TMI Blog2018 (1) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... s there are decisions of Hon ble Karnataka High Court which are in favour of revenue. In this regard we note that Hon ble Apex Court in the case of vegetable products 88 ITR 192 [ 1973 (1) TMI 1 - SUPREME COURT] had held that if two constructions are possible one in favour of the assessee should be adopted. Accordingly respectfully following the precedent we follow the Hon ble Delhi High Court decision. Accordingly we set aside the order of authority below. We hold that the transfer / sale of software in this case is not taxable as royalty. Hence the assessee was not liable to deduct tax at source u/s 195 of the Incometax Act, before remitting the money to the US supplier. - Decided in favour of assessee. - I.T.A. Nos. 926 & 927/Bang/2012 - - - Dated:- 8-1-2018 - SHRI SHAMIM YAHYA, AM AND SHRI SANDEEP GOSAIN, JM For the Appellant : Shri Madhur Agarwal Shri Dinesh patil For the Respondent : Shri M. V. Rajguru ORDER Per Shamim Yahya, A. M.: These are appeals by the assessee directed the against order of the ld. Commissioner of Income Tax (Appeals)-IV, Bangalore dated 30.05.2012 and pertains to the assessment years 2009-10 and 2010-11. 2. The comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onics Co Ltd and Others (ITA No 2808 of 2006 and others). 6. The learned CIT(A) has erred in law and in facts, by upholding the order of the learned A.O., deeming the Appellant as an assessee in default for nondeduction of taxes at sources under section 195 of the Act. 7. The learned CIT(A) has erred in law and in facts, by confirming a sum of ₹ 5499,090 (# 1) as payable the appellant under section 201(1) of the Act for A.Y. 2009-10. 8. The learned CIT(A) has erred in law and in facts, by confirming the amount of ₹ 14,74,990 (# 2) as interest under section 201(1A) of the Act for A.Y. 2009-10. (# 1) - ₹ 4926,310/- for A.Y. 2010-11 (# 2) ₹ 9,66,000/- for A.Y. 2010-11 3. During the financial years 2008-09 and 2009-10, the assessee company had made payments towards purchase of licensed software from the following foreign companies, collectively known as Shell Overseas entities: Sl. No. Name of the foreign company to whom payments were made F.Y. Total payment in Rs. 01 Shell International BV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining to software application. The intellectual property right associated with the software does not vest with the assessee but is retained by the concerned supplier. Hence the payments cannot be held for the use of copyright but the payment would be towards use of copyrighted article; 4. Under the Indian Copyright Act, a mere transfer of a computer programme to another person does not amount to allowing the use of the copyright by such other person. However, if the owner of copyright authorizes the other person to reproduce the work in any material form or to make any translation of the work or to make any adaptation of the work it would be construed as the grant of a right to use the copy right in the computer program. The right granted to the assessee to use the software should not be regarded as the right to use the copyright since it involves only a mere transfer of user right of a copyrighted article to another person and does not to allowing the use of the copyright by such other person. In support of its claim that the payments in question are not fees for technical services, it is submitted that no managerial, technical or consultancy services were received. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d against the appellant in decision of the jurisdictional High Court ( Supra) which is binding on the undersigned , the undersigned is duty bound to follow the same . Further, through finance Bill 2012, the explanation 4 5 (which reads as under) are proposed to be inserted with retrospective effect with effect from 01-06-1976 to clause (vi) to subsection (1) of Sec.9 of the Income tax Act, also makes it clear that the payment for the ' use of software amount to royalty : Explanation 4:- For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of ail or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5:- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- a) the possession or control of such right, property or information is with the payer; b) such right, property or information is used directly by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt vide order dated 24 February 2010. STIPL had made certain payments for the financial years 2008-09 and 2009-10 i.e. after the appointed date of merger but before the effective dated of the merger. However, on account of the appointed date of the merger, being 1st April, 2008, the payments were deemed to have been made by the Appellant, as all acts done by STIPL after the appointed date was deemed to have been done by STIPL. The issue involved in the instant case is whether tax was required to be withheld on the payments made by the Appellant to Non-Resident ('NR') entities in the financial years 2008-09 and 2009-10. In the instant case, the order under section 201 (1) 201 (1A) of the Income-tax Act, 1961 ('the Act') was passed I* the Officer in Bangalore on 11 March 2011 and the 'CIT(A)' order was passed by the CIT(A), Bangalore on 30 May 2012. The Appellant against the order passed by the CIT(A), Bangalore, filed an appeal before the Bangalore Income Tax Appellate Tribunal ('ITAT') on 24 July 2012. The Appellant filed an application for the transfer of files to the Mumbai jurisdiction before the AO vide letter dated 30 July 2012 (encl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Mumbai ITAT has jurisdiction over the assessee and, the Mumbai ITAT has the jurisdiction to decide on the issue raised by the assessee of non-deduction of taxes on payment to NR entities based on the jurisdictional decisions [Bombay High Court (in the matter of service tax) and Mumbai ITAT]. The Mumbai ITAT while deciding on the issue is not bound by the decision followed by the CIT(A) in the case of Samsung Electronics (supra). 15. We have carefully considered the submissions and propositions. We find ourselves in agreement with the submission of the ld. Counsel of the assessee that there is no Hon ble Bombay High Court decision on this issue. In such circumstances, the co-ordinate bench of this tribunal in National Stock Exchange of India Ltd. (in ITA no.7735/Mum./2011 dated 18.05.2017) has considered identical issue as under: 6. We have heard both the counsel and perused the records. 7. Ld. Counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by decision of Hon ble Delhi High Court. He further referred to several other case laws of tribunal in favour of the assessee. The submissions of the Ld. Counsel of the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by any of the vendors. Source code is not made available to the appellant company and it is provided with Activation code only for installation. Therefore, the appellant company does not have any copyright to give it forward to any other person to use. The transfer of licensed software cannot be considered as 'Royalty' within the meaning of Article 12(3) of the India-US Tax Treaty. As per the provisions laid down in clause (v) of Explanation (2) to section 9(1)(vi), the consideration for transfer of all or any rights (including the granting of a license), inter-alia, in respect of any copyright is treated as royalty income. Thus, transfer of rights in respect of copyright is envisaged and unless the transferee does not acquire and enjoy the same rights as that of the transferor, it cannot be said that there is any such transfer as envisaged in clause (v) of Explanation (2) to section 9(1)(vi). In the instant case nonexclusive and non-transferable license has been granted to the appellant. As licensee, the appellant is allowed to use the software only for its own business without any liberty to loan, rent, sell, sub-license or transfer the said software or any rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property of the supplier. It is an outright sale of the software by the non-resident to the appellant company and thus the payment made by the appellant is not for Royalty . The payments for obtaining computer software is in the nature of business receipts. The beneficiary of the receipts is not having any Permanent Establishment in India. They are not having any fixed place of business through which their business is wholly or partly carried on in India. Therefore, no operations have been carried in India i.e. no part of the business activities is carried in India by the non-resident sellers. Therefore, the income does not accrue or arise in India and hence there being no liability to income-tax in India, there is no withholding tax liability on such payments. 8. Various decisions relied upon by the Ld. Counsel of the assessee are as under: (a) DIT vs Infrasoft Ltd. (264 CTR 329) (Del He) (b) DIT vs Nokia Networks QY (358 ITR 259) (Del He) (c) DIT vs Ericsson A. B. (343 ITR 470) (Del He) (d) CIT vs Halliburton Export Inc (ITA No 363 of 2016) (Del He) (e) DDIT vs Reliance Industries Ltd (159 ITO 208) (Mum ITAT) (f) Capgimini Business Services (India) Ltd V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DIT Vs. New Skies Satellite BV Others, 382 ITR 0114, dated: 08-02-2016, the Hon'ble Delhi High Court in paras 48 to 50 of its order seems to have corrected its earlier stand regarding decision of Bombay High Court in the case of Siemens AG, supra and acknowledged that the Bombay High court has followed Ambulatory approach to interpretation of treaties. (Paras). That the Hon'ble Delhi High court has been very categorical in this regard when in para 50 of its order it has held that: .....The Bombay High court seems to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of law in force . We express no opinion in this regard since it is not in issue before this court.... 12. Hence Ld. DR pleaded that in view of the above pleadings this issue should be decided in favour of the revenue. 13. We have carefully considered the submissions and perused the records. Before proceeding further we may refer to the relevant law and clauses of DTAA Section 9(1)(vi) : The following income shall be deemed to accrue or arise in India. Income by way of Royalty payable by (a) the Government ; or (b) a person who i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ograph, films or work on films, tapes or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such rights or properly which are contingent on the productivity, or use or disposition thereof, and (b) Payments of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in Para 1 or article 8 (Shipping and Air Transport) from activities described in Para 2(c) or 3 article 8. We find that identical issue was considered by this tribunal in ADIT (IT) Vs. First Advantage P. Ltd (77.Taxmann.com 195). Where similar item and same DTAA with USA was under consideration. The tribunal vide order dated 11.01.2017 had held as under, in favour of the assessee We have heard rival contentions and perused the record. The Ld D.R placed his reliance on various case laws including the decision rendered by Hon ble Karnataka High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the co-ordinate bench of Mumbai ITAT, in its recent decision dated 13-062016 rendered in ITA No.7048/Mum/2010 in the case of ADIT Vs. M/s Baan Global B V (now known as Information Global Solution (Barneveld) BV) has considered an identical issue under the provisions of Income tax Act as well as India-US DTAA and has decided the issue in favour of the assessee. He further submitted that the provisions of DTAA will prevail over retrospective amendment made in the Income tax Act. We notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V (supra) has considered an identical issue and rendered its decision as under: 10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of royalty or business income. In case, if it is a business income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT(A) in his order is reckoned as admitted facts. Now, on these facts, we have to decide, whether the payment received by the assessee can be reckoned as royalty within the terms of article 12(4) of DTAA. Before that, the relevant paragraph of Article 12 dealing with the definition of royalty reads as under:- 4. 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, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience . From the plain reading of the article it can be inferred that, it refers to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rculation; (iii)to perform the work in public, or communicate it to the public; (iv)to make any cinematograph film or sound recording in respect of the work; (v)to make any translation of the work; (vi)to make any adaptation ofthe work; (vii)to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adapt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright. 12. One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of royalty as given therein should be read into the DTAA. We are unable to appreciate this contention of the Ld. DR because the retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of royalty . The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of royalty in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the royalty has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon the user of the copyright and not a lump sum payment as was the position in the present case. Once the payment in question was not royalty which would come within the mischief of clause (vi) the Explanation to section 9(1) would have no application. The payment received by the assessee was towards the title and GSM system of which soft- ware was an inseparable part incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment, therefore could be classified as payment towards royalty. 16. From the above case laws it is amply clear that it has been held that the software sold by M/s. Minitab Inc USA to the assessee fell into the category of copyrighted article against acquisition of copyright which qualified as royalty payment. Furthermore Hon ble Delhi High Court had held that even if the item was regarded as royalty payment as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased, software stored in a dumb CD requires a license to enable the user to download it upon his hard disk, in the absence of which there would be an infringement of the owner s copyright. (TCS vs. State of AP distinguished as being in the context of sales-tax); 18. We have also noted the submission of the Ld. DR that the seller of the software has a copyright upon it. That distinction between copyright and copyrighted article was originally coined by the US Internal Revenue Service. He had also submitted that this interpretation is supportive of internal revenue of the USA as majority of the software and the copyrights originate from USA. By terming such transfer of software which are under copyright in the USA as copyrighted article the software sellers of the USA where taken out of the ambit of taxation of the other countries which were purchasing/acquiring the software. Furthermore Ld. Counsel of the assessee has pleaded that after the insertion of explanation iv to Section 9(i)(iv), this software sale has also come under the ambit of royalty. However Hon ble Delhi High Court has applied the static approach under which domestic law as at the time of the entering of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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