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The Tax Publishers Galatea Ltd. v. Dy. CIT, [ITA No. 749/Mum/2015, dt. 24-2-2016] : 2016 TaxPub(DT) 1453 (Mum-Trib) Sale of hardware machine with its embedded software, whether embedded software is royalty taxable in India *Facts:* Assessee an Israeli company had sold to various customers Diamonds and Gems scanning machine along with its embedded software. Due to customs, security reasons of the software the billing was done separately for the machine and for the software. Some of the customers had done TDS @ 10% on the software. Thus assessee filed a return though they did not have any presence or PE in India to claim the TDS credit and refund. On a scrutiny assessment the assessing officer and DRP gave it a reading that the embedded software was royalty. Aggrieved the assessee appealed to the ITAT. The assessees grounds were three fold - The software was embedded and was part of hardware thus integral to the equipment as none of the customers bought the software separately nor was it separable nor were its rights separately exploitable due to software end user licence restrictions. The assessee did not have a PE in India thus their streams were business income which cannot be taxed in the absence of a PE. The DTAA of Indo-Israel had royalty clause limited vis-a-vis section 9(1)(vi) or its expanded definition thus DTAA was beneficial and needs to be applied. The sale of the software was the sale of a copyrighted article as it was a commodity. Held in favour of the assessee upholding the above three grounds by the ITAT. Thus held no tax could be fastened in India, assessing officer instructed to refund the TDS deducted, interest and penalty quashed as the prime levy did not sustain. *Authors Note:* A number of cases are cited in the decision for each of the 3 grounds and the overriding aspect of DTAA is also well brought out in this decision. The ITAT has also been categorical in the fact that whether the software is royalty under the amended definition of royalty under section 9(1)(vi) was not required due to override of DTAA.

The Tax Publishers

Galatea Ltd. v. Dy. CIT, [ITA No. 749/Mum/2015, dt. 24-2-2016] : 2016 TaxPub(DT) 1453 (Mum-Trib)

Sale of hardware machine with its embedded software, whether embedded software is royalty taxable in India

Facts:

Assessee an Israeli company had sold to various customers Diamonds and Gems scanning machine along with its embedded software. Due to customs, security reasons of the software the billing was done separately for the machine and for the software. Some of the customers had done TDS @ 10% on the software. Thus assessee filed a return though they did not have any presence or PE in India to claim the TDS credit and refund. On a scrutiny assessment the assessing officer and DRP gave it a reading that the embedded software was royalty. Aggrieved the assessee appealed to the ITAT. The assessees grounds were three fold -

The software was embedded and was part of hardware thus integral to the equipment as none of the customers bought the software separately nor was it separable nor were its rights separately exploitable due to software end user licence restrictions. The assessee did not have a PE in India thus their streams were business income which cannot be taxed in the absence of a PE.

The DTAA of Indo-Israel had royalty clause limited vis-a-vis section 9(1)(vi) or its expanded definition thus DTAA was beneficial and needs to be applied.

The sale of the software was the sale of a copyrighted article as it was a commodity.

Held in favour of the assessee upholding the above three grounds by the ITAT. Thus held no tax could be fastened in India, assessing officer instructed to refund the TDS deducted, interest and penalty quashed as the prime levy did not sustain.

Authors Note: A number of cases are cited in the decision for each of the 3 grounds and the overriding aspect of DTAA is also well brought out in this decision. The ITAT has also been categorical in the fact that whether the software is royalty under the amended definition of royalty under section 9(1)(vi) was not required due to override of DTAA.