TMI Blog2018 (4) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 9(1)(vi) of the Act cannot be extended to the meaning of the term ‘royalty’ defined under DTAA. Applying the principle laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (2016 (2) TMI 415 - DELHI HIGH COURT), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act being beneficial and the definition of ‘royalty’ having not undergone any amendment in DTAA, the assessee was not liable to withhold tax on the payments made for purchase of software. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term ‘royalty’ had been defined originally and not amended. As per the definition of ‘royalty’ under the DTAA, purchase of software does not fall in realm of ‘royalty’. Accordingly, there was no liability on the assessee to withhold tax and the assessee cannot be held to be in default. The demand created under section 201(1) and interest under section 201(1A) of the Act is thus, cancelled. - ITA No.1433/PUN/2014 - - - Dated:- 5-4-2018 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned CIT(A) has erred in treating the retrospective amendment to Section 9(1)(vi) vide Finance Act 2012 as clarificatory in nature and that the amendment has not created a new charge of withholding tax with a retrospective effect. 6 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding the appellant as 'assessee in default' under Section 201(1) of the Act for not deducting the tax under Section 195 of the Act on the payments made for purchase of software and determining the total tax liability of ₹ 1,794,263 (including interest of ₹ 746,385) under Section 201(1A) of the Act. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act in respect of payment to Greece entities instead of the applicable beneficial tax rate 10% (plus applicable surcharge and cess) under the Act in the tax demand computation in the order passed under section 201(1) read with section 201(1A). 5. The ground of appeal No.7 is not pressed and hence, the same is dismissed as not pressed. 6. Briefly, in the facts of the case, as per information available with the Assessing Officer, the assessee had not deducted tax at source while making payments to the Non-resident / foreign companies for purchase of software. The assessee was asked to explain the reasons for said non deduction of tax at source under section 195 of the Act in respect of all foreign payments including software purchases debited during the year along with copies of all relevant documentary evidence in support of his submissions. The said query was raised by the Assessing Officer during assessment proceedings under section 201(1) of the Act. In response thereto, the assessee furnished the information that it had paid the amounts to various Non-resident software suppliers without deduction of tax at source. The details of payments entity-wise along with na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. software. Reference was made to different judicial precedents, wherein it was held that the payment for software would not qualify as royalty under the DTAA. The Assessing Officer after considering the submissions of assessee noted that the assessee had not contested the chargeability of licence fees under the provisions of Indian Income Tax Act, 1961 and hence, he was of the view that it could be presumed that the assessee agrees that the payment received for right to use software (licence fees) was taxable as royalty under section 9(1)(vi) of the Act. The Assessing Officer vide para 4.3 at page 13 observed as under:- 4.3 The assessee has not provided the end user licence agreements with the software suppliers. Hence exact nature of software provided and the terms and conditions are not known. In case of payments for licence, the non-resident receives consideration for transfer of all or any right for use or right to use computer software and owns all right, title and interest in the softwares. Therefore, what the supplier parts with to the end-user is only a right to use the software for its applications. So, one of the rights embedded in the intellectual property, that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the character of above payments received for right to use software and for support services was clearly royalty as defined in Article 12 or Article VII of the respective DTAAs as well as Explanation 2 to section 9(1)(vi) of the Act. Reference was made to the CBDT s Circular issued and also several decisions including the decision of the Hon ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. in ITA No.2808 of 2005, judgment dated 15.10.2011 and the contentions of assessee were rejected and the payment received by the foreign company for supply of software and support services was held to constitute royalty under DTAA as well as under the Act. The case laws relied upon by the assessee were held to be distinguishable on facts and hence, not relatable. Consequently, the Assessing Officer held that the provisions of section 194(5) of the Act were squarely applicable for payment of licence fees and the assessee was bound by the law to deduct tax before remitting money to non-residents. The assessee was held to have committed default in terms of section 201(1) and 201(1A) of the Act by not deducting or withholding tax and thus, held the assessee in default as per section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax rate of 20% u/s. 115A, because the transactions are entered pursuant to the Agreement entered by the Company with the respective vendors prior to June 1, 2005. I find that the Appellant has not rebutted the learned AO s contention that there is no proof that there was no payment made before 01.06.2005. Therefore, I find no error in the learned AO s decision to tax payment made to the supplier located in Greece @ 20%. Accordingly, as stated, I confirm the AO s decision to tax royalty on payments made on the software suppliers situated in USA, Singapore and Greece. 9. The assessee is in appeal against the order of CIT(A). 10. The learned Authorized Representative for the assessee pointed out that certain payments were made for purchase of software. The Assessing Officer was of view that the payments were in the nature of royalty both under the Act and the DTAA. He further pointed out that Explanation 4 to section 9(1)(vi) of the Act was introduced in 2012 with retrospective effect from 1976. The learned Authorized Representative for the assessee pointed out that in financial year 2006-07, there was no such liability to deduct tax in the year. He further pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT(A) at page 10 were that Explanation introduced in 2012 was clarificatory in nature and hence, was applicable to earlier years. He placed reliance on the ratio laid down by the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. (supra) for the proposition that where the law was not clear, the assessee should have sought clarification. He also referred to the ratio laid down by the Hon ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO (2014) 361 ITR 575 (Mad) to point out that the amendment was clarificatory in nature. 12. The learned Authorized Representative for the assessee pointed out that the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. (supra) had laid down that on any sum chargeable to tax in 2007 law as it stood then, ought to be applied. He further pointed out that on the basis of judicial precedents, no tax was deducted at source. He referred to the ratio laid down by the Special Bench of Delhi Tribunal in Motorola Inc. Vs. DCIT reported in 147 Taxman 39 (Del) (SB), which decided the issue of deductibility of software and intra-software. He fairly admitted that the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment Country Altair Engineering Inc 19,68,423 AMC for software USA ANSYS Inc 8,38,536 Software license USA Beta Cae Systems S.A 10,53,360 Software license Greece Beta Cae Systems S.A 1,46,300 Software license Greece Parametric Technology Corporation 1,37,009 Software license USA Proforma Corporation 40,329 Software license USA Spicer Corporation 42,437 Software license USA Tata Technologies Pte Ltd 14,17,522 Software license Singapore Total 56,43,917 14. The first issue which is raised in the present appeal is the taxability of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive 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 06.12.2017 in MA Nos.28 29/PUN/2017, relating to assessment years 2004-05 2006-07, Tribunal has held that there was a mistake apparent from record in the order of Tribunal, which needs to be rectified, wherein the Tribunal in its order had failed to consider the decision of Co-ordinate Bench in the case of Allianz SE Vs. ADIT (2012) 51 SOT 399 (Pune) and also the decision of Hon ble High Court of Delhi in DIT Vs. Ericsson A.B. two others (2012) 343 ITR 470 (Del). Thus, the Tribunal vide order dated 06.12.2017 has recalled its order in Cummins Inc. (supra). It may also be noted that Mumbai Bench of Tribunal in bunch of Miscellaneous Applications had also recalled its order in DIT Vs. Reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 the assessee was international software marketing and development company and its holding company based in USA namely Infra Corporation. The Non-resident entity was developing customized software to be used for different purposes. The said customized software was licensed to Indian customer. It was noted that in terms of license agreement, licensee was allowed to make only one copy of software and associated support information for backup purposes with the condition that such copyright would include infrasoft copyright. It was also noted that software was to be used only for licensee s own purpose and without consent of assessee that software could not be lent, rented, sub-licensed or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Annual fees for checking software 24.06,2007 1,14,044 Serena Software Pte Ltd Purchase of general software 04.09.2007 66,990 Cipher Soft Inc, USA Software License Fee-conversion of forms release 3.0 Java with XML Swing 08.11.2007 47,784 Ajira Technologies Inc, USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 subsequent amendment in respect of payment made to non-resident for providi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty 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 with the amendment to section but otherwise holds it be roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 therein. The Hon ble High Court in the case of New Skies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. 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 interpretation of law, cannot be allowed to have the same retroac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in DIT Vs. New Skies Satellite BV (supra) and De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 accept the assessee s contention that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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