TaxTMI 
TaxTMI 
2016 (12) TMI 1542
X X X X Extracts X X X X
X X X X Extracts X X X X
....y of Software Supply as Royalty instead of Business Income. 1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned Assessing Officer of disregarding the appellants submission and in holding that the consideration for the supply of software be taxed @ 10% by treating it as royalty payment, within the meaning of section 9(1)(vi) of Income Tax Act 1961 and Article 12 of Double Taxation Avoidance Agreement (DTAA) between India & Israel. 1.2. Without prejudice to the above, the appellant contends that even if the consideration received for the supply of software are treated as Royalty under the Act, the same cannot be treated as Royalty within the meaning of Article 12 of DTAA between India & Israel. 1.3. The appellant contends that the income from software supply is in the nature of Business Income and in the absence of the appellant constituting Permanent Establishment (PE) in India in respect of such income; it is not taxable in India. 1.4. Without Prejudice to the above, the appellant contends that even if such income is to be regarded as taxable in India the same would be taxable only in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s a dependent agent PE of the appellant. The appellant contends that the facts of the Appellant's case are not identical to Rolls Royce PLC and hence TTI India does not constitute dependent agent PE of the appellant company. 2.5. In view of the above, the Appellant respectfully prays that TTI India be held to not constitute the Appellants PE in India. III. Ground No. III - Reimbursement of Expenses considered as Fees for Technical Services (FTS) taxable as Business Income consequent to holding that Indian Subsidiary is a PE of the Appellant. 3.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned Assessing Officer of holding the reimbursement of expenses as FTS under Article 13 of India - Israel DTAA. 3.2. Without prejudice to the above, the appellant contends that even if the reimbursements are treated as FTS under the Act, the same cannot be treated as FTS within the meaning of Article 13 of the India - Israel DTAA read with Protocol to the India-Israel DTAA and Article 12 of India- Canada DTAA, since such reimbursements neither make available technical knowledge, experience, skill, et....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts received towards supply of software & reimbursement of expenses while computing the tax liability, disregarding the submission made to the CIT(A) in this regard. 5.2. It is submitted by the appellant that while computing the total liability of the assessment year in which the income is sought to be taxed u/s 199, credit for the taxes deducted have to be given. 5.3.In view of the above, the Appellant respectfully prays that the credit for the taxes deducted on the amounts received towards supply of software & reimbursement of expenses be granted in the year under consideration. VI. Ground No. VI - Levy of interest under Section 234B 6.1. On the facts and circumstances of the case, the learned CIT(A) has erred in law and in fact, in holding that levy of interest under section 234B of the Act is consequential to the grant of tax credit, disregarding the fact that the Appellant is a non-resident Appellant and its entire revenues/ receipts are subject to tax withholding in India under section 195 of the Act and the Appellant is not liable to pay advance tax in respect of such revenues. 6.2. The Appellant respectfully submits that, as per the provisions of the Act, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of the assessee on this issue from various other High Courts. In his support, he relied upon the judgment of Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV 383 ITR 114 (Del). It was requested that under these circumstances, the Hon'ble Bench should follow the decision of the Tribunal rendered in assessee's own case in all the earlier years. 4.4. Under these circumstances, before deciding this issue independently on merits, we shall examine the primary aspect that whether judgments delivered by the Tribunal in assessee's own case in earlier years were passed in identical facts and legal position as compared to the year before us. If the answer to this question is yes, then, we shall like to respectfully follow the decision of the Tribunal rendered in earlier years in assessee's own case. If the answer to that question would be no, only then an effort could be made to decide the issue raised before us independently on its merits. We had also expressed our view in the open court during the course of hearing. Thus, with this understanding, we proceed to analyse the facts as have been brought out by both the parties before us. 4.5. The facts as culled out ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent year i.e. Al 2008-09 which were not presented before the assessing officer in the past years. Based on these facts the understanding of the case needs revision and the findings of the Hon'ble ITAT and Ld. CIT(A) for the earlier years will not apply. a. The assessee company entered into a Software Supply & License Agreement (SSLA) with Reliance Infocom Ltd. (Reliance/RJL) on 27.09.2002 for supply of sof tware, acceptance testing, installation and arrangements for annual maintenance (Annexure A) b. In the year under consideration an amendment to the Software Supply & License Agreement (SSLA) was made on 17.09.2007. c. The agreement also envisaged transfer of Source Code of the software to be transferred to Reliance through an escrow. d. The assessee after entering into the said agreement with RIL set up an Indian subsidiary (rri India) on 20.02.2003 and entered into a service agreement with the same on 23.02.2003. (Annexure B) e. Subsequently TTI India entered into an agreement with RIL on 28.05.2003 for providing services such as installation, acceptance testing (UAT), commissioning and annual maintenance, which otherwise, was an ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eliance Communication Ltd. (i.e. the buyer) and held that the amount received by the assessee from Reliance amounted to payment for 'royalty' under the provisions of Act as well as Article 12 of the Indo Israel DTAA, by observing, inter alia, as under: "38. The Income Tax act, 1961 recognizes royalty in Explanation 2 to section 9(1)(vi) as transfer of all or any rights (including the granting of a license). The fact that license of computer programs supplied along with computer under specified schemes of Government of India are excluded from the definition of Royalty further establishes that other software licenses are included in royalty for the purposes of section 9. 39. Reliance did not only have rights over the machine code i.e. the binary format, but also the source code developed by the assessee. The contention of the assessee that it has purchased an off-the-shelf product is conclusively proved to be false. Source code is the intellectual property generated by the assessee. It is a matter of public knowledge that only machine code (or executable copy) is transferred/sold for use of software. Such copy can never be read, modified or understood in any manner by the end u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the purported sale of good has been treated by the Assessing Officer in the past as royalty income in AY 2003-04 onwards. There have been new findings-namely the terms & conditions of the SSLA, the Escrow agreement for transfer of Source Code, and the agreement between Reliance & Indian subsidiary TTI India on the guarantee of the assessee. These new findings clearly explicate the nature of payment received by the assessee. It is a mischief of highest degree on the part of the assessee to color the payments received for supply of software and its proprietary Source Code as 'sale of goods'. 45. It is conclusive that what has been portrayed as an innocuous sale of goods is in fact a transfer of intellectual property and squarely covered as royalty. The same is taxable under Article 12 of the DTAA at the prescribed rate of 10%. Penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 are initiated separately for furnishing inaccurate particulars of income." 4.8. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and submitted in detail that there was no material change in fact or legal position. It was also argued that Ld. CIT(A) was bou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... v. Reliance Industries Ltd. (order dated 18.05.2016 in ITA No.1980/Mum/2008) wherein similar issue has been decided in favour of the assessee. 4.10. Per contra, Ld. CIT-DR submitted in detail that lower authorities have not followed the decisions of earlier year for the reasons mentioned in detail in their orders by the AO as well as Ld. CIT(A). He submitted that in this case material change in fact was that the new agreement contained clause with regard to transfer of source code. It was submitted that since source code was agreed to be transferred, therefore it is clear case of transfer of copyright. He submitted at the conclusion of the hearing a brief note summarising his submissions as under: "1. On the issue whether the Amendments/Explanations inserted in the Income Tax Act can be read into the DTAA or not, in my most respectful submissions, the Bombay high court decision in the case of CIT v. Siemens Aktiongesellschaf t, 310 ITR 320) (Born HC) rendered in the facts peculiar to that case has not been appreciated in the proper perspective in various decisions of the Delhi high Court and Mumbai Tribunal relied upon by the assessee. While appreciating the Siemens AG, supr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the operational part (paras 27 to 31) of the judgment in the case of Siemens AG, supra, nowhere it is mentioned that amendments in the I.T. Act can not be read into DTAA. ii. The nature of services rendered in the said case were found to be not Royalty under the DTAA though found to be Royalty under the Act (post 01-06- 1976) . Those services were found to fal l under the expression "commercial or industrial prof its" as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. Thus, the provisions of DTAA being more benef icial to the assesse were preferred over the provisions of I.T. Act. iii. In paras 13,22 and 28 of its order, the Hon'ble HC has approved the insertion of Explanation below S.9(2) inserted by the Finance Act 2007, thereby implying that the Clarif icatory Explanations could be read into modern DTAAs. iv. Mumbai Tribunal In the case of Viacom 18 Media (P.) Ltd.(2014) 162 TTJ 336 (Mum) has explained the import of Bombay HC decision in right perspective in paras 16 and 17 of its order while rejecting the assessee's argument that the HC has held that amendments in the Act can not be read into DTAAs. v. The Bombay HC has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs passed by the lower authorities as well as submissions made before us by both the sides and also judgment of the Tribunal passed in assessee's own case in the earlier years. The Only issue to be decided by us is whether amount received by the assessee on account of supply of software to M/s. Reliance Infocom Ltd.( subsequently name changed to Reliance Communication Ltd.) constituted payment of 'royalty' within the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA between India and Israel. It is noted by us that as discussed in detail above, the impugned amounts have been received in pursuance to an agreement between the assessee and Reliance dated 27th September, 2002 (entered into the period relevant to A.Y. 2003-04). The AO has contended in the order that an amendment has been made in the said agreement vide supplementary agreement dated 17th September 2007, which has brought out a material change and that is why decision given by the Tribunal in earlier orders needs to be deviated. We have analysed this contention very carefully. It is noted by us that agreement dated 27th September 2002 has been analysed by the Tribunal twice in two separate orders i.e. for A.Y. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with respect to (i) the sale of the wireless Reliance network (or any relevant component thereof) (ii) the financing of the wireless Reliance Network (or any component thereof) or (iii) The outsourcing by Reliance of any operating or maintenance functions related to the wireless Reliance Network, under the terms and conditions of the limited license as specified herein; or (iv) the transfer or assignment by Reliance of the Software Licenses to a Reliance Affiliate (or vice versa) in conjunction with a transfer of a portion of the wireless Reliance network to be operated in the territory of India only, provided that in each such case specified in (i)-(iv) above, such transferee, assignee, or outsourcee agrees in writing to abide by all the terms and conditions set forth in the software Licenses and the TTI is informed of the same in writing by Reliance and provided further that the rights transferred, assigned or granted to outsources, as the case may be shall be those reasonably necessary, to fulfill the commercial purposes of such transaction. (c) Notwithstanding any statement in this Agreement to the contrary, Reliance may permit use under the limited license of the Software (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....flect all revisions, modifications and enhancements to the software that are provided to Reliance hereunder. In the event that the Escrow Agreement has not been executed and the source code delivered to Escrow Agent within thirty (30) days after acceptance of the Software, then until such events have occurred Reliance shall be entitle to terminative this agreement by written notice provided that Reliance has given written notice and details of such breach to TTI and has advised TTI of its intention to terminate and TTI has failed to deliver the Source Code to the Escrow Agent within thirty (30) days from Reliance's notice thereof no payment obligation with respect to such software or nay support services (and if Reliance has previously paid any sums in respect thereof, TTI will promptly refund all such sums to Reliance). 11.2. Release of Source Code. Upon occurrence of the conditions described in the Escrow Agreement (each, a "Release condition") the Source Code placed in escrow will be delivered to Reliance for us, copying in connection with Reliance's use, maintenance and support of the software in accordance with its rights under this Agreement. 11.3 License; Ownership. TT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation with the earlier agreement dated 27th September 2002 for purchase of additional software by Reliance from the assessee to be used in technologically updated Wireless Reliance Network (i.e. CDMA or GSM etc.). Thus, vide this supplementary agreement, though scope of usages of the software for relatively wider range of products has been increased, but all other terms and conditions remained same. We do not find any change much less any material change in the terms and conditions of the original agreement which may have any bearing on the decision which has been taken by the Tribunal in earlier years. One of the main objections which had been prominently discussed by the lower authorities is with respect to transfer of source code by the assessee to Reliance. It is noted by us that firstly, as discussed above, the source code was intended to be provided by the assessee to Reliance only for the limited purpose of enabling it maintenance and support of software in accordance with its rights under the said agreement. Secondly, in any case, it has been informed that the aforesaid Escrow Agreement was never entered into and therefore, there was no question of providing any source code....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The case of the Revenue really rests on taxability under art. 12 which provides as follows: "Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. 3. 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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paras 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a PE situated therein, or perform in that other State independent pers....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne these two aspects of the definition of 'royalty' under the India-Israel tax treaty. 16. As regards the question whether the payment for software could be treated as payment for "use of, or the right to use, any copyright of literary, artistic or scientific work", we find that this issue directly came up for consideration of a Special Bench of this Tribunal in the case of Motorola Inc. (supra). That was a case in which the Special Bench had an occasion to decide whether payment for software amounts to 'royalty', for the purposes of India Sweden tax treaty [(1998) 229 ITR (St) 11] which incidentally is the same as in Indo-Israel tax treaty and which also defines royalty as "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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience". The Special Bench, after a very erudite discussion on various facets of the issue before them, concluded that "we hold that the software supplied was a copyrighted article and not a copyright....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as been taken but that conclusion is arrived at in the light of the provisions of cl. (v) in Expln. 2 to s. 9(1)(vi) which also covers consideration for "transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work" a provision which is clearly larger in scope than the provision of art. 12(3) of the Indo-Israel tax treaty. The word "of" between 'copyright' and 'literary, artistic or scientific work" is also missing in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statutory provision, and, by the virtue of s. 90(2) of the Act, the provisions of India Israel tax treaty clearly override this statutory provision. In Gracemac decision (supra), the Co-ordinate Bench was of the view that the provisions of the applicable tax treaty and the IT Act are "identical"-a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac decision (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for "process" as a computer program is nothing but....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (Del) 233 : (2011) 51 DTR (Del) 1 : (2011) 332 ITR 340 (Del), their Lordships, after a very erudite and detailed discussion, concluded that "we are unable to subscribe to the view taken by the Tribunal in the impugned judgment on the interpretation of s. 9(1)(vi) of the Act". It cannot, therefore, be open to us to approve the stand of the Revenue to the effect that the payment for software is de facto a payment for process. That is a hyper-technical approach totally divorced from the ground business realities. It is also important to bear in mind the fact that the expression 'process' appears immediately after, and in the company of, expressions "any patent, trademark, design or model, plan, secret formula or process". We find that these expressions are used together in the treaty and as it is well-settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th the law laid down by Hon'ble Andhra Pradesh High Court in the case of CIT vs. B.R. Constructions (1993) 113 CTR (AP) 1 : (1993) 202 ITR 222 (AP) does not constitute a binding judicial precedent. In our considered view, even a Co-ordinate Bench decision, which is admittedly contrary to earlier precedents on that issue from other Co-ordinate Benches, does not bind the subsequent Co-ordinate Benches. We have all the respect and admiration for the Co-ordinate Bench decision, but, in our considered view, this decision does not constitute a binding judicial precedent, and we leave it at that. The other aspect of the matter is that the issue of taxability of software, as a copyrighted article, is directly covered by a Special Bench of this Tribunal and the said decision, coming from a Bench of larger strength, prevails over the Division Bench decision. As laid down by the apex Court in the case of Ambika Prasad Mishra vs. State of UP AIR 1980 SC 1762 (p. 1764 of AIR 1980 SC ) "every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent. A decision does not lose its authority merely because it was badly argued, inadequately considered or fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the software installation, commissioning and maintenance services on behalf of the assessee. Reliance is the only client in India to whom the software has been supplied. The assessee has guaranteed all the services provided by TTI India to Reliance under agreement with assessee. TTI India has no support agreement with the Reliance and also TTI India has not provided any service to any other customer except Reliance. Therefore, TTI India is wholly dependent on assessee and the assessee also is wholly dependent on TTI India for providing its services to Reliance. TTI India has no other independent business. On these facts, the AO has also referred to user acceptance test clauses and parent guarantee clause of the agreement and has also held that TTI India and the assessee has close and invisible nexus for providing the services. Reliance has also been placed upon the fact that expenses to the tune of Rs. 154 lakhs have been reimbursed to the parent company at cost, implying thereby that the employees of the assessee have been traveling to India to render the services and that TTI India is not capable for rendering necessary services independently. 5.1. Being aggrieved, the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... always been accepted by the Revenue in all the earlier years. It is further noted that the Tribunal in assessee's own case in A.Y. 2006-07 clearly held that assessee had no permanent establishment in India. It is further noted that TTI India has entered into the agreement on independent basis. No facts have been discussed by the Ld. CIT(A) to show that how the judgment of Rolls Royce PLC was applicable in the preference of the decisions of the Tribunal rendered in assessee's own case. Under these circumstances, we do not find any reason to deviate from the order of the Tribunal of the earlier years. Thus, respectfully following the order of the Tribunal for A.Y. 2006-07, we decide this issue in favour of the assessee. Thus, ground no.2 is allowed. 6. Ground No.3: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the action of AO in holding reimbursement of expenses as fees for Technical Services (FTS) as per Article 13 of Indo-Israel DTAA. It is noted that Ld. CIT(A) has decided this ground as consequential to Ground no.2 and held that since assessee has a Permanent Establishment in India, therefore reimbursement expenses was nothing but busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ult in making available any knowledge, experience, skill, know-how or process to the assessee. That was essential before it could be said that the payment made to the assessee were fees for technical services rendered." 3.7 Thus, the services rendered by the assesseecompany does not fall within the ambit of fees for technical services as defined in Article 13(3) of the Indo- Israel Treaty read with clause 4 of Article 12 of India- Canada Tax Treaty. Therefore, I am of the considered opinion, that the appellant merely rendered services without imparting any knowledge, skills, etc to TTIIndia. Consequently, the services are not in the nature of fees for technical services within the meaning of Article 13(3) of the Indo-Israel Treaty read with clause 2 of the protocol dated29.01.1996. 3.8 I have also considered the cases relied by the AO in his order dated 19.12.2008 and mentioned above. I have perused the same it is noticed that these decisions relied upon by the Assessing Officer are in the context of taxability of reimbursement of expenses under the context of Income Tax Act ie the domestic law and there is no reference to the tax treaties therefore, these are not....