26. [2018] 96 taxmann.com 17 (Delhi – Trib) Ciena India (P) Ltd vs. ITO ITA Nos: 959 & 984 (Delhi) of 2011 A.Ys.: 2007-08 and 2008-09 Date of Order: 29th June, 2018 Articles 5, 12 of India-Netherlands DTAA; Section 9 of the Act – in absence of PE of the non-resident in India, purchaser of shrink-wrapped off-the-shelf software was not liable to withhold tax from payment.

Facts

The Taxpayer was an Indian Company.
It was a wholly owned subsidiary of an American Company (“USCo”). It was set up
as a 100% EOU under STPI Scheme of Government of India. The Taxpayer was
providing software development support to USCo. During the relevant years, the
Taxpayer made payments to a Netherlands based company for supply of computer
hardware, software and related support services for installation and
maintenance. It did not withhold any tax while remitting the said payments. The
software supplied was shrink-wrapped software, which was sold off-the-shelf in
retail.

The AO held that payments made for
software were in the nature of royalty and payments made for services were in
the nature of FTS. Hence, the Taxpayer was liable to withhold tax on both kinds
of payments.  

Held

•     Sale of hardware together
  with embedded software was not taxable in absence of PE of the non-resident in
  India.

•     Installation and other
  services did not make available any technical knowledge or technical knowhow.
  This was a pre-requisite for bringing such services within the ambit of Article
  12(5)(b) of India-USA DTAA.

•     Hence, payments in
  respect of them could not be considered as FTS. Therefore, the order of the AO
  was to be set aside.