9911796707
TMI Blog2017 (11) TMI 1985X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned that it had subscribed to a software from ISL on annual uses basis, that the subscription price was USD 34, 000 for the first year including a onetime on sight installation and training support for up to three days, that assessee was required to pay annual subscription fee of USD 14, 000 per year, that ISL did not have any Permanent Establishment (PE) in India, that the software was allowed to be used by the assessee without any right to exploit the copyright, that the same rested with ISL, that the proposed payment did not fall within the earning of royalty as per Article-12 of the India Israel Tax Treaty. The AO, vide his order, dt. 24/12/2012, passed u/s. 195(2) of the Act, held that a right was conforred on assessee to use the copy right over the software for its purpose and even to copy it for the use of its business purposes, that it was a right to use the copy right, that the use of copy right was given to the assessee for consideration, that the payment was royalty in terms of the Indo- Israel DTAA . He directed assessee to deduct tax @10% of the payment to be made to ISL. Accordingly, he issued a certificate to the assessee. 2.1. Aggrieved by the order of AO, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. It is clear that the assessee did not have any right to exploit the copyright of the software and that ISL had the copyright over the software. In other words the assessee was using a copyrighted article. ISL had sold copyrighted Article and not the copyright itself. We find that in the case of Alcatel Lucent, USA (supra), the Tribunal has dealt with the issue of sale of copyrighted Article and sale of copyright. We are reproducing the relevant portion of the order: "2. Effective ground of appeal, filed by the assessee, deals with nature of payment received by it from supply of software i. e. as to whether same is in nature of Royalty under the provisions of the Act and under Article 12 of the Double Taxation Avoidance Agreement (DTAA/Tax treaty) entered in to by India and USA. During the assessment proceedings, the AO found that the assessee had supplied softwares to Reliance Infocom Ltd. , that it had raised bills worth Rs. 19. 89 crore, that in the notes enclosed with the return of income it was claimed that the payments received by it were not taxable in India. The AO directed the assessee to give reasons for claiming the consideration received from Reliance a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied 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 Global BV (49 ITR (T) 73) (vi) First Advantage (P. ) Ltd. (77 taxmann. com 195) (vii) Galatea Ltd. (46 ITR (T) 690) (viii) Datamine International Ltd. (68 taxman. com) (ix) Reliance Industries Ltd. (69 taxman. com 311) (x) Ericsson A. B. (16 taxman. com 371) (xi) Solid Works Corporation (51 20T 34) (xii) Financial Software & System (P. ) Ltd. (47 taxman. com 140) (xiii) Antwerp Diamond Bank NV Engineering Centre (65 SOT 23) (xiv) Aspect Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )Samsung Electronics Co Ltd(345 ITR 494), Wipro Ltd. (355 ITR 284), 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 consideration from Reliance, the High Court order in the petition would have bearing on the present appeal, that the appeal may be ahjourned till the decision of aforesaid writ petition. He further referred to the provisions of explanation 4 to section 9 (1) (vi) and stated that explanation was of clarificatory nature, that same was inserted retrospectively, that if the explanation was applied to the assessee's case the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 (Bom HC) accordingly, he submitted that other decisions rendered by the Delhi High Court and the Tribunal may not be applicable. While appreciating the Siemens AG (supra) he submitted that, it may kind be borne in mind that: i) The question of law before the Hon'ble High Court was not that whether amendments in the Income-tax Act can be read into the DTAA or not; ii) In the said case, old DTAA (1960) between India and Germany was under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT(A)'s orders for the assessment years 2003-04 to 2004-05, 2005-06 and 2008-09. The Tribunal in the assessment year 2004-05 in ITA No. 7347/Mum/2007 on the issue of disallowance of Data Processing Cost has dealt and decided this issue in the following manner:- "15. Now, coming to the main issue i. e. , whether the reimbursement of data processing cost of Rs. 34, 03, 734, amounts to royalty or not, we find from the record that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 present case, the payment made by the Branch is not for "use" of or "right to use" of software which is being exclusively done by the Head Office only, installed in Belgium. The Branch does not have any independent right to use or control over such main frame of the computer software installed in Belgium, but it simply sends the data to the Head Office for getting it processed. Insofar as the Branch is concerned, it is only reimbursing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 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 Australian company gets paid. In our considered view, therefore, in essence the impugned payment is made to the Australian company in consideration of its processing of data belonging to the Indian company. As far as the scope of article 12(3)(a) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se, that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the assessee after detail analysis and discussion. Moreover, we find that in the latest decision of Hon'ble Delhi High Court in the case of DIT vs. News Sky Satellite BV passed in ITA 473/2012, order dated 8. 02. 2016 have explained the ratio and principle of Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra). The relevant observation of the Hon'ble Delhi High Court in the said case reads as under:- "48 In Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue 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 definition under the DTAA. In other words, the domestic law remains static for the purposes of the DTAA". 5. Thus, on the facts of the present case, we are bound to follow the judicial precedence in assessee's own case for the earlier years and in view of the finding given therein, we upheld the order of the CIT (A) and dismiss the grounds raised by the revenue. Accordingly, grounds no. 1, 2 & 3 are dismissed. 5. 2. As far as filing of writ petition to be file ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
