2011 (8) TMI 497 - AT - Income Tax

Assessment under section 143(3) - Whether the learned CIT(A) erred in holding that the Assessing Officer wrongly held that the amount of ₹ 3,00,44,506 received by the assessee for the supply of software is in the nature of royalty which is liable for taxation in India - Definition of the expression royalty in Article 12(3), the process has to be in the nature of know-how and not a product - In view of Hon ble Delhi High Court s declining to uphold the coordinate bench s decision in the case of Asia Satellite Telecommunication Co. Ltd. 2002 (11) TMI 263 - ITAT DELHI-C , we are of the considered view that the payment for software, by no stretch of logic, can be treated as a payment for a process liable to be taxed as royalty.

Issues Involved:
1. Taxability of the amount received for the supply of software as 'royalty' under the India-Israel Double Taxation Avoidance Agreement (DTAA).
2. Applicability of the provisions of the Income-tax Act, 1961, in light of the DTAA.
3. Interpretation of 'royalty' under Article 12(3) of the India-Israel DTAA.
4. Precedence of judicial decisions, specifically the Special Bench decision in Motorola Inc. v. Dy. CIT and the co-ordinate Bench decision in Gracemac Corpn. v. Asstt. DIT.

Issue-wise Detailed Analysis:

1. Taxability of the amount received for the supply of software as 'royalty' under the India-Israel Double Taxation Avoidance Agreement (DTAA):

The primary issue was whether the amount of Rs. 3,00,44,506 received by the assessee for the supply of software to Reliance Infocomm Limited (RIL) should be classified as 'royalty' and thus be taxable in India. The CIT(A) had concluded that the payment was not for the use of, or the right to use, any copyright as envisaged by section 14 of the Copyright Act. Consequently, the payment made by RIL to the assessee was considered a payment for the purchase of copyrighted material, not royalty under Article 12(3) of the India-Israel DTAA. The Tribunal upheld this view, emphasizing that the supply of software did not amount to a transfer of copyright.

2. Applicability of the provisions of the Income-tax Act, 1961, in light of the DTAA:

The Tribunal noted that the provisions of the India-Israel DTAA override the Income-tax Act to the extent they are beneficial to the assessee, as per section 90(2) of the Income-tax Act. The Tribunal referred to the Supreme Court's decision in Union of India v. Azadi Bachao Andolan, which established that the provisions of a tax treaty would prevail over the Income-tax Act in case of any inconsistency, provided the treaty provisions are more beneficial to the assessee.

3. Interpretation of 'royalty' under Article 12(3) of the India-Israel DTAA:

Article 12(3) defines 'royalty' as payments for the use of, or the right to use, any copyright of literary, artistic, or scientific work, among others. The Tribunal, following the Special Bench decision in Motorola Inc. v. Dy. CIT, held that the payment for software is for a copyrighted article, not for the use of copyright. The Tribunal rejected the revenue's argument that the payment for software could be considered a payment for a 'process,' emphasizing that the payment was for the product (software) itself and not for the technical know-how or process embedded in it.

4. Precedence of judicial decisions, specifically the Special Bench decision in Motorola Inc. v. Dy. CIT and the co-ordinate Bench decision in Gracemac Corpn. v. Asstt. DIT:

The Tribunal had to decide whether to follow the Special Bench decision in Motorola Inc. or the later co-ordinate Bench decision in Gracemac Corpn. The Tribunal chose to follow the Special Bench decision, which held that the payment for software is not 'royalty' under the DTAA. The Tribunal reasoned that the Special Bench decision, being from a higher forum, had binding precedence. The Tribunal also noted that the Gracemac decision did not consider the Special Bench ruling and was contrary to earlier decisions, thus lacking binding force.

Conclusion:

The Tribunal dismissed the appeal, upholding the CIT(A)'s decision that the amount received for the supply of software was not 'royalty' under the India-Israel DTAA and thus not taxable in India. The Tribunal emphasized the precedence of the Special Bench decision in Motorola Inc. and the overriding effect of the DTAA provisions over the Income-tax Act, reaffirming the principle of treaty override in cases of inconsistency.

← Previous Next →