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TMI Blog2018 (8) TMI 1056X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in ITA No. 863/Kol/2008 (AY 2003-04) and ITA No. 978/Kol/2009 (AY 2004-05) wherein the Tribunal vide order dated 20.09.2017 has allowed the appeal of the assessee on this issue and drew our attention to the grounds of appeal preferred before the Tribunal, which we find it to be the identical as that which has been preferred before us. We note that the Tribunal has gone extensively into the question raised before the Tribunal from para 14 to 19.2 wherein the Tribunal was pleased to allow the appeal of the appellant/assessee. The Ld. DR could not controvert before us that this issue is no longer res integra. We note that the Tribunal has decided the issue by observing as under: "14. On hearing rival contentions, we hold as follows:- The assessee has paid an amount to Organon NV Netherlands, which is undisputedly an AE of the assessee company. The AE purchased software on license from Microsoft U.S.A. for use of its group entities. The expenditure incurred by the AE towards the purchase of this software is claimed to have been apportioned by it between all the group companies. The assessee company is using this software. The payment for this software was made to the AE by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances-Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes-In instant case goods were manufactured outside India and even the sale has taken place outside India, property on goods passed on high seas-Supply has to be segregated from the installation and only then would question of apportionment arise to the determine the extent to which it arises in s. 9(1)(i)-Reliance placed by revenue on retrospective amendment of s. 9 was also misplaced-Assessee opted to be assessed by DTAA, the consideration cannot be assessed as "royalty" despite the retrospective amendments to the Act-In view of decision of Delhi High court in DIT v Ericsson AB, consideration for supply of software was not taxable as 'royalty' either under s. 9(1)(vi) or the relevant provision of the DTAA-Order of the Tribunal that 'NIPL' was a permanent establishment of assessee was based on many factual errors- Matter remitted to AO to consider this issue-Assessee's appeal partly allowed" 14.4. The ITAT Delhi 'A' B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India did not arise for consideration at all. On the issue whether the payment to the non resident was of the nature of royalty which could be brought to tax in India, the Hon'ble Delhi High Court held as follows: "WHETHER THE INCOME FROM THE SUPPLY CONTRACT CAN BE TREATED AS 'ROYALTY' UNDER SECTION 9(1)(vi) OF THE ACT: 50. Section 9 (1) (i) of the Act which deals with the taxability of "royalty income" reads as under:- "Section 9 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) The following incomes shall be deemed to accrue or arise in India :- (i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India" 51. The submission of Mr. Prasaran, learned ASG was that software part of the equipment supply would attract royalty as copy right of the said software programme still vests with the assessee. Therefore, payments made for the licence to use the software programme give rise to "royalty" for the purposes of both the Income-Tax Act as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to hold that no right exists in the first place, since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifically Article 13, para 3 of the DTAA (Article 12, para 3 of the Model Convention) which defines royalties to mean "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". The ITAT, it was submitted, has not appreciated that the royalty is for the use or right to use any copyright. According to him, since title of the software continued to vest with the assessee as provided in clause 20.2 of the Supply Agreement and the assessee was free to grant non exclusive licenses to other parties, it follow that there was no full time transfer of copyright but it was only a case of right to use the software, and thus payment for use of software is to be treated as royalty. He further argued that reference to OECD Commentary was not apposite as it could not be used to interpret the scope of the relevant provisions of DTAA. 54. It is difficult to accept the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical services rendered by a nonresident company, it must be deemed that there was a "business connection", and it attracts the provisions of Section 9(1)(vii) of the Income Tax Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfillment of the main contract entered into principal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the learned counsel for the assessee that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as payment towards royalty." 39. Similar view is expressed by the Hon'ble Jurisdictional High Court in the case of Nokia Networks OY (supra). 40. As far as the cases where only the software is separately licensed (i.e. with respect to 8 out of 63 customers to whom the assessee has licensed only the software), the issue is squarely covered by the decision of the Hon'ble Jurisdictional High Court in the case of Infrasoft Ltd. (supra), wherein their Lordships held as under:- "86. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licenceauthorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ser, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright i.e., the supplier owns-Thus, the amount paid to the non-resident supplier towards the supply of shrink wrapped software or off-the shelf software is not the price of CD alone or software alone or the licence but a combination of all-Therefore, the payments constitute 'royalty' within the meaning of art. 12(3) of the Indo-US DTAA and also as per the provisions of s. 9(1)(vi) as the definition of 'royalty' under s. 9(1)(vi) is broader than that under the DTAA-Consequently, assessee was under obligation to deduct tax at source under s. 195 from the amount paid to the foreign software suppliers" 14.6. We prefer to follow the propositions of law laid down by the Hon'ble Delhi High Court on this issue. The Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. [1973] 88 ITR 192(SC), held that when two interpretations and views are possible on an issue, then the view in favour of the assessee has to be applied. Hence we hold that the payment in question was for use of a copyrighted article and not for the copyright itself. Thus, the payment is not royalty. It is payment towards purchases. It would be assessable as business profits in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Department is accepted then the Department would be entitled to appropriate the moneys deposited by the payer even if it is not chargeable to tax because there is no provision in the Act whereby a payer can obtain refund-Sec. 237 r/w s. 199 implies that only the recipient of the sum can seek a refund-Thus, the interpretation of the Department leads to an absurd consequence-Entire basis of the Department's contention is based on administrative convenience in support of its interpretation-There are adequate safeguards in the Act which would prevent revenue leakage 14.7. Respectfully applying the propositions of law laid down in this case to the facts of our case, we hold that there is no violation of Section 195 of the Act by the assessee. Hence, the disallowance made under section 40(a)(i) of the Act is bad in law. Hence we delete the disallowance on this ground alone. 14.8. Even otherwise, the assessee invokes the Non Discrimination Clause under Article 24of the India-Netherland DTAA. The said Article 24(4) reads as follows:- 4. Except where the provisions of paragraph 1 of Article 9, paragraph 9 of Article 11, or paragraph 9 of Article 12, apply, interest, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Article 26 (3) DTAA? 39. To recapitulate, the case of the Revenue is that the expression 'other disbursements' should take colour from the context and would apply only to income which is of passive character just like interest and royalties. The Revenue invokes the doctrines of 'noscitur-a-sociis' and 'ejusdem generis'. It is submitted that FTS does not qualify as 'other disbursements' since it is not a passive character like royalties and interest. 40. The Court is unable to agree with the above submissions of the Revenue. In the context of which the expression 'other disbursement' occurs in Article 26 (3), it connotes something other than 'interest and royalties'. If the intention was that 'other disbursements' should also be in the nature of interest and royalties then the word 'other' should have been followed by 'such' or 'such like'. There is no warrant, therefore, to proceed on the basis that the expression 'other disbursements' should take the colour of 'interest and royalties'. 41. The expression 'other disbursements' occurring in Article 26 (3) of the DTAA is wide enough to encompass the administra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services payable to a resident, or amounts payable to a ITA No. 7/2007 Page 27 of 35 contractor or subcontractor' etc. It does not include an amount paid towards purchases. Correspondingly, there is no requirement of TDS having to be deducted while making such payment. 49. However, the element of discrimination arises not only because of the above requirement of having to deduct TDS. The OECD Expert Group which brought out a document titled 'Application and Interpretation of Article 24(Non- Discrimination), Public discussion Draft, May 2007 did envisage deduction of tax while making payments to non-residents. It is viewed only as additional compliance of verification requirement which would not attract the non- discrimination rule. The OECD Expert Group noted that the non-discrimination obligation under tax conventions is restricted in scope when compared with equal treatment or nondiscrimination clauses in an investment agreement." Specifically, in relation to withholding taxes, the Expert Group in the note by its chairman titled "Non-Discrimination in Bilateral Tax Conventions' noted as follows" "6. The more limited non-discrimination obligations in tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of India and contended that the line of enquiry envisaged examining whether (a) the classification was based on an intelligible differentia and (b) whether the classification had a rational nexus with the object of the statute. 52. Section 40 (a) (i), in providing for disallowance of a payment made to a nonresident if TDS is not deducted, is no doubt meant to be a deterrent in order to compel the resident payer to deduct TDS while making the payment. However, that does not answer the requirement of Article 26 (3) of the DTAA that the payment to both residents and non-residents should be under the 'same conditions' not only as regards deduction of TDS but even as regards the allowability of such payment as deduction. It has to be seen that in those 'same conditions' whether the consequences are different for the failure to deduct TDS. 53. It is argued by the Revenue that since in the present case no condition of deduction of TDS was attracted, in terms of Section 40 (a) (i) of the Act as it then stood, to payments made to a resident, but only to payments made to non-residents, the two payments could not be said to be under the 'same condition'. The further submission is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 9 of the Indo-Netherlands DTAA, reads as follows:- 1. Where- (a) an enterprise of one of the States participates directly or indirectly in the management, control or capital of an enterprise of the other State, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of one of the States and an enterprise of the other State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. A plain reading of this Article demonstrates that the conditions imposed are cumulative. The first condition is that an enterprise of one state participates directly or indirectly in the management, control or capital of the other state or that some person participates directly or indirectly in the management, control or capital of an enterprise of one of the states and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifically talks about the determination of taxable income of a resident company only. 19. In view of the above discussion, applying the propositions of law laid down by the Hon'ble Delhi High Court in the case of Herbalife International India (P) Ltd. (supra) and the Co-ordinate Bench of the Tribunal in the case of Honda Cars India Ltd. vs. DCIT (supra), we allow this ground of the assessee and delete the disallowance made u/s 40(a)(i) of the Act. 19.1. As we have granted relief on this ground also, we do not adjudicate the other argument raised by the assessee, as it would be a mere academic exercise. 19.2. In the result, these grounds of the assessee are allowed." 3. Respectfully following the aforesaid order of the Tribunal we allow this ground of appeal of the assessee. Therefore, the appeal of assessee is allowed. 4. Coming to the revenue's appeal. We note that the only issue is against the action of the Ld. CIT(A) in deleting the expenses amounting to Rs. 75,29,700/-, which according to the AO was capital in nature . 5. Brief facts of the case are that the assessee company was in the process of setting up of pharmaceutical factory on Kona land in West Bengal for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the facts and circumstances of the case. We note that the assessee had during the previous year incurred expenses on account of engineering charges, design and drawing expenses, fees paid for NOC for setting up of pharmaceutical factory at Kona land in West Bengal and for expansion of its factory on Kona land in West Bengal and for expansion of its existing business. We note that the expenses incurred by the assessee were for the expansion of the already existing unit and it was incidental to the assessee's business and the expenses were capitalized under work-inprogress. We note that the assessee abandoned the project being non-viable in the year under consideration. We note that the finding rendered by the Ld. CIT(A) that no asset of enduring nature was created to the assessee on the expenditure claimed by the assessee has been challenged by the Revenue before us. We note that in the facts and circumstances of the case, the Ld. CIT(A) is right in finding that the expenditure is incidental to the business carried out by the assessee and, therefore, the said expenditure is nothing but loss incidental to the assessee's business. It is well settled that profits and gains which a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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