1 Lucent Technologies International Inc v. DCIT
(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008
Issue :
- Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.
- Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.
Facts :
The assessee, US Company (USCO), is a leading supplier of hardware and software used for GSM cellular radio telephone system. The USCO supplied telecommunication hardware and software to its customers in India. USCO had an Indian subsidiary (herein WOS) which undertook the work of installation and providing after-sales services to the customers of USCO in India.
USCO had entered into a contract with one Indian telecom company by name Escotel Mobile Communications Ltd. (herein Escotel). In terms of the agreement between USCO and Escotel, USCO was to supply hardware and software to Escotel while the services of installation were to be provided by WOS. In terms of the contract with Escotel, USCO had the responsibility of designing, manufacturing, supplying and delivering all hardware and software. The contract also required USCO to undertake installation, testing, commissioning and achieve final acceptance of the system by the customer. A part of responsibility of the inspection, installation and supervising the testing and commissioning was that of the Indian WOS. To some extent there was an overlap of responsibilities of USCO vis-à-vis that of WOS. As part of the supply contract, the assessee also provided licence for use of computer software which was required for the purposes of functioning of GSM network.
For enabling the WOS to discharge its obligation, USCO made available to WOS personnel who were the employees of the affiliates of USCO. Such employees were under the control of USCO and the WOS was required to pay remuneration to USCO. USCO claimed that it incurred no tax liability in India as the hardware was supplied from outside India. The assessee also claimed that payment received for the licence agreement for use of computer software was business income and was not royalty chargeable in terms of Article 12 of DTAA. Reliance for this was placed on the decision of Special Bench in case of Motorola Inc v. DCIT, (96 TTJ 1) (Delhi SB). The AO claimed that the USCO attracted tax liability in India on the ground that, in the circumstances of the case, USCO had PE in India. The AO claimed that (i) USCO had PE in the form of WOS being its dependent agent; (ii) that premises of WOS were available at the disposal of the employees who were deputed by USCO; (iii) that negotiation and conclusion of the contract happened in India. In respect of software supply, the Department claimed that software licence fees was chargeable as royalty income.
Held :
The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :
(1) Having regard to the terms of the contract with the customer, not only Indian WOS but also USCO was responsible for turnkey functioning of the project of the GSM network. The ITAT noticed that the agreements with customer in India made USCO and WOS responsible for the turnkey completion of the GSM project individually and severally. The responsibility to Escotel was such that USCO had to complete installation should WOS fail in any manner. Conversely, WOS had responsibility of arranging for hardware and software should USCO fail in its responsibility. Having noted this, the ITAT concluded that the arrangement was ‘in short a consortium or partnership’ between USCO and WOS.
(2) The ITAT noted that the terms of agreement between Escotel and USCO and WOS also required of WOS to provide warranty in respect of the hardware supply made by USCO. This, according to the Tribunal, supported that the WOS was acting on behalf of USCO.
(3) The ITAT noted that USCO made available the personnel (though employees of the affiliates of USCO) to WOS for the purpose of enabling the WOS to discharge the responsibility of installation, commissioning, etc. of the GSM equipments. Such personnel were made available for remuneration. The ITAT concluded that in terms of the treaty, the service PE was triggered when the USCO provided services to its affiliate WOS even for a day. Since USCO provided services to ICO with the help of personnel who were under USCO’s control, the ITAT concluded that the USCO had service PE in terms of Article 5(2)(l)(ii) of the treaty.
(4) On the aspect of taxation of consideration received for software licence agreement, the ITAT noted that the facts of the case of USCO were at par with the facts which operated in the case of Motorola (supra). Relying on the Special Bench decision, the ITAT accepted the assessee’s contention that the licence fee was business income and was not royalty.
Compilers’ remarks :
The ITAT was not concerned with nor has dealt with the aspect of determination of income which is attributable to USCO’s activities in India to the extent the ITAT concluded that USCO had PE in India.
