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2016 (8) TMI 729 - ITAT MUMBAI

2016 (8) TMI 729 - ITAT MUMBAI - TMI - Nature of ‘Royalty’ - payments received towards sale of software as part of machinery - India-Israel DTAA - Held that:- Following the decision of the Coordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2011-12 we hold that the amounts received by the assessee on sale of operational/application software and spare parts is not exigible to tax as ‘Royalty’ and therefore the addition made by the AO and sustained by the DRP is to be deleted. We .....

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of the directions issued by the Dispute Resolution Panel-I, Mumbai under section 144C(5) of the Act vide order dated 28.09.2015. 2. The facts of the case, briefly, are as under: - 2.1 The assessee, a 100% subsidiary of Sarin Technologies Ltd., Israel is engaged in the business of development of proprietary technology for automated evaluation of internal features in diamond, carrying out its operations in diamond processing centres at Surat and Mumbai. As part of its business, the assessee sells .....

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no withholding of tax was required to be made in respect of such receipts from sale of application software. In these factual circumstances, the assessee filed its return of income for A.Y. 2012-13 on 05.10.2013 and a revised return on 28.03.2014 declaring total income at Nil. The case was selected for scrutiny. The draft order of assessment was passed under section 144C(1) r.w.s. 143(3) of the Act vide order dated 23.02.2015 wherein the income of the assessee was determined at ₹ 74,24,17 .....

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efore the DRP. The DRP disposed off the assessee s objections by way of directions issued under section 144C(5) of the Act dated 28.09.2015 rejecting the assessee s objections and thereby upholding the AO s findings that the payments received by the assessee for sale of operational/ application software, spare parts, etc. were exigible to tax as Royalty. It is in pursuance of these directions of the DRP that the AO passed the impugned final order of assessment under section 143(3) r.w.s. 144C(13 .....

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fficer erred on facts and in law in completing the assessment vide order dated 09.10.20 15 under section 143(3) read with section 144C of the Act at an income of Rs. 74,24,17,360/- as against returned income of Rs. Nil!-. 1.2 That the DRP erred on facts and in law in the affirming the draft assessment order by passing a cryptic and non-speaking order, without judiciously considering the entire material and the submissions/ objections filed by the appellant. 2. That the assessing officer erred on .....

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of the Galatea machines supplied by the appellant to customers in India without which such machines could not function and thereby the supply of the software like the payment for supply of the hardware was in the nature of business profits not liable to tax in India in the absence of a permanent establishment of the appellant in India. 4. Without prejudice, the assessing officer erred on facts and in law in not appreciating that the software supplied to the customers in India only resulted in t .....

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yalty. 6. That the assessing officer erred on facts and in law in not allowing credit of TDS amounting to ₹ 32,85,560/- while finally computing the income tax liability, although the same was directed to be allowed in the assessment order. 7. That the assessing officer erred on facts and in law in levying interest)of ₹ 4,22,447/- and ₹ 1,81,65,221/- under section 234A and 234B of the Act respectively. 8. That the assessing officer erred on facts and in law in initiating penalty .....

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India @10% of the gross amount. At the outset, the learned A.R. for the assessee submitted that the issue in dispute has been considered in detail and held in favour of the assessee by a Coordinate Bench of this Tribunal in the assessee s own case for A.Y. 2011-12, the immediately preceding year, in ITA No. 749/Mum/2015 dated 24.02.2016. 5.2.1 Per contra, the learned D.R. placed strong reliance on the orders of the authorities below. It was contended that if the software was an integral part of .....

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lowing judicial pronouncements: - i) CIT vs. Synopsis International Old Ltd. (212 Taxman 454) (Kar); ii) CIT vs. Samsung Electronics Co. Ltd. (345 ITR 494) (Kar) 5.2.2 According to the learned D.R., after the amendment by way of insertion of Explanation 4 to section 9(1)(vi) of the Act by Finance Act 2012 w.e.f. 01.04.1976, the consideration received by the assessee for transfer or sale of computer software would now be covered by the definition of Royalty and that since the Explanation has been .....

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r, the learned A.R. for the assessee reiterated that the issue in dispute for consideration in this appeal is covered in favour of the assessee by the decision of the Coordinate Bench in the assessee s own case for A.Y. 2011-12 (supra). It was submitted that the assessee s case finds support from the decision of the Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra) (viz. Q.No. 1 and para 34) and CIT vs. Nokia Network 358 ITR 259 and the decision of the Coordinate Be .....

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wn case for A.Y. 2011-12 in ITA No. 749/Mum/2015 dated 24.02.2016. At para 4 to 52 thereof the Coordinate Bench has held as under: - 4. In Grounds no. 2 to 5, the assessee has challenged the action of the lower authorities in bringing to tax the amount received by the assessee on account of sale of software as part of machinery by alleging the same to be income in the nature of Royalty within the meaning of section 9(1)(vi) of the Act. 5. During the course of hearing, it has been submitted by th .....

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the machine which was required to make that machine operational. The customers who purchased the machine were not concerned with the software but with the functioning of the machine. Our attention has been drawn on various pages of the paper book showing that there was no separate sale of software. All the customers purchased machines along with requisite software to operate that machine. Pages-222, 223 and 224 of the paper book are the lists showing party-wise details and sales made by the ass .....

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assessee company and its customers to show that the software had no independent existence. It was integral part of the machine and the customer was not allowed to isolate the software from the machine or to re-engineer the same. From various evidences and facts on record, it was shown by the Ld. Counsel for the assessee that the software was integral part of the machine and the transaction done with the customer was that of sale of machine and not of software. It was clarified by him that the s .....

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sputed facts on record are that assessee had no Permanent Establishment (P.E.) or business connection in India and, therefore, its business income was not liable to be taxed in India. In support of his proposition that in case of embedded software being integral part of machine, income on account of sale of software could not have been separately taxed as Royalty under section 9(1)(vi) of the Act, he relied upon the following judgments:- i) DIT v/s Ericsson A.B., 343 ITR 470 (Delhi); ii) DIT v/s .....

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ay of insertion of Explanation-4 to section 9(1)(vi) by Finance Act, 2012, with retrospective effect from 1st June 1976 is taken into account, the said payment still cannot be regarded as royalty within the meaning of the term Royalty as used in Article-12 of Indo-Israel treaty. It was submitted that it is well settled position of law that in terms of section 90(2) of the Act, provisions of the Act or Treaty whichever is more beneficial, shall apply to the assessee. It was submitted that since n .....

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sions of treaty should be read in preference to the provisions of the Act so long as they are more beneficial to the assessee in determining its tax liability. The amendment made in the provisions of the Act cannot be automatically read into the articles of the treaty, unless of course, corresponding amendment is made in the treaty also. For this proposition, he has relied upon the following judgments:- i) DIT v/s Infrasoft Ltd., 39 Taxmann.com 88 (Del.); ii) CIT v/s Siemens Aklcongesllschaft, 1 .....

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article. It was submitted by him that if we go by definition of the term Royalty as per article-12(3) of Indo-Israel treaty, then unless there is a transfer of copyright itself, there would not be any occasion to treat the amount of consideration as Royalty . He took us through section 14 of the Copyright Act, to demonstrate that there was no transfer of any copyright in this case. It was submitted that in this case, no source code was supplied by the assessee. The customer had no right to use .....

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322 ITR 125 (AAR); iv) Geoquest Systems B.V. v/s DIT, 327 ITR 001 (AAR); v) Motorola Inc. v/s DCIT, 95 ITD 269 (Del.) (SB); vi) TII Team Telecom International, 140 TTJ 649 (Mum); vii) DIT v/s Infrasoft Ltd. 39 Taxmann.com 88 (Del.); viii) Financial Software and Systems Pvt. Ltd. v/s DCIT, 47 Taxmann.com 410 (Chhenai); ix) DDIT v/s Solid Works Corporation, 152 TTJ 570 (Mum.); x) Aspect Software Inc., ITA no.221/Del./2013 dated 18th May 2015 (Del.); and v) CIT v/s Alcatel Lucent, Canada, 372 ITR 4 .....

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necessity to receive the payment separately and mentioning about the same separately in the invoice. It was further submitted that the software was received separately by e-mail, thus, under these circumstances, it could not be said that software was integral part of the machine. He placed reliance on the following judgment in support of his argument that impugned transaction was in the nature of Royalty liable to be taxed in India in the hands of the assessee company: i) DDIT v/s Reliance Infoc .....

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is clearly covered in the amended law and, therefore, the orders of the lower authorities should be upheld. 12. We have gone through the orders of the lower authorities and the submissions made and evidences shown to us as well as copies of judgments read and relied upon by both the parties in support of their respective arguments. The solitary dispute which is required to be addressed by us is that consideration received by the assessee towards software claimed to have been supplied as part of .....

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d by the Assessing Officer on this issue. Thus, admittedly, the assessee is a non-resident company. It appears that residential status of the assessee has been mentioned by mistake as Resident on the first page of the order passed by the DRP. 14. During the year, the assessee company was involved in the business of developing, manufacturing and servicing machinery, equipment, tools, supporting software, accessories, equipments, products, parts and materials for the diamond, gems and jewellery in .....

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lty under article 12(3) of the Israel tax treaty. But since the assessee was of the view that the aforesaid payments made by the customers did not constitute Royalty , under the Israel tax treaty and the tax was wrongly withheld by the customers, it filed its return of income for the impugned assessment year at nil and claimed refund of the tax withheld / deducted by its customers. The Assessing Officer treated the same as taxable in the hands of the assessee in India. Being aggrieved, assessee .....

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n in India. Thus, under these circumstances, the impugned amount of consideration is not liable to be taxed as business income of the assessee. The taxability of the same, however, has to be examined in view of the provisions contained in clause (vi) of sub-section (1) of section 9 of the Act read with relevant provisions of Indo-Israel DTAA. On this issue, we have examined carefully all the arguments made by the Ld. Counsel as well as counter submissions made by the Ld. Departmental Representat .....

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f machine and, therefore, it could not have been brought within the definition of Royalty as envisaged in section 9(1)(vi) of the Act and, therefore, in the absence of there being any P.E. of the assessee in India, the income arising from sale of machine could not have been taxed in its hands in India. 17. We have carefully analyzed the facts of the case and arguments made by the Ld. Counsel for the assessee as well as counter arguments made by the Ld. Departmental Representative. The undisputed .....

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n response to a specific query put to him by the Bench. It is noted that complete details have been given by the assessee in the paper book at Page-222 and 224. Our attention was also drawn on certificate from the assessee enclosed at Page-225 of the paper book certifying that software supplied by the assessee to end user was for integration with the machine supplied by the assessee and that this software had no other independent use as such, except to enable such machine to function. We have al .....

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l feature of rough diamond and creating a three dimensional image of these features of rough diamond. Clause 2.2 of the agreement puts certain restrictions upon the customers for any other use of the software in any other machine. This clause restrains the customer from duplicating the software or making any copies, modifications, isolating the software and making it available as a standalone data base or product, removing any product identification, copyright or other proprietary notice from th .....

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ow. This software cannot be used by the customer except for the operation of the machine. It is further noted by us that the machine was equipped with requisite security controls and hardware locks to stop any type of misuse of software. Clause 10.2 of one of the agreement available at Page-49 is reproduced hereunder for the sake of ready reference:- 10.2 SARIN INDIA acknowledges that GALATEA may use software and/or hardware locks or other protective mechanisms to regulate the use of software. S .....

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ested in the system as a whole and functioning of the machine. Operating software enable the machine to run and the application of software made functioning of the machine possible. It is an undisputed fact that the software which was loaded onto the hardware did not have any independent existence as such. The software supplied was ostensibly and undisputedly an integral part of the hardware. Now, since the hardware and software constituted one integrated system, part of the payment thereof cann .....

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for the assessee was that in this case, payment was made separately for the software at the time of sale of machine as well as subsequently and that software was provided by e-mail and, therefore, separate treatment should be given to the software. In our considered opinion, argument of the Ld. Departmental Representative would not be sustainable under the law. The dominant and fundamental character of the transaction shall not be altered because of these two features only. The break-up of invo .....

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ents have been made at the time of sale and subsequently by customer as a matter of terms between both the parties keeping in view various factors such as financial and administrative convenience and commercial expediency. The dominant and essential character of the transaction was sale of machine by the assessee and purchase of the same by the customer, and it shall remain the same with or without these two features. 20. The view taken by us is not res-integra. Our view is supported by many jud .....

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of the judgment is reproduced herein for the sake of ready reference:- The Revenue claims to be aggrieved by the order dated 04.04.2014 of the Income Tax Appellate Tribunal (hereinafter referred to as the ITAT ) in several connected appeals preferred by it, all of which were rejected by the ITAT. It argues that the ITAT erred in law in not considering that the income from supply of software embedded in the hardware equipment or otherwise to customers in India amounts to royalty under Section 9(1 .....

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ries used to manufacture, trade and supply equipments and services for GSM Cellular Radio Telephones Systems. The assessee had supplied hardware and software to various entities in India. Software licensed by the assessee embodies the process which is required to control and manage the specific set of activities involved in the business use of its customers. Software also made available the process to its customers, who used it to carry out their business activities. In this view of the matter, .....

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was not involved. 5. We have noticed, at the outset, that the ITAT had relied upon the ruling of this Court in Director of Income Tax V. Ericsson A.B. 343 ITR 470 wherein identical argument with respect to whether consideration paid towards supply of software along with hardware - rather software embedded in the hardware amounted to royalty. After noticing several contentions of the revenue, this Court held in Ericsson A.B. (supra) as follows:- 54. It is difficult to accept the aforesaid submis .....

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oceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loa .....

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, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services Vs. State of Andhra Pradesh (2004) 271 ITR 401 (SC), wherein the Apex Court held that software which is incorporated on a media would be goods, and therefore, liable to sales tax. Following discussion in this behalf is required to be noted:-"In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include a .....

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ctual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itsel .....

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quot; includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes… In Advent Systems Ltd. v. Unisys Corpn, (925 F. 2d 670 (3rd Cir. 1991)), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were define .....

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disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" be .....

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. 7. In view of this settled position, this court is of the opinion that no substantial question of law arises. The appeal is accordingly dismissed 22. Thus, from the perusal of the aforesaid judgment, it may be noted that the Hon ble High Court has also taken into account various other judgments available such as (i) DIT v/s Ericson A.B., (Delhi High Court), (ii) DIT v/s Nokia Networks O.Y. (Delhi High Court) and (iii) Tata Consultancy Services (SC), etc. 23. Further, on this issue, judgment of .....

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e which is embedded / etched / burnt is to be included in the part of hardware. What is to be seen mainly is that whether the software has got its independent value and marketable as such or the sole purpose of software is to make the machine operational and functional. Para- 14.2 of the judgment is reproduced for the sake of ready reference:- 14.2 On a close analysis of the decisions relied upon by both sides, in matters relating to classification/valuation, the following important guidelines/p .....

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lation to computer are to the effect that if any software is embedded/etched/burnt then it has to be included as part of the hardware and cannot be treated as stand-alone software and that the value of such embedded software should be part of the value of computer. However, it cannot be concluded that only the value of software which is embedded/etched/burnt is to be included in the value of the computer. (c) It is not as if essentiality is an irrelevant criterion for determining the classificat .....

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software loses its identity as software and becomes part and parcel of hardware and similarly, in certain circumstances, hardware loses its identity as hardware and becomes part and parcel of software…………… 24. Thus, from the aforesaid judgments, it is clearly evident that Courts have held that where software is supplied predominantly as part of an equipment and if the software loses its identity and the equipment takes over the main objects of the transaction .....

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hands of the assessee and the amount bifurcated for software cannot be treated differently as consideration in the nature of Royalty as envisaged under section 9(1)(vi) of the Act and since the assessee has no P.E. in India, as per admitted facts on record, the amount of profit arising on receipt of sale consideration of machine would not be liable to be taxed in its hands in India. 25. We have also examined second argument of the Ld. Counsel for the assessee wherein it has been submitted in de .....

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of the treaty unless of course a corresponding amendment is made in the tax treaty as well. It was thus submitted that amendment made in section 9(1)(vi) by way of insertion of an Explanation by Finance Act, 2012, for extending the scope of the term Royalty , shall not be read into the provisions of Article 12.3 of the Indo-Israel tax treaty incorporated in the treaty for explaining meaning of the term Royalty . 26. We have carefully considered this argument of the assessee also. We find that p .....

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sovereign Legislature to amend its laws, a DTAA entered into by the Government, in exercise of the powers conferred by section 90(1) of the Act must be honoured. The provisions of Section 9 Income Tax Act were applicable and the provisions of DTAA, if more beneficial than the I.T. Act, the provisions of DTAA would prevail. Thus, in the instant case also, it is not possible for the revenue to unilaterally decide contrary to the provisions of the DTAA. 27. In terms of section 90(2) of the Act, pro .....

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the aforesaid judgment of Hon'ble Bombay High Court by observing that an amendment made in the provisions of the Act cannot be automatically read into the treaty. 29. Similarly, Mumbai Bench of the Tribunal in B4U International Holdings Ltd., 148 TTJ 237, has also reiterated the same position and held that in the absence of corresponding amendment in the tax treaty, the amendment made in the Act cannot be given effect to. 30. Further, in the case of W.N.S. North America Inc. v/s ADIT, Mumba .....

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Going by such rule, the amendment to the Act shall have no unfavorable effect on the computation of total income of the assessee." 31. Similarly, Hon'ble Delhi High Court in DIT v/s Infrasoft Ltd., 39 Taxmann.com 88 (Del.) has analyzed this issue in detail and held that in case provisions of the Act are more burdensome then the provisions of the Act would not apply and the assessee would be governed by the provisions of DTAA. Hon'ble Delhi High Court followed the judgment of Hon .....

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d be Royalty in terms thereof. 32. Recently, Hon ble Delhi High Court in the case of DIT v. NEW SKIES SATELLITE BV in its order dated 8th February 2016 in ITA NO.473/M/12 got an occasion to analyse in detail entire law on the issue that amendment made in the domestic law i.e. Income Tax Act shall not be automatically read in to provision of DTAA, unless specific amendment is made by both the countries in the DTAA, as the DTAA is an agreement of two sovereign countries and one of them cannot unil .....

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ent, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a me .....

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The rules laid down in Part II of the VCLT apply to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly a .....

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s all the relevant aspects or features which are at variance with the general taxation laws of the respective countries". Thus, an interpretive exercise by the Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the power to amend a treaty. It is certainly true that law laid down by the Parliament in our domestic context, even if it were in violation of treaty principles, is to be given .....

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of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. The Parliament is simply not equipped with the power to, through domestic law, change the terms of a treaty. A treaty to b .....

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hose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal. Every treaty entered into by the Indian State, unless selfexecutory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected .....

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on of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an intern .....

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ould be preferred over the provisions of the Act, since there is no amendment in the treaty and the Department is seeking to put more tax liability upon the assessee taking help of amendment made in section 9(1)(vi). 34. We have gone through the provisions of Article-12 of India Israel tax treaty which defines the term Royalty . Article 12(3) has revised this term Royalty as under:- (3). The term Royalty as used in this Article means payments of any kind received as a consideration for the use o .....

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f copyright is different from transfer of copyrighted article. Thus, in view of the facts of the case before us, even if payment for software is taxed separately from hardware, on a standalone basis, even then the same would not fall within the scope of Article-12(3) since there was merely transfer of a copyrighted article, and not the copyright or any rights contained therein. This position is substantially clarified once we go through various clauses of agreement entered into by the assessee w .....

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scussed some of these judgments hereunder:- i) DIT v/s Infrasoft Ltd., 39 Taxmann.com 88 (Del.), Hon ble High Court discussed and analysed these provisions in detail, in the identical facts. Some of the relevant observations of the High Court are reproduced hereunder:- 85. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is .....

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. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverseengineer the Software without Infrasoft‟s written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licens .....

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s permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft‟s copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee s own business as defined within the Infrasoft Licence .....

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nsee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. I .....

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nce, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for copyrighted article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee .....

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s of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the .....

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xtent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or th .....

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pose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyright .....

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ee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without .....

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s that upon termination of the agreement for any reason, the licensee shall return the software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot .....

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alty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor .....

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ctronics Co. Ltd (supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extende .....

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ra) as not amounting to acquiring a copyright in the software. 99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. 100. The question of law is thus answered in favour of the Assessee and against the Revenue that the Income Tax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on gr .....

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the High Court are reproduced hereunder:- 59. Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copyright of a literary, artistic or scientific work. Section 2 (o) of the Copyright Act makes it clear that a computer programme is to be regarded as a 'literary work'. T .....

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o be made between the acquisition of a "copyright right" and a "copyrighted article". 60. Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK., In re [2010] 188 Taxman 223 (AAR-New Delhi). We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regar .....

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s dependent upon user of the copyright and not a lump sum payment as is the position in the present case. iii) Similar view was taken by the Hon'ble Delhi High Court in Nokia Networks O.Y. (supra) and CIT v/s Dynamic Vertical Software Pvt. Ltd., 332 ITR 222 (Del.). 37. We have also noted that the Special Bench of the Tribunal in Motorola Inc., 95 ITD 269 (Del.) had after analyzing the provisions of Copyright Act and considering the OECD commentary on characterization of income arising from s .....

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supra) after distinguishing the judgment of the co-ordinate bench in the Grace Mac Corporation v/s ADIT, 42 SOT 550 (Del.) and held that in view of Article-12(3) of India-Israel DTAA, the consideration for payment of standard software would not constitute Royalty under the India Israel DTAA. 39. Similar view has been taken by Co-ordinate bench of Tribunal in Financial Software and Systems Pvt. Ltd. v/s DCIT, 47 Taxman.com, 410 (Chennai), wherein it was held that payment made to non-resident comp .....

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ce of a P.E., no income accrued in India. In this judgment, the Bench also dealt with the argument of the Revenue that the principle that where two views are available, the view which is favourable to the assessee should be preferred, does not apply upon a non- resident assessee. The Bench did not accept this argument of the Revenue and held that if the assessee has the benefit of tax concession in view of the provisions of DTAA, then the same cannot be denied to it by applying the provisions of .....

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e a permanent establishment and therefore business income of the Assessee cannot be taxed in India in the absence of a permanent establishment. 41. Similarly, the Delhi Bench of the Tribunal in Aspect Software Inc. v/s ADIT, ITA no.221/Del./2013, vide its order dated 18th May 2015, interpreted the provisions of Article 12 of the tax treaty and giving benefit of the same, it was held that payment for copyrighted article would not fall within the scope of term Royalty . Relevant Para s of this jud .....

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answered in these decisions. Further, the Delhi High Court in Infrasoft has expressed its disagreement with the view taken by the Karnataka High Court in the case of Samsung Electronics Co Ltd. Hence, the decisions relied by the Ld. CIT-DR in the case of Samsung Electronics and Gracemac Corporation (supra) does not help the case of the Revenue, as we are under the Jurisdiction of the Hon'ble Delhi High Court. 42. In view of the above, respectfully following the decision of Hon'ble Jurisd .....

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we hold that there was no transfer of any right in respect of copyright by the assessee and it was a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article. Hence, the payment for the same is not in the nature of royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connect .....

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s reproduced below:- 18. Insofar as the reliance placed by the learned Departmental Representative on the decisions of the Madras High Court and also the scope of royalty as given in Explanation 4 and 5 to section 9(1)(vi) brought in statute by the Finance Act, 2012 are concerned, we find that the same is not tenable for the reason that once the assessee has opted for the benefit of the DTAA, then there is no requirement for resorting to the definition and the scope of royalty as given in sectio .....

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issue involved as is evident from the substantial question of law which were formulated by the High Court for adjudication. Hence, the said decisions are not applicable. 43. Thus, from the aforesaid judgments, we can safely conclude that if the assessee cannot be fastened with the tax liability taking shelter of provisions of tax treaty, then the same cannot be imposed by applying the provisions of the Act by disregarding and overriding the provisions of the treaty. However, we shall also like .....

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t we have decided this case primarily on the first issue in favour of the assessee on the ground that in the case before us, it was the case of predominantly a transaction of sale of machine by the assessee to its customers and for the customers also it was in effect a transaction of purchase of machine only, and thus it was not a case of sale of software, as such. This issue was not there before the High Court in these judgments. Therefore, this issue has not been addressed by the High Court. 4 .....

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have held on facts that it is a case of predominantly a transaction of sale and purchase of machine. The software had no independent identity. The substance of the transaction was supply of machine by the assessee and its usage by the customers in whatever manner it was possible i.e., with or without software. Thus, we find and respectfully state that all these judgments as have been relied upon by Ld. CIT-DR are not applicable on the facts of this case before us. It is further noted by us that .....

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ein, in the given facts of this case, by the assessee to its customers in India. In this regard, we find that section 14 of the said Act explains and defines the meaning of term copyright. Relevant part of section 14 reproduced herein: 14. Meaning of copyright-For the purposes of this Act, 'copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely (a) in the .....

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he work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-cls. (I) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in cl. (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential .....

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ustomers were supplied the software through email and other electronic medium and they has also made copies of the software programme for the purpose of loading it the machine and creating back-up files. It is noted that even this apprehension of the Revenue has been taken care of by the Copyright Act. Section 51 of the Act lists out those situations when copyright is infringed or deemed to be infringed. Further, section 52 of the Act, carves out exception to section 51 and lists out certain act .....

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e in order only to utilize the computer programme for the purpose for which it was supplied. Thus, from the above, it is clear that if customer makes requisite copies to enable it to use the software for exclusively its own purposes or makes back-up copies purely as a temporary protection against loss, in order only to utilize the computer programme for the purpose for which it was supplied, then section 52 of the Act clearly states that it shall not amount to infringement of the copyright. Thus .....

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om that, we find that Hon'ble Supreme Court has observed time and again in some of its judgments that where two views are available, then the view favourable to the assessee should be followed, in the interest of justice and harmony. We are reminded of a recent judgment of Hon'ble Supreme Court in CIT v/s Vatika Township Pvt. Ltd., 367 ITR 466, wherein similar view has been reiterated by the Hon'ble Supreme Court by making the detailed observations on this aspect. Relevant portion of .....

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ed principle of statutory interpretation, to help finding out as to whether particular category of assessee are to pay a particular tax or not. No doubt, with the application of this principle, Courts make endeavor to find out the intention of the legislature. At the same time, this very principle is based on "fairness" doctrine as it lays down that if it is not very clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons o .....

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Billings v. U.S., the Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction: "Tax Statutes ... should be strictly construed, and, if any ambiguity be found to exist, it must be resolved in favor of the citizen. Eidman v. Martinez, 184 U.S. 578, 583; United States v. Wigglesworth, 2 Story, 369, 374; Mutual Benefit Life Ins. Co. v. Herold, 198 F. 199, 201, affd 201 F. 918; Parkview Bldg . Assn. v. Herold, 203 F. 876, 880; Mutual Trust Co. v. Miller, 17 .....

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ue before us and, therefore, under such circumstances and in the interest of justice and fairness we have preferred to follow more recent judgments brought before us by the parties. Our approach is also in live with the guidance given by Hon ble Supreme Court in the case of Vatika Township, (supra). 51. Before we part with, we shall like to clarify and reiterate at the cost of repetition that we have not examined the effect of subsequent amendment to section 9(1)(vi) of the Act and also whether .....

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