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2016 (9) TMI 1566 - AT - Income TaxTaxability of receipt as 'Royalty’ - remuneration received by Microsoft regional sales Corporation (MRSC ) from Indian distributors for sale of software is taxable as “royalty” in the hands of GraceMac - India USA DTAA - retrospective amendment effect - HELD THAT:- The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of "royalty" in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the 'royalty' has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty. As decided in of Infrasoft Ltd. [2013 (11) TMI 1382 - DELHI HIGH COURT] DIT v. Erisson [2011 (12) TMI 91 - DELHI HIGH COURT] and DIT v. Nokia Networks OY [2012 (9) TMI 409 - DELHI HIGH COURT]concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. In ALCATEL LUCENT CANADA [2015 (5) TMI 431 - DELHI HIGH COURT] has held that sale of software is a sale of “copyrighted article and ultimately held that the payment for the same is not in the nature of “royalty” With respect to the retrospective amendment by the Finance Act 2012, it has been held by Hon‘ble Delhi high court in case of DIT versus New Skies Satellite BV [2016 (2) TMI 415 - DELHI HIGH COURT]wherein it has been held that unless Double Taxation Avoidance Agreement is jointly amended by both the countries to incorporate particular income partaking the nature of “royalty” or amend definition in a manner so that such income automatically becomes royalty, The Finance Act, 2012 which inserted several explanations to section 9 (1) (vi) by itself would not affect the meaning of the term “royalty‘ as mentioned in article 12 of the Double Taxation Avoidance Agreement.Therefore, the retrospective amendment made to the Income tax Act will not apply in deciding the issue of taxability of income of the assessee in present case. where the provisions of the Double Taxation Avoidance Agreement are more beneficial to the assessee, the treaty would prevail over the act. Accordingly the retrospective amendment made to the Income Tax Act, if are not beneficial to an assessee, who is also entitled to the benefit of the Double Taxation Avoidance Agreement, then whatever is less rigorous to the assessee should be followed for the purpose of the taxation in case of that assessee. In the present case therefore Double Taxation Avoidance Agreement between India and USA is required to be seen and applied, if by retrospective amendment to the Income Tax Act the taxation regime with respect to the “royalty‘ and “fees for technical service‘ have become more stringent. In view of the above facts it is apparent that after rendering of the decision of the tribunal based on which the reopening has been initiated by revenue and addition has been made in the hands of the appellant, the decision of the Hon‘ble Delhi high court in case of DIT V versus Infrasoft limited covers the issue in favour of the assessee [2013 (11) TMI 1382 - DELHI HIGH COURT]. As the lower authorities did not have any benefit of the decision of the Hon‘ble Delhi high court while deciding the issue about the taxation of copyrighted article i.e. the software being sold by the appellant but have solely relied upon the decision of the coordinate bench in case of M/s Gracemac Corporation, it would be in the interest of the Justice to set the whole issue back to the file of the Ld. assessing officer to decide it afresh after considering the decision of Hon‘ble Delhi high court DIT versus Infrasoft Ltd (supra), applying it to nature of the software of the appellant, which covers the issue with respect to the sale of software holding that according to article 12 (3) of the Indo US DTAA, is a sale of “copyrighted article‘, and is not chargeable to tax as “royalty‘.
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