Facts
Lucent Technologies India (taxpayer) obtained orders from the Department of Telecommunications (Telecom Department) for the manufacture and supply of telecommunication/switching equipment.
For executing the above contract, the taxpayer imported software from Lucent Technologies, USA (Lucent US) and separately imported hardware from Lucent Technologies, Taiwan (Lucent Taiwan). The taxpayer integrated the software and the hardware in India, for execution of the contract with the Telecom Department.
The Assessing Officer (AO) held that contract for import of software was different from the contract with the Telecom Department and hence the payments for software could not be integrated into the contract with the Telecom Department. The AO held that payment for software made to Lucent US amounted to “royalty” under section 9(1)(vi) of the Income -tax Act, 1961 (the Act) read with the Double Taxation Avoidance Agreement between India and USA and hence, liable for withholding tax. The AO’s view was upheld by the Commissioner of Income Tax (Appeals).
However, the Income tax Appellate Tribunal (ITAT) held that the taxpayer had purchased integrated equipment, both hardware and software, from US and Taiwan and that the acquisition of the software without the hardware did not serve any purpose. The ITAT also observed that the taxpayer did not acquire any rights in the copyright and the same could not be exploited commercially and accordingly held that payment for the same cannot be taxable as “royalty”.
2
Issue before the Karnataka High Court
Whether the payments made by the taxpayer to Lucent US was taxable as “royalty” and hence the taxpayer was
liable to withhold tax from the same?
Observations and Ruling of the Karnataka High Court
Supply of software by Lucent US to the taxpayer was an independent transaction. Only after receipt of both
software and hardware, they were integrated by the taxpayer in India and thereafter supplied to the Telecom
Department as an end product in terms of an independent contract.
Under the second proviso to section 9(1)(vi) of the Act, payment made for grant of license in respect of computer
software along with computer or computer based equipment under a scheme approved under the “Policy on
Computer Software Export, Software Development and Training, 1986” of the Government of India is not
considered as “royalty”. However, no such approval was obtained by the taxpayer.
The ITAT had committed an error in looking into the contract between the taxpayer and the Telecom Department
and had not given any importance to the contract/s entered into between the taxpayer and Lucent US/Lucent
Taiwan.
The finding of the ITAT that the payments made for supply of software was part of an integrated import and was
not in the nature of royalty under section 9(1)(vi) of the Act could not be sustained.
Conclusion
The High Court held that the separate payment for supply of software was taxable as “royalty” and the Taxpayer was
liable to withhold tax while making such payments.
Source: CIT v. Lucent Technologies and Others (ITA Nos. 756/2006, 757/2006, 758/2006, 168/2004 and 170/2004) (Karnataka High
Court) dated 21st October, 2011
Lucent Technologies India (taxpayer) obtained orders from the Department of Telecommunications (Telecom Department) for the manufacture and supply of telecommunication/switching equipment.
For executing the above contract, the taxpayer imported software from Lucent Technologies, USA (Lucent US) and separately imported hardware from Lucent Technologies, Taiwan (Lucent Taiwan). The taxpayer integrated the software and the hardware in India, for execution of the contract with the Telecom Department.
The Assessing Officer (AO) held that contract for import of software was different from the contract with the Telecom Department and hence the payments for software could not be integrated into the contract with the Telecom Department. The AO held that payment for software made to Lucent US amounted to “royalty” under section 9(1)(vi) of the Income -tax Act, 1961 (the Act) read with the Double Taxation Avoidance Agreement between India and USA and hence, liable for withholding tax. The AO’s view was upheld by the Commissioner of Income Tax (Appeals).
However, the Income tax Appellate Tribunal (ITAT) held that the taxpayer had purchased integrated equipment, both hardware and software, from US and Taiwan and that the acquisition of the software without the hardware did not serve any purpose. The ITAT also observed that the taxpayer did not acquire any rights in the copyright and the same could not be exploited commercially and accordingly held that payment for the same cannot be taxable as “royalty”.
2
Issue before the Karnataka High Court
Whether the payments made by the taxpayer to Lucent US was taxable as “royalty” and hence the taxpayer was
liable to withhold tax from the same?
Observations and Ruling of the Karnataka High Court
Supply of software by Lucent US to the taxpayer was an independent transaction. Only after receipt of both
software and hardware, they were integrated by the taxpayer in India and thereafter supplied to the Telecom
Department as an end product in terms of an independent contract.
Under the second proviso to section 9(1)(vi) of the Act, payment made for grant of license in respect of computer
software along with computer or computer based equipment under a scheme approved under the “Policy on
Computer Software Export, Software Development and Training, 1986” of the Government of India is not
considered as “royalty”. However, no such approval was obtained by the taxpayer.
The ITAT had committed an error in looking into the contract between the taxpayer and the Telecom Department
and had not given any importance to the contract/s entered into between the taxpayer and Lucent US/Lucent
Taiwan.
The finding of the ITAT that the payments made for supply of software was part of an integrated import and was
not in the nature of royalty under section 9(1)(vi) of the Act could not be sustained.
Conclusion
The High Court held that the separate payment for supply of software was taxable as “royalty” and the Taxpayer was
liable to withhold tax while making such payments.
Source: CIT v. Lucent Technologies and Others (ITA Nos. 756/2006, 757/2006, 758/2006, 168/2004 and 170/2004) (Karnataka High
Court) dated 21st October, 2011
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