9911796707
TMI Blog2011 (8) TMI 497X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s own case in a preceding assessment year, for the reasons we will set out in a short while, it is perhaps appropriate and desirable to deal with the issue at some length. 4. The relevant material facts, as culled out from the material on record before us, are like this. The assessee is a company incorporated in, and tax resident of, the State of Israel. The assessee-company has its registered office at 12 Amal Street, Afek Park, Rosh Ha'ayain, Israel 48092, and it does not have any office, or permanent establishment in any other manner, in India. As evident from material on record, there is no dispute also that the assessee is eligible for benefits of India-Israel Double Taxation Avoidance Agreement (254 ITR Stat 245; 'Indo-Israel tax treaty', in short). On 17-9-2002, the assessee entered into an agreement with Reliance Infocomm Limited (RIL, in short), for supply and licence of software for RIL's wireless network in India. Under the said agreement, RIL placed the two purchase orders, i.e., PO 13009821 and 13009823 - both dated 17-9-2002, for US $ 25,84,300 and US $ 6,65,880 respectively. While the first purchase order for US $ 25,84,300 was executed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Ltd. Unreported ITAT Delhi Bench decision [IT Appeal Nos 564 to 566/Delhi/05], Sonata Information Technology Ltd. v. Addl. ACIT [2006] 103 ITD 324 (Bang.), ISBC Consultancy Services v. Dy. CIT [2004] 88 ITD 134 (Mum.), and the Assessing Officer further noted the fact that in the assessment year 2003-04, the same issue has been decided in favour of the assessee by the CIT(A). However, as the Assessing Officer noted, since the order of the CIT(A) is contested in appeal before the higher authorities, the amount in respect of supply of software was considered taxable in the hands of the assessee. Accordingly, this amount of US $ 6,65,880, which worked out to Rs. 3,00,44,506, was brought to tax in the hands of the assessee. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) inter alia noted that the assessee, being a tax resident of Israel, is entitled to the benefits of India Israel DTAA, which override the provisions of the Income-tax Act to the extent the same are beneficial to the assessee. The provisions of the India Israel DTAA were, accordingly, applied. In an erudite and detailed order, following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook us though the order of the co-ordinate Bench in assessee's own case and submitted that the issue in appeal before us was squarely covered by the same. It was also pointed out that the contract for supply of software was the same, as in the assessment year 2003-04, and the income in the assessment years 2003-04 and 2006-07, i.e., assessment year before us, was on the same set of material facts. It was submitted that there was not even slightest change in facts of the case or in the applicable legal position, and that it cannot indeed be open to the Tribunal to take different views on the income arising to the assessee under the same contract in different assessment year - particularly as there was no change in the legal position or the material facts. However, when learned counsel's attention was invited to a later decision of the co-ordinate Bench in the case of Gracemac Corpn. v. Asstt. DIT [2010] 42 SOT 550 (Delhi), which holds that even the sale of copyrighted software, without sale of or right to use of copyright, could be treated as royalty in terms of materially identical tax treaty provision, it was submitted that the said decision was contrary to the law laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndagan Chettiar's case (supra), must prevail over the Special Bench decision. Learned Departmental Representative, who had almost given up his case in his first round of arguments, was now vehement in his reliance on the stand of the Assessing Officer and supportive of the line of reasoning adopted by the co-ordinate Bench in Gracemac Corpn.'s case (supra). None of these decisions, learned Departmental Representative pointed out, was considered by the CIT(A) or even the co-ordinate Bench in the preceding year. He also took us through the observations made in Gracemac decision, and the manner in which earlier decisions on the same issue, in favour of the assessee, were distinguished in detail. A reference was also made about press reports on a recent Supreme Court judgment which is said to have held that despite secrecy clause in Indo German tax treaty, the information obtained from German tax authorities could not have been withheld from public. He urged us to vacate the order of the CIT(A) and restore that of the Assessing Officer. 7. We have duly considered all these submissions, carefully perused the material before us and conscientiously deliberated upon the applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the terms of the DTAC." 9. As evident from a plain reading of section 90, as also the esteemed views of Hon'ble Supreme Court, it is wholly immaterial whether the provisions of the Income-tax Act are later provisions or whether these provisions were legislated prior to the tax treaty having been entered into. Once a tax treaty is entered into, and is notified by the Central Government, the provisions of the Income-tax Act have to make way for the provisions of the tax treaty, wherever these provisions are in conflict with the provisions of the tax treaty-unless, of course, when the provisions of the Income-tax Act are more favourable to the assessee vis-à-vis the corresponding provisions of the tax treaty. It is important to bear in mind the fact that this unqualified treaty override is not due to operation of any provisions of the general law or convention, but by the virtue of a specific provision to that effect in the Income-tax Act itself. The Indian Income-tax Act itself restricts its application to a situation covered by the provisions of a tax treaty entered into, and duly notified, under the scheme of section 90 of the Income-tax Act. We must, at this stage, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust respect rules of International law even as nations respect international opinion. The comity of Nations requires that Rules of International law may be accommodated in the Municipal Law even without express legislative sanction provided they do not run into conflict with Acts of Parliament. But when they do run into such conflict, the sovereignty and the integrity of the Republic and the supremacy of the constituted Legislatures in making the laws may not be subjected to external rules except to the extent legitimately accepted by the constituted Legislatures themselves. The doctrine of incorporation also recognises the position that the rules of international law are incorporated into national law and considered to be part of the national law, unless they are in conflict with Act of Parliament. Comity of Nations or no, Municipal Law must prevail in case of conflict. National Courts cannot say yes if Parliament has said no to a principle of international law. National Courts will endorse international law but not if it conflicts with national law. National courts being organs of the National State and not organs of international law must perforce apply national law if internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the provisions of the treaty and the Income-tax Act, but, assuming there was indeed a conflict, "we would like to deal with such a hypothetical situation". It is well settled in law that obiter dicta of co-ordinate Benches are not binding (unlike the ratio), but they may be regarded as persuasive in a future decision. In observed by Hon'ble Bombay High Court, in the case of CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727, an obiter does not have a binding force, though it "may have some persuasive efficacy". Even as we hold the observations of the Bench with highest respect, though with respectful disagreement, we do not regard the observations made by the Bench as of binding force, in view of the peculiar circumstances in which these observations are made. That's one reason that despite a contrary ruling on this issue by a co-ordinate Bench, we see no need to refer the matter to the special Bench. Secondly, we have noted that Gracemac decision did not have the benefit of guidance by Hon'ble Supreme Court's direct judgment on the issue of treaty override, in the context of the provisions of the Income-tax Act. There cannot obviously be any point in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s "in order that the right guaranteed by Clause (1) of Article 32 be meaningful, and particularly because such petitions seek the protection of fundamental rights, it is imperative that in such proceedings the petitioners are not denied the information necessary for them to properly articulate the case and be heard, especially where such information is in the possession of the State". Their Lordships further observed that "to deny access to such information, without citing any constitutional principle or enumerated grounds of constitutional prohibition, would be to thwart the right granted by clause (1) of Article 32". The law so laid down by Their Lordships does not, in any way, dilute the principles of tax treaty override, even as Their Lordships observe that when Courts have to interpret the provisions of tax treaty, they must not do so in such a manner as to come in conflict with the basic structure of the Constitution of India. This observation cannot, in our humble understanding, be construed as limited the principles of tax treaty override either. As a matter of fact, Their Lordships, later in the judgment, have observed that "We have perused the documents in question, and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or perform in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply. (5) Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience". The Special Bench, after a very erudite discussion on various facets of the issue before them, concluded that "we hold that the software supplied was a copyrighted article and not a copyright right, and the payment received by the assessee in respect of the software cannot, therefore, be considered as royalty either under the IT Act or the DTAA". Right now we are only concerned with the provisions of the tax treaty, and we have noticed that the provisions of tax treaty as before the Special Bench are exactly the same as before us in this case. The issue, therefore, as to whether payment for supply of software can be viewed as a payment for copyright or not is no longer res integra. The Special Bench has decided this issue in favour of the assessee, and the views so expressed by the Special Bench, being from a higher forum than this division bench, are binding on us. In any case, as the provisions of Article 12(3) specifically provide, what is liable to be treated as royalty is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision. In Gracemac Corpn. case (supra), the coordinate bench was of the view that the provisions of the applicable tax treaty and the Income-tax Act are "identical" - a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac Corpn. case (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for "process" as a computer program is a nothing but a set of instruction lying in the passive state and this execution of instructions is 'a process' or 'a series of processes'. No doubt, in terms of the provisions of section 2(ffc) of the Indian Copyright Act, 1957, a computer program, i.e., software, has been defined as "a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result", but the moot question is as to what is that a customer pays for when he buys, or to put it in technical terms 'obtains licence to use' the software - for the process of executing the instructions in the software, or for the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , secret formula or process". We find that these expressions are used together in the treaty and as it is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Hon'ble Shri M.K. Chaturvedi, had, in an article 'Interpretation of Taxing Statutes' (AIFTP Journal: Vol. 4 No. 7, July, 2002, at p. 7), put it in his inimitable words as follows : "Law is not a brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on common-sense approach. Suppose a man tells his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as a copyrighted article, is directly covered by a Special Bench of this Tribunal and the said decision, coming from a bench of larger strength, prevails over the division bench decision. As laid down by the Apex Court in the case of Ambika Prasad Mishra v. State of Uttar Pradesh AIR 1980 SC 1762 (p. 1764 of AIR 1980 SC) "Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent. A decision does not lose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned....". Therefore, whatever be the points, right or wrong, which can be put against the Special Bench decisions, the Special Bench decision continues to have a binding force on this division bench. In our humble understanding, the Special Bench decision in Motorola's Inc. case (supra) binds us and we have to respectfully follow the same. Respectfully following this Special Bench decision, as also a series of other division bench decisions on the same lines, we must approve the conclusions arrived at by the CIT(A). 20. In view of the above discussions, respectfully following Special Bench decision in Motorola's Inc. case (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
