2016 (11) TMI 1467 - AT - Income Tax

Rectification of mistake - Tribunal did not follow the co-ordinate bench decision rendered in the case of Solid Works Corporation (2012 (2) TMI 406 - ITAT MUMBAI) and the same has resulted in a mistake apparent from record - whether misreading of a decision would amount to mistake apparent from record? - whether the payment received by the assessee on sale of computer software is royalty or not as per DTAA between India and USA? - Held that - In the case of Solid Works Corporation as relying on the case of DIT Vs. Ericsson AB (2011 (12) TMI 91 - Delhi High Court ) and held that the consideration received by the assessee for sale of software was not royalty. Misreading of decision of Hon ble High Court would result in a mistake apparent from record warranting recall of the order. We have noticed that the assessees have submitted that the software purchased by them is specific to run the hardware and hence it was not a case of shrink wrapped software. Further the Hon ble Delhi High Court has held in the case of Ericsson (supra) that the software would not be royalty, even it was supplied separately. All these points support the case of the assessee that the Tribunal has misread the decision rendered by Hon ble Delhi High Court in the case of Ericsson (supra). We also notice that the Tribunal has committed an error in not appreciating the facts prevailing in the instant cases. Hence we find merit in the contentions of the assessee that the impugned order of the Tribunal suffers from mistake apparent from record.

Issues Involved:
1. Non-consideration of submissions made by the assessee.
2. Non-following of co-ordinate Bench decision.
3. Taxability of payees not considered.
4. Specific agreements not considered.
5. Embedded theory not argued by the Revenue.
6. Misreading of the decision of the Hon'ble Delhi High Court in the case of Ericsson.
7. Lack of proper opportunity granted to the assessee.

Detailed Analysis:

1. Non-consideration of Submissions Made by the Assessee:
The assessee contended that the Tribunal's decision was based on the submissions made by Lucent's Counsel, which were not applicable to their case. The Tribunal failed to consider that the software was specific to telecom hardware and not a case of shrink-wrapped software. This oversight led to a violation of the principles of natural justice and the right to be heard.

2. Non-following of Co-ordinate Bench Decision:
The assessee argued that the Tribunal did not follow its earlier decision in the case of Solid Works Corporation, which held that payments for software were not royalty as per the DTAA between India and the USA. The Tribunal should have adhered to this precedent or referred the matter to a larger Bench if it disagreed. The failure to consider this decision constituted a mistake apparent from the record.

3. Taxability of Payees Not Considered:
The assessee pointed out that the Tribunal did not consider that in several cases, the payees were held not chargeable to tax by various Benches of the Tribunal and even by High Courts. Since tax deduction at source is a collection mechanism and not a charging section, the Tribunal's decision to hold the assessee liable to deduct tax at source was a glaring mistake of law.

4. Specific Agreements Not Considered:
The Tribunal failed to consider specific agreements reviewed by the CIT(A), which showed that no tax should be deducted at source on payments made for the purchase of software. The Tribunal generalized the facts without considering each agreement, leading to an erroneous conclusion.

5. Embedded Theory Not Argued by the Revenue:
The Tribunal's decision was based on the "embedded" theory, which was never argued by the Revenue. The Tribunal misunderstood the facts, as the software purchased by the assessee was specific to telecom hardware and necessary to run it. This misinterpretation of facts led to an incorrect judgment.

6. Misreading of the Decision of the Hon'ble Delhi High Court in the Case of Ericsson:
The Tribunal misread the decision of the Hon'ble Delhi High Court in the case of Ericsson, which held that software, whether supplied separately or with hardware, was not royalty. The Tribunal's distinction based on the separate supply of software was contrary to the High Court's ruling, resulting in a mistake apparent from the record.

7. Lack of Proper Opportunity Granted to the Assessee:
The Tribunal decided the appeals based on the arguments made by Lucent's Counsel without providing the assessee an opportunity to address those arguments. This lack of opportunity violated the principles of natural justice and constituted a mistake apparent from the record.

Conclusion:
The Tribunal's order suffered from multiple mistakes apparent from the record, including non-consideration of relevant submissions, failure to follow co-ordinate Bench decisions, misinterpretation of the Ericsson case, and lack of proper opportunity for the assessee. These errors warranted the recall of the impugned orders in the Reliance group cases. The Tribunal allowed the miscellaneous applications filed by the assessees, recalling the orders and granting a fresh hearing.

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