TMI Blog2016 (12) TMI 1542X X X X Extracts X X X X X X X X Extracts X X X X ..... d Reliance, it was agreed that a separate agreement would be entered into for providing annual maintenance services by the assessee to Reliance but this agreement was never entered into. Subsequently, assessee’s subsidiary i.e. TTI India entered into a separate agreement with Reliance for verification of AMC dated 28th May 2003. The said agreement was executed independently by TTI India as independent terms and conditions and on ‘Principal to Principal’ basis, and assessee was not part to the said agreement. Articles of Indo Israel DTAA have not been referred to at all while deciding this issue against the assessee. Dependent agency principles were not applicable in this case. It was also submitted that in A.Y. 2006-07, the Tribunal has already examined all the facts and held that assessee did not have any PE in India, and thus he requested for following order of the Tribunal. - Decided in favour of the assessee Expenses taxed as Fees for Technical Services in the hands of assessee - Held that:- In A.Y. 2005-06, Ld. CIT(A) decided this issue in favour of the assessee wherein it was held that amount of reimbursement of expenses (which were similar to expenses reimbursed in the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant constituting Permanent Establishment (PE) in India in respect of such income; it is not taxable in India. 1.4. Without Prejudice to the above, the appellant contends that even if such income is to be regarded as taxable in India the same would be taxable only in the year of receipt as per Article 12(2) read with Article 12(1) and 12(3) of the DTAA. 1.5. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not following the favorable decisions of the Honorable Tribunal in the appellant's own case for A.Y. 2003-04 and A.Y. 2006-07 by holding that new facts have come to light during the year under consideration. In doing so, the learned CIT(A) has failed to appreciate that the facts before the learned CIT(A) are same as the facts before the Honorable Tribunal in the earlier years. 1.6. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the appellant has not supplied the software to known client in overseas market disregarding the submission made by the appellant in this regard. 1.7. In view of the above, the Appellant respectfully prays that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if the reimbursements are treated as FTS under the Act, the same cannot be treated as FTS within the meaning of Article 13 of the India - Israel DTAA read with Protocol to the India-Israel DTAA and Article 12 of India- Canada DTAA, since such reimbursements neither make available technical knowledge, experience, skill, etc nor consist of the development and transfer of a technical plan or a technical design. 3.3. Without prejudice to the above, the learned CIT(A) has further erred in confirming the action of the learned Assessing Officer of holding that these payments would be considered as FTS under Article 13 of India - Israel DTAA and consequently, TTI India being PE of the appellant in India, payment would be considered as Business income under Article 7 read with Article 13(4) of India - Israel DTAA and taxed @ 42.23%. 3.4. Without prejudice to the above, the appellant contends that even if the said amount is taxable in India as Business Profit then the executive and general administrative expenses incurred for earning this income is to be allowed as a deduction in arriving at the taxable income. 3.5. The appellant contends that learned CIT(A) has allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uential to the grant of tax credit, disregarding the fact that the Appellant is a non-resident Appellant and its entire revenues/ receipts are subject to tax withholding in India under section 195 of the Act and the Appellant is not liable to pay advance tax in respect of such revenues. 6.2. The Appellant respectfully submits that, as per the provisions of the Act, the interest under section 234B of the Act is not leviable and the learned CIT(A) be directed to delete the interest levied under section 234B. 3. During the course of hearing, Ld. Counsel of the assessee did not press Ground No.4 5 and therefore these are dismissed as not pressed. 4. Ground No.1: It was stated by the Ld. Counsel during course of hearing that only Ground No.1.1 is the effective ground and others sub grounds are supporting arguments only. In these grounds the assessee has challenged the action of Ld. CIT(A) in confirming the action of AO in holding that the consideration for supply of software should be taxed @ 10% by treating it as payment of royalty within the meaning of section 9(1)(vi) of the Act, as well as Article 12 of Double Taxation Avoidance Agreement between India Israel. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case. If the answer to that question would be no, only then an effort could be made to decide the issue raised before us independently on its merits. We had also expressed our view in the open court during the course of hearing. Thus, with this understanding, we proceed to analyse the facts as have been brought out by both the parties before us. 4.5. The facts as culled out form the assessment order reveals that the assessee company i.e. TTI Team Telecom International Ltd. is a company incorporated in Israel and engaged in the business of supply of software. Further facts noted by AO in the assessment order are as under: During the previous year relevant to the Assessment Year 2003-04, the assessee company had entered into an agreement for supply of software with Reliance Infocomm Ltd. (RIL), now merged with Reliance Communications Ltd (Reliance). During the previous year relevant to AY 2008-09, the assessee company had entered into another agreement on 17th Sep. 2007 wherein the scope was extended for supply of additional software. The consideration for this was USD 1,810,433. Out of the said amount invoices to the extent of USI) 1,084839 was raised by the assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring into the said agreement with RIL set up an Indian subsidiary (rri India) on 20.02.2003 and entered into a service agreement with the same on 23.02.2003. (Annexure B) e. Subsequently TTI India entered into an agreement with RIL on 28.05.2003 for providing services such as installation, acceptance testing (UAT), commissioning and annual maintenance, which otherwise, was an obligation of the assessee. (Annexure C) f. The assessee was also a guarantor in the service contract between ITI India and RIL (Clause 18 and Annexure F of agreement dated 28.05.2003 - Annexure B) g. TTI India is the only company in the country to with which the assessee has entered into a service contract and which is capable of providing services with respect to telecom software purchased by RIL. h. The only source of revenue for 'ITI India is the service contract with RIL which has been guaranteed by the assessee. REVENUE'S STAND 8. Based on the new facts found during the course of assessment proceedings, most of which were not brought to the knowledge of the Assessing Officer in the earlier years, it is the case of Revenue that the Indian subsidiary is a depende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. The contention of the assessee that it has purchased an off-the-shelf product is conclusively proved to be false. Source code is the intellectual property generated by the assessee. It is a matter of public knowledge that only machine code (or executable copy) is transferred/sold for use of software. Such copy can never be read, modified or understood in any manner by the end user. Executable copies of computer application are like monolithic black boxes which can be put to use but cannot be understood or modified upon in any way. The fact that assessee not only partakes with an executable copy but also partakes away with the source code (which is the very creation of programmers developers) clearly establ ishes that the intellectual property of the sof tware so developed had also been explicitly transferred to Reliance through the agreement. 40. Interestingly it may be noted that unlike clause 2.1 of the SSLA, which speaks of the transfer of software being 'royalty-free' the transfer of source code is not stated to be royalty free. This alone established that the transfer of source code cannot be said to be a 'royalty-free' affair. 41. Transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 12 of the DTAA at the prescribed rate of 10%. Penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 are initiated separately for furnishing inaccurate particulars of income. 4.8. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and submitted in detail that there was no material change in fact or legal position. It was also argued that Ld. CIT(A) was bound by the decision of the Tribunal in assessee s own case of earlier years. But, Ld. CIT(A) endorsed the observations of the AO relying upon the judgment of Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra). After analyzing various clauses of the agreements and various judgments available before him at the time of passing of the order, he independently analysed the issue and chose not to follow the order of the Tribunal in assessee s own case in earlier years and decided this issue raised by the assessee independently on facts. The crux of the reasoning given by the Ld. CIT(A) was that the terms of the agreement entered into by the assessee with Reliance indicated that right in copyright of the software was transferred by the assessee to Reliance and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act can be read into the DTAA or not, in my most respectful submissions, the Bombay high court decision in the case of CIT v. Siemens Aktiongesellschaf t, 310 ITR 320) (Born HC) rendered in the facts peculiar to that case has not been appreciated in the proper perspective in various decisions of the Delhi high Court and Mumbai Tribunal relied upon by the assessee. While appreciating the Siemens AG, supra, the following facts may kindly be kept in mind: i. The exact question of law before the Hon'ble High court was NOT that whether Amendments in the I.T. Act can be read into the DTAA or not and therefore, the Hon'ble High Court can not be said to have answered it as claimed. ii. In the said case, old DTAA (1960) between India and Germany was under consideration in which Royalty had not been defined.( Para 15). iii. Royalty under the I.T. Act has been def ined in Explanation 2 to S.9(1)(vi), inserted by the Finance Act 1976 w.e.f 01-06-1976. iv. The agreements under consideration in the case of Siemens AG, supra which gave rise to the impugned income were entered into before 01-06-1976 when there was no definition of Royalty both under the I.T. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Finance Act 2007, thereby implying that the Clarif icatory Explanations could be read into modern DTAAs. iv. Mumbai Tribunal In the case of Viacom 18 Media (P.) Ltd.(2014) 162 TTJ 336 (Mum) has explained the import of Bombay HC decision in right perspective in paras 16 and 17 of its order while rejecting the assessee's argument that the HC has held that amendments in the Act can not be read into DTAAs. v. The Bombay HC has approved ambulatory approach (para 22) to interpretation of treaties against Static approach adopted by the Delhi HC. Klaus Vogel in commentary has also advocated ambulatory approach. 4.11. Finally, Ld. CIT-DR prayed that in view of the above submissions orders passed by the Tribunal in earlier years should not be followed. 4.12. In rejoinder, Ld. Counsel of the assessee submitted that Revenue has not properly appreciated the crucial facts here. He took us through the supplementary agreement which was entered during the relevant period to show that intention of providing the source code by the assessee to Reliance was not to transfer the full rights in the software. But, it was meant only to protect the buyer in case of any disast ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has contended in the order that an amendment has been made in the said agreement vide supplementary agreement dated 17th September 2007, which has brought out a material change and that is why decision given by the Tribunal in earlier orders needs to be deviated. We have analysed this contention very carefully. It is noted by us that agreement dated 27th September 2002 has been analysed by the Tribunal twice in two separate orders i.e. for A.Y. 2003-04 and A.Y. 2006-07 and detailed orders were passed wherein it was observed, after analyzing various clauses of the agreement and position of law, that the impugned amount did not constitute royalty in the hands of the assessee. Under these circumstances, we shall not repeat the exercise done by the coordinate bench in assessee s own case, nor shall we like to modify the conclusion drawn by the coordinate bench as far as analysis of the original agreement is concerned. We shall therefore analyse the nature and scope of amendment agreement dated 17th September 2007 in the light of some of the relevant clauses of the original agreement dated 27th September 2002, which are reproduced hereunder: License Grant. a) TTI hereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the terms and conditions set forth in the software Licenses and the TTI is informed of the same in writing by Reliance and provided further that the rights transferred, assigned or granted to outsources, as the case may be shall be those reasonably necessary, to fulfill the commercial purposes of such transaction. (c) Notwithstanding any statement in this Agreement to the contrary, Reliance may permit use under the limited license of the Software (or any part thereof) under the terms of any agreement between reliance and any third party (Contractor Agreement ) including without limitation, consultant programmers, system integrators, system maintainers, outsourcing or disaster recovery or other service suppliers (Authorized Subcontractors) (Reliance shall be entitled to grant such Authorized subcontractors a limited sub license to use the software solely to provide services to Reliance under such contractor agreement in respect of the software (the limited License). The limited License expressly excludes any right for the Authorized Sub-contractors. Such limited License shall terminate on termination of the contractor Agreement (or if later, on termination of any obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has previously paid any sums in respect thereof, TTI will promptly refund all such sums to Reliance). 11.2. Release of Source Code. Upon occurrence of the conditions described in the Escrow Agreement (each, a Release condition ) the Source Code placed in escrow will be delivered to Reliance for us, copying in connection with Reliance s use, maintenance and support of the software in accordance with its rights under this Agreement. 11.3 License; Ownership. TTI hereby grants and agrees to grant to Reliance a perpetual, non-exclusive, worldwide license to use, copy, and create derivative works the purposes specified in Section 11.2 (the Derivative Works ). Reliance will be the exclusive owner of any modifications to or Derivative Works of the Source Code created by or for Reliance under this terms and circumstances Section 11. 4.15. It was contended by the Ld. Counsel that the lower authorities mislead themselves by making incomplete reading of the said clause with regard to source code. It was contended by Ld. Counsel that there was no absolute transfer of source code of the assessee to Reliance. In fact, source code was meant to be provided for the limited purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of source code by the assessee to Reliance. It is noted by us that firstly, as discussed above, the source code was intended to be provided by the assessee to Reliance only for the limited purpose of enabling it maintenance and support of software in accordance with its rights under the said agreement. Secondly, in any case, it has been informed that the aforesaid Escrow Agreement was never entered into and therefore, there was no question of providing any source code by the assessee to Reliance in this regard. The assessee had submitted on record a copy of declaration which reads as under: Declaration To whomsoever it may concern 1. Exhibit C of the Original Software Supply and License Agreement (SSLA) dated 27th September 2002 executed between TTI Team Telecom International Ltd. (TTI) and Reliance Infocomm Ltd. (now known as Reliance Communications Ltd. (RCL) has never been executed. 2. The original SSLA dated 27th September, 2002 between TTI and RCL contained a clause for the transfer of source code to RCL in an escrow account. However, TTI and RCL did not enter any Escrow Agreement and the source code of TTI s software was never deposited at RCL or w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paras 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 PE 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 PE or fixed base. In such case, the provisions of art. 7 or art. 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 subdivision, 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 PE or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such PE or fixed base, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x treaty clearly override this statutory provision. In Gracemac decision (supra), the Co-ordinate Bench was of the view that the provisions of the applicable tax treaty and the IT Act are identical -a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac decision (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 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 s. 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 results achieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ula 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 commonsense approach. Suppose a man tells his wife to go out and bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly 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 vs. State of UP 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 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 case (supra) as also a large number of Division Bench decisions on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt guarantee clause of the agreement and has also held that TTI India and the assessee has close and invisible nexus for providing the services. Reliance has also been placed upon the fact that expenses to the tune of ₹ 154 lakhs have been reimbursed to the parent company at cost, implying thereby that the employees of the assessee have been traveling to India to render the services and that TTI India is not capable for rendering necessary services independently. 5.1. Being aggrieved, the assessee contested this issue before Ld. CIT(A) and submitted in detail that TTI India should not have been held as DAPE of the assessee because it was neither an agent of the assessee nor it was dependent upon the assessee and nor it had authority to conclude contracts on behalf of the assessee. But, Ld. CIT(A) did not agree with the submission of the assessee; he relied upon the judgment of Hon ble Delhi High Court in the case of Rolls Royce PLC dated 30.08.2011 and held that the aforesaid Indian subsidiary was DAPE of the assessee. Ld. CIT(A) simply reproduced the aforesaid judgment and concluded that the aforesaid company being Indian subsidiary of the assessee constituted its PE in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue in favour of the assessee. Thus, ground no.2 is allowed. 6. Ground No.3: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the action of AO in holding reimbursement of expenses as fees for Technical Services (FTS) as per Article 13 of Indo-Israel DTAA. It is noted that Ld. CIT(A) has decided this ground as consequential to Ground no.2 and held that since assessee has a Permanent Establishment in India, therefore reimbursement expenses was nothing but business income of the assessee in India. During the course of hearing before us, it was stated by the Ld. Counsel that in A.Y. 2005-06, Ld. CIT(A) decided this issue in favour of the assessee wherein it was held that amount of reimbursement of expenses (which were similar to expenses reimbursed in the impugned year) could not be taxed as FTS in the hands of assessee and this issue was not contested by the Revenue and thus attained finality. But, in A.Y. 2006-07 and 2007-08, this issue had reached before the Tribunal wherein, taking support from the order of the Ld. CIT(A) of A.Y. 2005-06, the Tribunal vide its order dated 11.09.2015 for AY 2006-07 held as under: 8. We have heard bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of Article 13(3) of the Indo-Israel Treaty read with clause 2 of the protocol dated29.01.1996. 3.8 I have also considered the cases relied by the AO in his order dated 19.12.2008 and mentioned above. I have perused the same it is noticed that these decisions relied upon by the Assessing Officer are in the context of taxability of reimbursement of expenses under the context of Income Tax Act ie the domestic law and there is no reference to the tax treaties therefore, these are not applicable to the present case under consideration. In view of these facts, the Ground no.2 is allowed in favour of the assessee. 9. Further, we have also gone through the judgment of the Hon'ble Bombay High Court in the case of Seimens Aktiongesellschaft (supra) and find para 33 of the said judgment is relevant in this regard and the relevant portion of the said para is extracted as follows: 33. the last contention whether the amounts by way of reimbursements are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in Industrial Engineering Projects (P) Ltd's case (supra). The Ld Division Bench ..... 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