9911796707
TMI Blog2018 (6) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2003-04, the assessee has entered into an agreement for supply of software with Reliance Infocom Ltd. which subsequently merged with Reliance Communication Ltd. Further, during the previous year relevant to the assessment year 2008-09, more precisely on 17th September 2007, the assessee had entered into a supplementary agreement with Reliance Communication Ltd., wherein, scope of the earlier contract was extended for supply of additional software. Out of the total project value under the contract, the assessee during the previous year relevant to the assessment year under dispute, received an amount of U.S. $ 3,50,767 equivalent to Rs. 1,70,25,149. Though, the assessee claimed the aforesaid amount to be not taxable in India, as it is not in the nature of royalty, however, the Assessing Officer following the view taken by him in assessment years 2008-09 and 2009-10, held that the amount received from Reliance Communication Ltd. for supply of software is in the nature of royalty and since the assessee has a Permanent Establishment (PE) in India, the amount is taxable in India in terms of section 9(1)(vi) of the Act. Similarly, the Assessing Officer also held that the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty' within the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA between India and Israel. It is noted by us that as discussed in detail above, the impugned amounts have been received in pursuance to an agreement between the assessee and Reliance dated 27th September, 2002 (entered into the period relevant to A.Y. 2003-04). The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment by Reliance of the Software Licenses to a Reliance Affiliate (or vice versa) in conjunction with a transfer of a portion of the wireless Reliance network to be operated in the territory of India only, provided that in each such case specified in (i)-(iv) above, such transferee, assignee, or outsourcee agrees in writing to abide by 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 softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has given written notice and details of such breach to TTI and has advised TTI of its intention to terminate and TTI has failed to deliver the Source Code to the Escrow Agent within thirty (30) days from Reliance's notice thereof no payment obligation with respect to such software or nay support services (and if Reliance 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any change much less any material change in the terms and conditions of the original agreement which may have any bearing on the decision which has been taken by the Tribunal in earlier years. One of the main objections which had been prominently discussed by the lower authorities is with respect to transfer 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not exceed 10 per cent of the gross amount of the royalties. 3. The term royalties as used in this article means payments of any kind 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. 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 payin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide whether payment for software amounts to 'royalty', for the purposes of India Sweden tax treaty [(1998) 229 ITR (St) 11] which incidentally is the same as in Indo-Israel tax treaty and which also defines royalty as "payments of any kind 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 copyr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statutory provision, and, by the virtue of s. 90(2) of the Act, the provisions of India Israel tax 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground business realities. It is also important to bear in mind the fact that the expression 'process' appears immediately after, and in the company of, expressions "any patent, trademark, design or model, plan, secret formula or process". We find that these expressions are used together in the treaty and as it is well- settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Hon'ble Shri M.K. Chaturvedi, had, in an article 'Interpretation of Taxing Statutes' (AIFTP Journal: Vol. 4 No. 7, July, 2002, at p. 7), put it in his inimitable words as follows : "Law is not a brooding omnipotence in the sky. It is a pragmatic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in our considered view, this decision does not constitute a binding judicial precedent, and we leave it at that. The other aspect of the matter is that the issue of taxability of software, as a copyrighted article, is directly covered by a Special Bench of this Tribunal and the said decision, coming from a Bench of larger strength, prevails over the Division Bench decision. As laid down by the apex Court in the case of Ambika Prasad Mishra 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of assessee's submissions that TTI India has not undertaken any operations during the relevant previous year and there were no employees, however, it upheld the decision of the Assessing Officer that TTI India is a dependent agent PE of the assessee. 11. The learned Authorised Representative submitted, this issue also stands decided in favour of the assessee by the decision of the Tribunal in assessee's own case for assessment years 2008-09, 2009- 10 and 2010-11. 12. The learned Departmental Representative agreed with the aforesaid submissions of the assessee. 13. We have considered rival submissions and perused materials on record. As could be seen from the facts on record, in the preceding assessment years also the Assessing Officer has treated TTI India as a dependent agent PE of the assessee. However, while deciding the issue in dispute, the Tribunal in the order referred to above, have held in the following manner:- "5.3. We have gone through the orders passed by the lower authorities. It is noted by us that it is sixth year of the transactions; which have always been accepted by the Revenue in all the earlier years. It is further noted that the Tribunal in assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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