Income Tax Appellate Tribunal Bangalore Lucent Technologies Hindustan Ltd. vs Income Tax Officer on 31 October, 2003 Equivalent citations: [2005]92ITD366(BANG), [2006]286ITR133(BANG), (2004)82TTJ(BANG)163 ORDER G.E. Veerabhadrappa, A.M. 1.These are appeals by the assessee arising out of the consolidated order dt. 29th Nov., 2001, of the CIT(A)V, Bangalore, for the asst. yrs. 19992000 and 20002001. 2. The assessee is a limited company and is engaged in the business of manufacture and sale of electronic switching systems required for the telecommunication industry and substantial part of its sales are to the Department of Telecommunications (DOT). During the financial years, relevant to the aforesaid assessment years, the assessee imported certain equipments from M/s Lucent Technologies Inc. USA (hereinafter referred to as "Lucent, USA"), a nonresident company. In respect of payments made, the assessee had not deducted tax at source. For failure to deduct tax at source, the assessee has been treated as assesseeindefault under Section 201(1) of the IT Act, 1961 (hereinafter referred to as "the Act") and the Department has also demanded interest under Section 201(1A) of the Act. 3. The contention of the assessee before the ITO(TDS) was: (i) No tax was deducted on the amounts paid, for the reason that acquisition of software is inextricably linked to the acquisition of hardware inasmuch as neither of them can function without the other. (ii) As the transfer of software had taken place outside India, no profit accrued or arisen or could be deemed to have accrued or arisen in India. (iii) In any event, by virtue of the provisions of the Double Taxation Avoidance Agreement (DTAA), the gains, if any, arising from the transfer of the software was not chargeable to tax as the supplier has no permanent establishment in India. 4. The ITO (TDS) did not accept these contentions and held that the provisions of Section 195 did apply to these transactions and the assessee was required to deduct tax at source on the payments made to nonresident. The arguments that weighed with the ITO (TDS) in reaching these conclusions may be found in the following paragraphs: (i) Software and hardware have been imported separately. In fact, software has come from Lucent, USA, whereas hardware has come from Lucent, Taiwan. (ii) Proviso to Section 9(1)(vi) of the Act dealing with royalty gives exemption in respect of computer software supplied by a nonresident manufacturer along with a computer or computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training 1986 of the Govt. of India. The assessee cannot claim the benefit of this provision on two accounts: (a) As mentioned earlier, computer hardware and software have been supplied separately. (b) The import has not been made under any approved schemes. 5. It was contended that the assessee is a manufacturer and supplier of electronic switching systems required in the telecommunication industry and the switching system manufactured and supplied to the customers is based on customer specific requirement and depending upon such requirement of each customer's order, switch has to be configured and the software is integrated with the switch. The assessee, for this purpose, imports software as well as parts and components of the switching system. The assessee integrates software into hardware and sells switch to the DOT and it was claimed that as it was integrated transaction, there was no obligation to deduct tax at source. The contention of the assessee was rejected by the ITO (TDS) on the ground that import of software may be regarded as patent or invention or as a scientific work or a secret formula or process and accordingly the payments made for acquisition of the same would be a royalty as defined in the Explanation to Section 9(1)(vi) of the Act. He has also taken the view that the amount paid could be regarded as royalty within the meaning of the expression in Article 12(3)(a) of the DTAA entered into between India and the United States as the definition of royalty in the DTAA is similar to the definition in the Explanation to Section 9(1)(vi) of the Act. According to him, the software is not sold outright as the intellectual property rights continue to belong to Lucent. However, as the software is an integral part of the equipment supplied, the consideration paid would also be regarded as consideration for the use of or the right to use industrial, commercial or scientific equipment and would accordingly be royalty within the meaning of Article 12(3)(b). In corning to this conclusion, the AO has also relied upon the decision of the Authority for Advance Ruling in ABC, In re (1999) 238 ITR 296 (AAR). The relevant findings of the AO recorded in para. 2 of his order are extracted for the purpose of completion : "Software is an Intellectual property right (IP