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TMI Blog2016 (10) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of the assessee was not obliged to deduct tax at source while making payment of data processing cost to the Head Office and that section 40(a)(i) of the Act is not applicable to this payment. 3. On the facts and in the circumstances of the case and in law, CIT(A) has erred in holding that the definition of the Income Tax Act in sec.9(1)(vi) read with explanation 4 & 5 would not be applicable in case where 'Royalty' has been defined under the treaty. 4. On the facts and in the circumstances of the case and in law, CIT(A) was not justified in holding that interest payable by the Indian Permanent Establishment of the foreign bank to its HO and is deductible while computing the total income. 5. On the facts and in the circumstances of the case and in law, CIT(A) erred in holding that interest income payable by the Indian PE of a foreign bank its HO and branch offices abroad cannot be taken into account for the purpose of computing the income of HO liable to be taxed in India. 6. On the facts and in the circumstances of the case and in law, CIT(A) erred in holding that no TDS is required to be done on the amount of interest paid to HO by the Branch Office. 2. At the outset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. He further submitted that, the Hon'ble Bombay High Court decision in the case of Siemens Aktiongesellschaft (supra) would reveal that, i) Nowhere in the said order, the High Court has held that Amendments/Explanations cannot be read into DTAA as it was not question before the Hon'ble High Court; ii) The natures of services rendered in the said case were found to be not Royalty under the DTAA though found to be Royalty under the Act. Those services were found to fall under the expression "commercial or industrial profits" as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. The provisions of DTAA being the beneficial to the assessee were preferred over the provisions of the Income-tax Act; iii) In paras 13, 22 and 28 of its order, the Hon'ble High Court has approved the insertion of Explanation below section 9(2) inserted by the Finance Act 2007, thereby implying that the explanations inserted by FA 2007 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 High Court decision in right perspective in paras 16 and 17 of its order while rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sive non-transferrable rights to use the computer software brought for personal use and clause 16 of the said agreement specifically provides that the Head Office does not have any right to assign, sub-license or otherwise transfer the license of this agreement. Thus, the payment by the Branch for use of computer software is not the right in the copy right but only for doing the work from the said software which subsist in the copy right of the software. The branch is using the computer software and the I.T. resources installed at Belgium for which the payment is made by the Head Office towards the use of such software license. Since the Branch is using the same software for the purpose of business operations, the Head Office allocates the said expenditure on a prorata basis for the use of the said resources which is being reimbursed by the Branch to the Head Office. It is not in dispute that the assessee has sought the benefit of treaty between India and Belgium and had specifically relied upon the definition of "royalty" as given in the Article 12. Clause (a) of Para-3 of Article-12, which defines the term "royalty" in the following manner:- 3(a) The term "royalties" as used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Head Office is being made by the Head Office, then any allocation of cost and reimbursement thereof by the Branch to the Head Office cannot be termed as independent payment for the purpose of royalty. To fall within the ambit of "royalty" under Article, the payment should be exclusively qua the use or the right to use the software exclusively by the Branch. The character of the payment under the royalty transactions depends upon the rights that the transferee acquires in relation to the use and exploitation of the software programme. Here, there is no such right which has been acquired by the Branch in relation to the usage of software, because the Head Office alone has the exclusive right of the license to use the software. Thus, the reimbursement of the data processing cost to the Head Office does not fall within the ambit of definition of "royalty" under Article 12(3)(a). 17. The learned Commissioner (Appeals) and the learned Senior Counsel have strongly relied upon the decision of the co- ordinate bench of the Tribunal in Kotak Mahindra Primus Ltd. (supra). On a perusal of the said decision, it is seen that the conclusion drawn by the Tribunal, is directly applicable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pyright. The authority for this proposition is contained in Special Bench decision in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (Del)(SB), Samsung Electronics Company Ltd. v. ITO (2005) 94 ITD 91 (Bang), and Lucent Technologies Hindustan Ltd. v. ITO (2005) 92 ITD 366 (Bang). It is not even the revenues case that the payment in question is not (sic) for the use of, or right to use of, patent, design or model, plan, secret formula or process, or trade mark. In any event, having perused these classifications and having considered the facts before us, we are of the considered view that the payment does not fit into any of these classifications. It is, however, contended that the impugned payment is covered by the residuary clause, i.e., "other like property or right". It is contended that by making payment of US $ 60,000 per annum, the Indian company gets a valuable property and right as the payment cannot be said to. have been made in vacuum and without any consideration. This plea also does not impress us. It is not every property or right which can be covered by these expressions appearing in the end of article 12(3)(a), because, following the principles of ejusdem gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f article 12(3)(b) cannot have any application in the matter." 18. Insofar as the reliance placed by the learned Departmental Representative on the decisions of the Madras High Court and also the scope of "royalty" as given in Explanation 4 and 5 to section 9(1)(vi) brought in statute by the Finance Act, 2012 are concerned, we find that the same is not tenable for the reason that once the assessee has opted for the benefit of the DTAA, then there is no requirement for resorting to the definition and the scope of "royalty" as given in section 9(1)(vi). The said amendment cannot be read into the treaty and will not influence the definition of "royalty", as given in Article 12(3). This proposition is squarely covered by the decision of the Bombay High Court in Siemens Aktiongesellschaft (supra), the decision of Delhi High Court in Nokia Network (supra) and DIT v/s Ericson AB, [2012] 343 ITR 470. Even the decisions of Madras High Court as relied upon by the learned Departmental Representative is not applicable which is evident from the issue involved as is evident from the substantial question of law which were formulated by the High Court for adjudication. Hence, the said decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the express language of article 1(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 Tax Avoidance Agreement was entered into." 49. It is essential to note the context in which this judgment was delivered. There, the Court was confronted with a situation where the word royalty was not defined in the German DTAA. Following from our previous discussion on the bifurcation of terms within the treaty, in situations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic "laws in force". It was in this context that the Bombay High Court held that they were unable to accept the assesse's contention that the law applicable would be the law as it existed at the time the Double Tax Avoidance Agreement was entered into. This is the context in which the ambulatory approach to tax treaty interpretation was not rejected. The situation before this Court however is materially different as there is in fact a definition of the word royalty under Article 12 of both DTAA, thus dispensing with the need for recou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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