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TMI Blog2018 (4) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... s literary work under the Copyright Act, 1957. b. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that computer software can also be termed as scientific work. c. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the licensed software qualifies as secret formula or process. 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred to appreciate that the software payment made by the appellant does not fall within the meaning of the term 'Royalty' as per respective Double Tax Avoidance Agreements ('DTAA'). 3 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not providing relief under the beneficial provisions of India - USA and India - Singapore DTAA under section 90(2) of the Act for determining the scope of income chargeable under the head 'Royalties' and tax rate at which income is taxable in India. 4. On the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate the difference between right to use a copyright in software and sale of copyrighted article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with grounds of appeal. The perusal of grounds of appeal reflect that originally the assessee had raised grounds of appeal upto grounds of appeal 6 but in the revised Memo of appeal, the assessee has raised grounds of appeal 1 to 9. The additional grounds of appeal raised by the assessee i.e. 7 to 9 are infructuous and are dismissed. The assessee has further filed separate application for additional grounds of appeal No.7 to 9, which read as under:- "7. On the facts and circumstances of the case and in law, the learned Deputy Director of Income Tax (International Taxation) -II, Pune ['the learned AO'] erred in initiating proceedings under section 201(1) read with section 201(1A) without issuing show cause notice under section 201(1) read with section 201(1A) on the Company for AY 2007-08 and hence the proceedings initiated and the order passed u/s.201(1) read with section 201(1A) is invalid and bad in law. 8. On the facts and circumstances of the case and in law, the learned AO erred in initiating proceedings under section 201(1) read with section 201(1A) beyond the reasonable period of four years. 9. On the facts and circumstances of the case and in law, the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident, is chargeable to tax in India. Further, the assessee referred to section 195 of the Act which provides for withholding of tax in relation to payments made to Non-resident or foreign company, taxable in India. Reference was made to the ratio laid down by the Hon'ble Supreme Court in GE India Technology Centre (P) Ltd. reported in 234 CTR 153 (SC), wherein it has been held that the words "chargeable under the provisions of the Act' used in section 195(1) of the Act clearly indicate that the payments made to Non-resident should partake the character of income chargeable to tax, in order to trigger withholding of tax. The assessee claimed that similar proposition was laid down by the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. reported in 155 CTR 489 (SC) / 239 ITR 587 (SC). Further, the assessee referred to section 90 of the Act and pointed out that where the DTAA has been entered into with a country, then the provisions of the Act or Treaty, whichever is more beneficial shall apply. He referred to the relevant extracts of provisions relating to the royalty as defined in different Treaties and pointed out that royalty would include pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the definition of 'computer software' provided in Explanation 3 under section 9(1)(vi) of the Act and held that the payment for right to use was therefore in the nature of royalty and taxable under clause (v) of Explanation 2 of section 9(1)(vi) of the Act. The Assessing Officer further referred to clarification issued by the Finance Act, 2012 which had vide Explanation 4 provided that the right to use computer software including granting of licence was royalty. The Assessing Officer referred to the Memorandum of Finance Bill, 2012 and held that in view of the above Explanation, the payment was in the nature of royalty and taxable as royalty under section 9(1)(vi) of the Act. He then, referred to the computer programmes and the copyright and was of the view that as the source code or object code of computer had been protected and not available freely, these softwares could even qualify for secret formula or process, therefore, the payment received was royalty as per clause (i) & (iii) of Explanation 2 of section 9(1)(vi) of the Act i.e. payment received as consideration for the use or the right to use secret formula or process. The Assessing Officer thus, held that in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility of performance regarding tax deduction in compliance with the retrospective legislations. In this connection, it may be mentioned that, in this case, the law has not created charge of the TDS by retrospective amendment but has clarified this legal position by way of inserting Explanation. The meaning of the Explanation for statutory interpretation explained in the case of CIT Vs. Voltas Ltd. (1994) 205 ITR 569 ( Bom.) which held as under : "An Explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduces something new which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonize it with the section and to clear up any ambiguity in the main section." 2.2.4. Therefore, the law always required the assessees to make TDS on the payments made for acquiring software. The explanation has merely clarified this position. Accordingly, I do not find merit on the issue of the impossibility of performance deducting tax on payments made to acquire software. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty but it does not talk of fees for technical services. He stressed that the assessee had purchased copy righted software from third parties except last one. The learned Authorized Representative for the assessee pointed out that grounds of appeal No.1 to 4 were against the issue of whether the payments made by the assessee were royalty or not. He further pointed out that the issue raised vide grounds of appeal No.5 and 6 was against the order of authorities below in putting the TDS obligation upon the assessee. He pointed out that once it is held that no TDS obligation can be put upon the assessee by way of retrospective amendment being brought in and then all other issues would become academic in nature. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by Pune Bench of Tribunal in DDIT Vs. iGATE Computer Systems Ltd. in ITA Nos.1172 to 1174/PN/2013, relating to assessment years 2008-09 to 2010-11, order dated 10.04.2015 and Mumbai Bench of Tribunal in Shinhan Bank Vs. DDIT in ITA No.1936/Mum/2014, relating to assessment year 2009-10, order dated 04.07.2016. The learned Authorized Representative for the assessee also pointed out that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... catory nature of amendments to section 9(1)(vi) of the Act were neither questioned nor adjudicated but were applied to assessment year predating the amendment. He stressed that so far as tax withholding liability was concerned, it was dependent on the law as it stood at the point of time when payments from which taxes ought to have been withheld, were made and the tax deductor could not be expected to envisage how the law would change in future. Reliance was placed on the decision of the Pune Bench of Tribunal in DDIT Vs. iGATE Computer Systems Ltd. (supra). He further relied on the ratio laid down by the Hon'ble High Court of Delhi in DIT Vs. New Skies Satellite BV (2016) 382 ITR 114 (Del) to hold that the amendment to section 9(1)(vi) of the Act by insertion of Explanation 4 would not have any effect to the interpretation of the term 'royalty' under the respective DTAAs. 13. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is the treatment to payment made for software licence fees. During the year under consideration, the assessee had made the under-mentioned payments to various non-resident software suppliers for purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyrighted article, then the impugned payment was not taxable as 'royalty'. 15. Another aspect which was pointed out was that where the DTAA existed between two countries and the terms of DTAA had not been amended, then retrospective amendment in the Income Tax Act would not alter the provisions of DTAA. Since the provisions of DTAA were beneficial, then the same were to be applied and in the absence of any amendment, there was no obligation to withhold tax out of payments made to Non-resident entities for purchase of software. The learned Authorized Representative for the assessee in this regard has relied on several judicial precedents on the issue. The learned Departmental Representative for the Revenue on the other hand, had relied on different propositions laid down by different High Courts. 16. Before proceeding further, we may point out that the CIT(A) had rejected the claim of assessee in turn, relying on the ratio laid down by Pune Bench of Tribunal in Cummins Inc Vs. DCIT (2014) 146 ITD 460 (Pune), order dated 08.08.2013 and also on the ratio laid down by Mumbai Bench of Tribunal in DDIT Vs. Reliance Infocom Ltd. (supra), order dated 06.09.2013. Vide order dated 06.12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(1)(vi) of the Act inserted by Finance Act, 2012. In other words, Finance Act, 2012 has enlarged the meaning of term 'royalty'. The said amendment was issued with retrospective effect w.e.f. 01.06.1976. 18. The Pune Bench of Tribunal in Allianz SE Vs. ADIT (supra) relying on the decision of the Hon'ble High Court of Delhi in DIT Vs. Ericsson A.B. & two others (supra) held that payment made for purchase of software was not 'royalty'. Similar is the proposition laid down by the Hon'ble High Court of Delhi in DIT Vs. Infrasoft Ltd. reported in 220 taxman 273 (Del), judgment dated 22.11.2013 and also in PCIT Vs. M. Tech India Pvt. Ltd. (2016) 381 ITR 31 (Del), judgment dated 19.01.2016. In the facts of Allianz SE Vs. ADIT (supra), it was noted that copyright of software vested with the developer and what was transacted by it in the license agreement between the assessee and its India affiliate was only grant of user right in copyrighted software and not use of copyright itself and hence, it was held that license charges received by Non-resident entity could not be brought to tax as 'royalty'. In the case of DIT Vs. Infrasoft Ltd. (supra), the Hon'ble High Court of Delhi noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 9(1)(vi) of the Act were not on record. The law cannot compel a person to do something which is impossible to perform. The amendment was brought into the Statute by the Finance Act, 2012 with retrospective effect, but such an amendment cannot create liability against the assessee. As on the date of payment, the assessee was not liable to withhold tax under section 195 of the Act. Accordingly, we hold that no liability can be fastened on the assessee to deduct tax at source on the basis of subsequent amendments made in the Act in relation to payments made to Non-resident, on a date anterior to the date of amendment, though retrospectively applied. 22. Similar ratio has been laid down by the Pune Bench of Tribunal in DCIT Vs. iGate Computer Systems Ltd. (supra). The Tribunal held as under:- "14. We have heard the rival contentions and perused the record. The assessee for the year under consideration had made payments for the purchase of software and for other related costs as detailed as under:- Name of the company Nature of payment Date of payment Amount (Rs) Savvion Inc. USA Purchase of general software 04.05.2007 1,23,80,564 NCC Services Ltd, UK Annu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign company does not become chargeable to tax in India then the question of applicability of section 195 does not arise. Therefore, without considering the amendment brought into the statute by Finance Act 20I2 with retrospective effect from 01.06.1976 it has to be held that there was no liability of the assessee to deduct tax at source on the payment made by it with respect to work relating to phase one and two. Further the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. The Tribunal based its decision on a legal Maxim lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform. Amendment brought into the statute by Finance Act 2012 with retrospective effect from 01.06.1976 amendment does not create any liability against the assessee as the legal position prevailing at the relevant time was to be considered. Assesses was not liable for deduction of tax under section 195 of the Act. Channel Guide India Ltd. vs. ACIT, 139 ITD 49, relied on. Assessee cannot be made liable to deduct TDS on basis of subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r scientific work has referred to in the definition of 'royalty' under DTAA, obviously includes software and he further observed that there was no requirement of transfer of copyright for treating the payment as 'royalty' under DTAA. The Assessing Officer further observed that the payment received for supply of software was taxable as 'royalty' and in turn, relied on different decisions including the decision of the Hon'ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. (supra). In the absence of agreement being available with the Assessing Officer, the findings of Assessing Officer that software was in nature of literary or scientific work, cannot stand. When going into the aspect of purchase of software being royalty or not, the issue which has to be seen is whether the assessee had purchased copyright or copyrighted articles. The purchase of software by a person cannot be held to be work of literary or scientific work. There is no merit in the observations of Assessing Officer in this regard and the same are dismissed. 25. Before us, the learned Authorized Representative for the assessee strongly stated that the Hon'ble High Court of Karnataka does not deal wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transponders of its satellites. The assessee therein was the service provider and the receipts were sought to be taxed under section 9(1)(vi) of the Act. The Hon'ble High Court considered the pre-amended and post-amended provisions of the said section and observed that though the Revenue authorities considered the income from data transmission services as taxable as royalty under section 9(1)(vi) of the Act; however, the Tribunal on the basis of ratio laid down in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) did not. The Hon'ble High Court in that case had held that receipts earned from providing data transmission services through provision of space segment capacity on satellites did not constitute royalty within the meaning of section 9(1)(vi) of the Act. It was further held that while providing transmission services to its customers, control of satellite always remained with satellite operator and the customers were only given access to transponder capacity and hence, the payment could not be termed as royalty for the use of a process or equipment. The said decision was in the context of section 9(1)(vi) of the Act and the provisions of DTAA were not considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of income shall rest on the interpretation of terms of DTAA. The Hon'ble High Court vide para 39 onwards then took note of Article 12 of the DTAA, under which the State of Residence had the primary right to tax royalty; the Source State shall concurrently have the right to tax the income, to the extent of 15% of total income. The Hon'ble High Court also observed that before the amendment brought about by the Finance Act, 2012, the definition of 'royalty' under the Act and DTAA were treated as pari materia. Again reference was made to the ratio laid down in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) and observed that the question was whether in an attempt to interpret the two definitions uniformly i.e. domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. The Hon'ble High Court held as under:- "41. This court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no double taxation avoidance agreement." 19. The above judgment was delivered by the Hon'ble High Court on 08.02.2016. 20. The learned Authorized Representative for the assessee relied on various decisions of the Hon'ble High Courts for the proposition that telecommunication services rendered by Non-residents outside were not taxable in India. The learned Departmental Representative for the Revenue on the other hand, pointed out that the payment to Non-residents on account of it being routed through holding or related company abroad, was taxable. Both learned Authorized Representatives have relied on series of decisions for the proposition as to whether the payments to Non-residents paid directly or routed through a third party on account of lease line charges falls within amended definition of 'royalty', which is to be applied retrospectively. In view of the ratio laid down by the Hon'ble High Court of Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s applied the ratio of the Hon'ble Supreme Court of Canada in R Vs. Melford Developments Inc., 82 DTC 6281 (1982) and observed as under:- "The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression 'laws in force'. . . While considering the Double Tax Avoidance Agreement the expression 'laws in force' would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agree ment as set out in article I(2). Considering the express language of article I(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the double taxation avoidance agreement was entered into." 29. In the facts of the case before the Hon'ble Bombay High Court the word 'royalty' was not defined in German Treaty and in that context, the Hon'ble Bombay High Court held that they were unable to a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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