TMI Blog2017 (5) TMI 1605X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri P.J. Pardiwala Madhur Aggarwal-DR For The Assessee : Shri Jasbir Chouhan-CIT-DR Order u/s. 254(1)of the Income- tax Act , 1961(Act) PER RAJENDRA, AM - Challenging the orders of the Assessing Officers(AO. s), passed in pursuance of the direction of the Dispute Resolution Panel(DRP)/orders the CIT (A)-10, Mumbai the Assessing Officer(AO) and the assessee have filed appeals for the above mentioned three Assessment Years (AY. s). Assessee-company is incorporated in and a tax resident of USA. As the issue involved in all these appeals are almost similar, so, we are passing a common order to adjudicate them. The details of dates of filing of returns, returned incomes, assessment dates can be summarised as under: AY. ROI filed on Returned income Asstt. Date Assessed income 2005-06 31. 10. 2005 Nil 25. 11. 2009 ₹ 19, 89, 04, 807/- 2006-07 28. 11. 2006 Nil 10. 12. 2008 ₹ 9, 70, 07, 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended its business to large number of sites and use number of softwares which was far more in number than sold by the assessee, that the natural inference was that the buyer had right to create copies by using the secret codes of the assessee, that the nature of payment by Reliance was correctly taken as royalty. In pursuance of the directions of the DRP, the AO finalised assessment and treated the consideration received by the assessee from Reliance as royalty and taxed it accordingly. 4. During the course of hearing before us, the Authorised Representative(AR)contended that the amounts received from the supplier of software to Reliance were not in the nature of royalty under the provisions of article 12 of the India-USA tax treaty, that the assessee was not liable to pay tax in India, that identical issue was decided in favour of the assessee by the Tribunal while adjudicating appeals for the AY. s. 2003-04 and 2004-05. He relied upon the cases of (i) Infrasoft Ltd. (220 Taxman 273) (ii) Qad Europe B. V. (53 ITR(T) 259) (iii) Colgate Palmolive Marketing SDN BHD, ITA No. 2129-2130/8311/Mum/2004 (iv) Vinzas Solutions India (P. ) Ltd. (392 ITR 155) (v) Baan Globa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Infrasoft Ltd(264CTR329), Nokia Networks OY(358 ITR259), Ericsson AB(343ITR470), that the Tribunal had held that unless tax treaties were amended the amendments in the Act could not read into treaties under the DTAA and that such consideration would not amount to royalty, that the Hon ble Karnataka High Court had decided the issue in favour of the Department in the cases of Synopsis International Old Ltd. (212 taxman 454)Samsung Electronics Co Ltd(345 ITR 494), Wipro Ltd. (355ITR284), that the Hon ble Karnataka High Court had decided the issue of software royalty both before the insertion of explanations 4, 5 and 6 to section 9 (1) (vi) of the Act By the Finance Act, 2012 and even after their insertion, that the insertion had not altered the views of Hon ble High Court of Karnataka, that the Mumbai Tribunal while dealing with the issue of software royalty in the case of Reliance Infocomm Ltd. had decided the issue in favour of the revenue, that later on the Tribunal record its order on a miscellaneous application filed before it, that the Department was considering filing a petition against the recalling of the order, that the assessee being a payee having received conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. Counsel, Mr. K. K. Ved submitted that similar issue has been decided by the Tribunal in favour of the assessee in assessee s own case right from the assessment years 2004-05, 2005-06 and 2008-09. The second issue relating to disallowance of interest paid to the Head Office also has been decided in favour of the assessee by the Special Bench in Sumitomo Mitsui Banking Corpn. , wherein, the assessee was one of the party. 3. On the other hand, Ld. DR strongly relied upon the order of the Assessing Officer and submitted that, so far as Data Processing Cost is concerned, the same is in the nature of Royalty and in support he has strongly relied upon the two Karnataka High Court decisions in the case of :- i) CIT vs. Wipro Ltd. , reported in 355 ITR 284; ii) CIT vs. CGI Information Systems Management Consultants (P) Ltd. , 226 Taxman 319 The issue whether the amendment brought by Finance Act 2012 in Section 9(1)(vi) by way of Explanations inserted in the Income-tax Act with retrospective effect can be read into DTAA or not has to be seen in the light of the decision of Hon ble Bombay High Court in the case of CIT v Siemens Aktiongesellschaft, reported in 310 ITR 320 (Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e s argument that the HC has held that amendments in the Act cannot be read into DTAAs; and v) The Bombay High Court has approved ambulatory approach (para 22) to interpretation of treaties against Static approach adopted by the Delhi High Court. So far as the interest paid by the Branch Office to the Head Office income of Headquarter, he submitted that, expenditure including interest attributable of earning of income which does not form part of the total income has to be disallowed under section 14A if it has to be held that in view of the Special Bench decision in the case of the assessee, the interest paid by the Branch Office to the Head Office is not the commission of the Head Office. In support, he relied upon the decision of Oman International Bank AG on the admissibility of the belief, he relied upon the decision of Hon ble Supreme Court in the case of NTPC vs. CIT, reported in 229 ITR 383. 4. After considering the aforesaid submissions and on perusal of the impugned orders, we find that so far as the issue raised vide ground No. 1 to 3 is concerned it is a recurring issue in the case of the assessee right from the earlier years. The Ld. CIT (A) too has followed the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 16. The above definition of royalty thus provides that, when the payment of any kind is received as a consideration for use of or the right to use of any of the copy right of any item or for various terms used in the said Article, then only it can be held to be for the purpose of royalty . The said definition of royalty is exhaustive and not inclusive and, therefore, it has to be given the meaning as contained in the Article itself and no other meaning should be looked upon. If the assessee is claiming the application of the DTAA, then the definition and scope of royalty given in the domestic law, in the present case, section 9(1)(vi) should not be read into or looked upon. The character of payment towards royalty depends upon the independent use or the right to use of the computer software, which is a kind of copy right. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the assessee s case also, which is evident from the following observations and conclusions drawn by the Tribunal: 11. The consideration of payment is only this data process work. No part of this payment can be said to be for the use of specialized software on which data is processed or for the use of mainframe computer because the Indian company does not have any independent right to use the computer or even physical access to the mainframe computer, so as to use the mainframe computer or the specialized software. All that the right is for processing of data, and the use of mainframe computer is permitted only for that purpose. The Indian company can feed the raw data in the mainframe computer in Australia, with the help of the telecommunication link, and the output data, after due processing is transmitted back to the Indian company. There is no privilege or right granted to the Indian company by the Australian company. The control of the Indian company is only on the input transmission and the right is to get the output processed data back. The actual processing of data is the exclusive control of the Australian company and it is for this work that the Aust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em generis meaning of the general words following the specific words have to take colour from the specific words preceding it. When that property or right, even if it so exists, is not of the nature of any of the specific categories set out in article 12(3)(a), it cannot be covered by the general words following those categories either. For all these reasons, we are of the considered view that provisions of article 12(3)(a) cannot be invoked on the facts of the case before us. That takes us to the question whether the provisions of article 12(3)(b), as relied upon by the revenue authorities, can be invoked on the facts of the present case. Article 12(3)(b) can apply only when the payment in question can be held to be payment for the use of, or the right to use, any industrial, commercial or scientific equipment . This condition can only be satisfied when it is established that the impugned payment is made for the use of, or right to use of, mainframe computer. The Indian company does not have any control over, or physical access to, the mainframe computer in Australia. There cannot, therefore, be any question of payment for use of the mainframe computer. It is indeed true that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions are not applicable. 19. Thus, in view of the aforesaid reasons, we hold that the impugned payment made by the Branch to the H. O. towards reimbursement of cost of data processing cannot be held to be covered within the scope of expression royalty under Article 12(3)(a) of the India Belgium DTAA. Accordingly, the conclusion drawn by the learned Commissioner (Appeals) is affirmed. 20. Since we have already held that the data processing cost paid by the assessee does not amount to royalty, consequently, there is no requirement for deducting tax at source on such payment. Therefore, the provisions of section 40(a)(i) will not apply. Accordingly, the issue arising out of ground no. 1 and 2 is dismissed . This decision of the Tribunal have been followed in the subsequent years by the Tribunal, i. e. , in AY 2006-07 and 2007-08. In the aforesaid decision of the Tribunal, the decision of Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and Delhi High Court decision in the case of Nokia Network, reported in [2012] 253 CTR (De) 417 and DIT v Sony Ericson AB, reported in [2012] 343 ITR 470 have been taken note of. Thus, this issue has been decided in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 3. 50. There are therefore two sets of circumstances. First, where there exists no definition of a word in issue within the DTAA itself, regard is to be had to the laws in force in the jurisdiction of the State called upon to interpret the word. The Bombay High Court seems to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of laws in force . We express no opinion in this regard since it is not in issue before this Court. This Court's finding is in the context of the second situation, where there does exist a definition of a term within the DTAA. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA and the ultimate taxability of the income under the agreement. That is not to say that the Court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just because there is a domestic definition similar to the one under the DTAA, amendments to the domestic law, in an attempt to contour, restrict or expand the definition under its statute, cannot extend to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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