The Income Tax Appellate Tribunal (ITAT), Delhi Bench in relief to Nokia held that no TDS is deductible as no separate payment shown relating to purchase of software embedded in mobile phones.
The assessee, Nokia India Sales Private Ltd. is an indirect wholly-owned subsidiary of Nokia Corporation Oy, Finland and is engaged in the business of marketing, distribution, and sales of mobile phones (including accessories) and services.
This business of the assessee was earlier handled by M/s Nokia India Pvt. Ltd. (NIPL), another subsidiary of Nokia Corporation OY, till about end of December, 2012 and in that sense NIPL is business predecessor to the assessee. The assessee filed e- return declaring total income of Rs.286,06,91,570 and revised return declaring Rs. 296,66,91,570.
In respect of taxability of software embedded in mobile phones, during the previous year relevant to the subject AY, the Appellant had paid an amount of Rs. 3555,66,06,815 to Nokia Corporation Finland towards consideration for purchase of finished mobile phones.
The Assessing Officer, based on the assessment of NIPL for preceding years, proceeded with the artificial splitting of the price of imported mobile phones into the price of embedded software and price of the component in the ratio of 40:60. Thereafter, alleging that the artificial cost of embedded software such arrived is taxable as ‘royalty’ in India both under the provisions of the Act and as well as India-Finland Tax Treaty, the Assessing Officer proceeded with making disallowance under section 40(a)(i) of the Act of the impugned price of embedded software on the grounds that the assessee was liable to withhold tax at source thereon.
The software embedded in the hardware, which is not supplied separately is a standard operating software that can be used to activate and operate/ run the specific mobile handset supplied by Nokia Corp and is incapable of being traded by the assessee on a standalone basis.
The CIT(A) has recorded detailed reasons and deleted the addition following binding decisions of High Court in case of DIT v. Ericsson A.B, CIT vs. Alcatel Lucent Canada and others and has rightly held that consideration received by Assessee as a distributor of phones cannot be artificially split between the price for hardware and software.
The two-member bench of N.K.Billaiya and Suchitra Kamble noted that note that the CIT(A) has given a detailed finding as relates to non-deduction of tax at source under Section 195 for software embedded in mobile phones imported by the assessee during the previous year.
Therefore, the ITAT while dismissing the appeal of the revenue held that the Revenue could not point out the distinguishing fact that there was a separate payment made for the purchase of software embedded in mobile phones.
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