TMI Blog2018 (6) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... y 2016, passed under section 144C(13) r/w section 143(3) of the Income Tax Act, 1961 (for short the Act ) for the assessment year 2012 13, in pursuance to the directions of the Dispute Resolution Panel (DRP) II, Mumbai, under section 144C(5) of the Act. 2. In ground no.1 with its sub grounds, the assessee has challenged the taxability of the amount of ₹ 1,70,25,149, received for supply of software as royalty. 3. Brief facts are, the assessee a tax resident of Israel is engaged in supply of software. For the assessment year under dispute, the assessee filed its return of income on 30th November 2012, declaring nil income. In the previous year relevant to assessment 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned DRP also confirmed the view of the assessing officer. However, the Tribunal while deciding the issue in the appeals filed by the assessee, took note of the orders passed by it in assessee s own case for earlier assessment years and held as under: 4.13. We have gone through the orders passed by the lower authorities as well as submissions made before us by both the sides and also judgment of the Tribunal passed in assessee s own case in the earlier years. The Only issue to be decided by us is whether amount received by the assessee on account of supply of software to M/s. Reliance Infocom Ltd.( subsequently name changed to Reliance Communication Ltd.) constituted payment of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified in the purchase order only. (b) The aforementioned licenses set forth above are hereinafter be referred to as the Software Licenses . Such software Licenses shall not be sold transferred, assigned, sublicensed by or used by outsourcees of Reliance without TTIs prior written consent except with respect to (i) the sale of the wireless Reliance network (or any relevant component thereof) (ii) the financing of the wireless Reliance Network (or any component thereof) or (iii) The outsourcing by Reliance of any operating or maintenance functions related to the wireless Reliance Network, under the terms and conditions of the limited license as specified herein; or (iv) the transfer or assignment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the execution or this Agreement, the parties will duly execute and deliver the Escrow Agreement, and TTI, upon Acceptance of the software, will deliver to the Escrow Agent a complete master, reproducible copy of all source code relating to the software. TTI promptly will update the source code in escrow to reflect all revisions, modifications and enhancements to the software that are provided to Reliance hereunder. In the event that the Escrow Agreement has not been executed and the source code delivered to Escrow Agent within thirty (30) days after acceptance of the Software, then until such events have occurred Reliance shall be entitle to terminative this agreement by written notice provided that Reliance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnology. But, subsequently mobile phones based on GSM technology were also included under the aforesaid amendment agreement. Thus, in brief, main objective of the aforesaid amendment agreement was to include mobile phones using new technology. 4.17. Thus, this supplementary agreement has been entered into in continuation with the earlier agreement dated 27th September 2002 for purchase of additional software by Reliance from the assessee to be used in technologically updated Wireless Reliance Network (i.e. CDMA or GSM etc.). Thus, vide this supplementary agreement, though scope of usages of the software for relatively wider range of products has been increased, but all other terms and conditions remained same. We do 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble tax treaty. 14. It is an admitted position that the assessee did not have any PE in India in terms of the provisions of art. 5 of the tax treaty, and, accordingly, the assessee cannot be held liable to be taxed in respect of business profits, under article 7, on supply of software in question. The case of the Revenue really rests on taxability under art. 12 which provides as follows: Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged 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 scienti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding cinema photographic film , and, while examining this question, it is important to bear in mind the fact that there is a specific mention about the use of copyright. The only other clause in which payment for software could possibly fall is consideration for use of, or right to use of, a process . Let us examine these two aspects of the definition of royalty under the India-Israel tax treaty. 16. As regards the question whether the payment for software could be treated as payment for use of, or the right to use, any copyright of literary, artistic or scientific work , we find that this issue directly came up for consideration of a Special Bench of this Tribunal in the case of Motorola Inc. (supra). That was a case in which the Special Bench had an occasion to 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, trademar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even Revenue s case that any of these rights have been transferred by the assessee, on the facts of this case, and, for this reason, the payment for software cannot be treated as payment for use of copyright in the software. As we hold so, we may mention that in the case of Gracemac (supra), a contrary view has been taken but that conclusion is arrived at in the light of the provisions of cl. (v) in Expln. 2 to s. 9(1)(vi) which also covers consideration for transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work a provision which is clearly larger in scope than the provision of art. 12(3) of the Indo-Israel tax treaty. The word of between copyright and literary, artistic or scientific work is also missing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment for process liable to be treated as royalty within meaning of that expression under Expln. 2 to s. 9(1)(vi) of the IT Act. However, when this decision came up for scrutiny of Hon ble Delhi High Court, in the case reported as Asia Satellite Telecommunications Co. Ltd. vs. Director of IT (2011) 238 CTR (Del) 233 : (2011) 51 DTR (Del) 1 : (2011) 332 ITR 340 (Del), their Lordships, after a very erudite and detailed discussion, concluded that we are unable to subscribe to the view taken by the Tribunal in the impugned judgment on the interpretation of s. 9(1)(vi) of the Act . It cannot, therefore, be open to us to approve the stand of the Revenue to the effect that the payment for software is de facto a payment for process. That is a hyper- technical approach totally divorced from the 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 elaborat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h for different reasons. 19. On this aspect of the matter also, Gracemac decision (supra) has come to a different conclusion by opining that payment for software is in fact a payment for a process, but the view so expressed, being contrary to earlier decisions of the other Co- ordinate Benches and in accordance with the law laid down by Hon ble Andhra Pradesh High Court in the case of CIT vs. B.R. Constructions (1993) 113 CTR (AP) 1 : (1993) 202 ITR 2(22)(e) (AP) does not constitute a binding judicial precedent. In our considered view, even a Co-ordinate Bench decision, which is admittedly contrary to earlier precedents on that issue from other Co-ordinate Benches, does not bind the subsequent Co-ordinate Benches. We have all the respect and admiration for the Co- ordinate Bench decision, but, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2008 09, which shall be applicable mutatis mutandis. 8. There being no difference in facts brought to our notice by learned Departmental Representative, respectfully following the aforesaid decision of the Tribunal in assessee s own case as referred to above, we hold that the amount received by the assessee not being in the nature of royalty as per Article 12 of the India Israel DTAA is not taxable as such in India, but, has to be treated as business profit of the assessee. 9. Ground no.2, raised by the assessee is on the issue of holding TTI India as a dependent agent PE of the assessee. The Assessing Officer while framing the draft assessment order held that TTI India is the dependent agent PE of the assessee, hence, the business profits of the assessee are taxable in India. 10. The DRP, though, took note 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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