROYALTY'. ACCORDINGLY, IT IS SUBMITTED THAT THE SUBJECT PAYMENTS WILL NOT Q UALIFY AS ROYALTY IN TERMS OF CLAUSE (VI) OF THE AFORESAID DEF INITION. FROM THE ABOVE, IT CAN BE SEEN THAT THE CASE OF THE APPELLANT IS SQUARELY COVERED BY THE JURISDICTIONAL DECISION OF THE DELHI HIGH COURT (SUPRA). THOUGH IN THE FACTS O F THE CASE, THE APPELLANT HAS NOT PROVIDED THE HARDWARE AND HAS ON LY SUPPLIED THE SOFTWARE BUT IT IS PERTINENT TO NOTE TH AT THE APPELLANT IN OTHER SIMILAR TRANSACTIONS ENTERED INTO WITH OTHER CUSTOMERS SUPPLIED BOTH HARDWARE AFTER OBTAINING FR OM OTHER OVERSEAS VENDOR AND SOFTWARE DEVELOPED IN HOUSE. ALS O, IT WAS SUBMITTED BY THE APPELLANT THAT THE PAYMENTS MAD E BY NORTEL UNDER THE SUBJECT TRANSACTION INCLUDES PAYME NTS TOWARDS THE CONFIGURATION OF THE SOFTWARE WITH THE HARDWARE WHICH SUBSTANTIATES THE CONTENTION THAT THE SOFTWAR E DOES NOT HAVE ANY INDEPENDENT USAGE AND IS AN INTEGRAL PART OF THE HARDWARE. IT WAS THE CONTENTION OF THE APPELLANT TH AT THE SAID SOFTWARE COULD NOT HAVE BEEN USED BY NORTE! OR ANY OF ITS ITA NO. 557/DEL/2013 (AY 2006-07) PAGE 5 OF 6 CUSTOMERS UNLESS THE SAME WOULD HAVE BEEN CONFIGURED BY THE APPELLANT INTO THE HARDWARE. IN VIEW OF THE SAME, I T WAS SUBMITTED BY THE APPELLANT THAT ITS CASE IS COVERED B Y THE DECISION OF THE DELHI HIGH COURT AND THE PAYMENTS REC EIVED BY IT CANNOT BE CLASSIFIED AS 'ROYALTY'. THE JURISDICTIONAL HIGH COURT DECISION IN THE CASE O F ERICSSON AB HELD THAT THE SOFTWARE SUPPLIES WOULD NOT BE TAXABLE AS ROYALTY EVEN AFTER THE AMENDED LAW. HENCE, RS 42,564,247 RECEIVED BY THE APPELLANT FROM NORTEL WOULD NOT BE 'ROYALTY' BUT WOULD BE TAXABLE AS BUSINE SS INCOME. ACCORDINGLY, THE AFORESAID ADDITION MADE BY T HE AO TREATING RS. 4,25,64,247/- AS ROYALTY STANDS DELETE D. 7. WE DO NOT FIND ANY INFIRMITY IN THE ABOVE FINDING S OF LD. CIT (A). AS LD. DR HAS NOT BROUGHT ON RECORD ANY DISTIN GUISHING FACTS WE ARE INCLINED TO UPHOLD THE ORDER PASSED BY LD. CIT (A) ON THIS ISSUE. IN THE RESULT APPEAL FILED BY REVENUE STANDS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH JANUARY, 2017. (J. S.REDDY) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 19.01.2017 @M!T COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI)