The Delhi bench of the Income Tax Appellate Tribunal held that no interest under section 234B of the Act can be charged as the assessee, being a non-resident company was not liable to pay advance tax, since, the payer is under an obligation to withhold tax under section 195 of the Act while making payment to the assessee. Also the receipts from sale of software licenses are not in the nature of royalty income. Thus, though such income may be in the nature of business profit, however, no part of which can be attributed to the PE in India
The assessee, a non-resident corporate entity and a tax resident of USA is engaged, inter alia, in the business of developing and marketing of telecommunication equipments and related software. In the relevant assessment year, the assessee had a branch office in India. For the assessment year under dispute, the assessee filed its return of income on 31.10.2004 declaring income of Rs.1,19,62,800/-.
The Assessing Officer noticed that, though, the assessee had receipts of Rs.7,34,95,361/- from certain Indian companies, however, the assessee had not offered such receipts to tax. When the Assessing Officer called upon the assessee to explain, why such receipts should not be treated as royalty income, the assessee submitted that it had sold the software along with hardware on outright sale. The assessee submitted that the software sold by the assessee is embedded in the hardware. Therefore, it cannot be treated as royalty.
The Assessing Officer, however, was not convinced. Referring to agreements entered with various Indian telecommunication companies, the Assessing Officer concluded that the receipts from transfer of right to use the software are in the nature of royalty.
Further, he held that since the assessee had a branch office in India and the agreements with the Indian telecommunication companies have been signed in India by an employee of the branch office, the royalty income is connected to the branch office, which constitutes Permanent Establishment of the assessee in India. Thus, he held that the receipts would be taxable in India, as royalty income, both under section 9(1)(vi) read with section 115A/44D of the Act as well as under the India- USA DTAA, since, the assessee had a PE in India in terms of Article 5 of the treaty.
Being aggrieved with the said addition, the assessee preferred an appeal before learned first appellate authority. The CIT (A) held that held that the receipts from Bharti Telenet Ltd. and Tata Teleservices Ltd. are taxable as business profit under Article 7 of India – USA DTAA as the assessee had a PE in India and such receipts are integrally connected to the PE. Insofar as deductibility of expenses from the profit attributed to the PE, the CIT (A) directed the Assessing Officer to compute the income of the PE. Being aggrieved with the order passed by the first appellate authority, both the assessee and the Revenue appealed before the tribunal.
After hearing both the parties, the tribunal held that no interest under section 234B of the Act can be charged as the assessee, being a non-resident company was not liable to pay advance tax, since, the payer is under an obligation to withhold tax under section 195 of the Act while making payment to the assessee. Accordingly, the Assessing Officer is directed to delete the interest charged under section 234B of the Act.
The two bench member consisting of G.S pannu (President) and Saktijit Dey (Vice President) came to the conclusion that the receipts from sale of software licenses are not in the nature of royalty income. Thus, though such income may be in the nature of business profit, however, no part of which can be attributed to the PE in India. Thus, the tribunal’s decision in the said appeal will apply mutatis mutandis to the appeal.
Thus the appeal of the assessee was allowed.
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