2017 (11) TMI 1985 - AT - Income Tax

Tribunal rules software subscription payment not royalty under India-Israel DTAA

Bharat Bijlee Ltd. Versus Asstt. Director Income tax- (Intl. Taxation) -3 (2), Mumbai

The tribunal allowed the appeals filed by the assessee, reversing the orders of the AO and FAA. It held that the payment made to Inherent Simplicity Ltd. ... TDS u/s 195 - deduct tax for making payment to a foreign entity - AO holding that the payment by the assessee to ISL was in the nature of royalty within the meaning of Article-12 of India Israel Tax Treaty - HELD 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[2017 (5) TMI 1605 - ITAT MUMBAI] the Tribunal has dealt with the issue of sale of copyrighted Article and sale of copyright as held that provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to it, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In our opinion, international taxation issues have to be decided keeping in mind the above broad principles. - 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 - 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. - Decided in favour of assessee. Issues Involved:1. Whether the payment made by the assessee to Inherent Simplicity Ltd. (ISL) for software subscription constitutes 'royalty' under Article 12 of the India-Israel Double Taxation Avoidance Agreement (DTAA).Detailed Analysis:1. Payment to ISL as Royalty:The primary issue revolves around whether the payment made by the assessee to ISL for software subscription constitutes 'royalty' under Article 12 of the India-Israel DTAA. The assessee contended that the payment was for a copyrighted article (software) and not for the copyright itself, thus it should not be classified as royalty. The assessee argued that ISL did not have a Permanent Establishment (PE) in India and that the payment did not fall under the definition of royalty as per the DTAA.The Assessing Officer (AO), however, held that the payment constituted royalty. The AO's decision was based on the premise that the assessee had the right to use the copyright over the software for its business purposes, which included copying the software. Consequently, the AO directed the assessee to deduct tax at 10% before making the remittance to ISL.Upon appeal, the First Appellate Authority (FAA) upheld the AO's decision, referencing the case of Samsung India Electronics Ltd. and distinguishing the cases cited by the assessee. The FAA concluded that the payment was indeed in the nature of royalty under Article 12 of the India-Israel DTAA.In the tribunal, the Authorised Representative (AR) reiterated that the payment was for a copyrighted article and not for the copyright itself. The AR cited various case laws, including Ericsson A.B., Alcatel Lucent USA Inc., and Siemens Aktiongesellschaft, to support the argument that the payment should not be classified as royalty.The tribunal, after reviewing the submissions and material on record, found that the payment was for the use of a copyrighted article (software) and not for the copyright itself. The tribunal referenced the case of Alcatel Lucent USA Inc., which dealt with similar issues, and concluded that the payment did not constitute royalty under the DTAA. The tribunal emphasized that the amendment of the definition of royalty under the Income-tax Act could not be read into the DTAA.The tribunal also cited the case of Siemens Aktiongesellschaft, where it was held that unilateral amendments to domestic law could not alter the provisions of a DTAA. The tribunal concluded that the payment made by the assessee to ISL was not taxable as royalty under the DTAA, and therefore, the assessee was not required to deduct tax at source.Conclusion:The tribunal allowed the appeals filed by the assessee, reversing the orders of the AO and FAA. It held that the payment made to ISL for software subscription did not constitute royalty under Article 12 of the India-Israel DTAA, and thus, the assessee was not liable to deduct tax at source. This decision was based on the interpretation that the payment was for a copyrighted article and not for the copyright itself, aligning with the principles established in various cited case laws.