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2017 (5) TMI 1605 - AT - Income TaxRoyalty - payment received against supply of software - impact of amendment to section 9(1) - Article 12 of the Double Taxation Avoidance Agreement (DTAA/Tax treaty) entered in to by India and USA - Held that - A plain reading of section 90(2) of the Act makes it clear that the 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. - Following the decision in the case of Antwerp Diamond (.2016 (10) TMI 1218 - ITAT MUMBAI) decided in favor of assessee.
Issues Involved:
1. Nature of payment received from the supply of software - whether it constitutes royalty under the Income-tax Act, 1961, and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA). Issue-Wise Detailed Analysis: 1. Nature of Payment Received from Supply of Software: Assessment Proceedings: During the assessment proceedings, the AO found that the assessee had supplied software to Reliance Infocom Ltd. and raised bills worth ?19.89 crore. The assessee claimed that the payments received were not taxable in India. However, the AO held that the payments constituted royalty under the Income-tax Act and Article 12 of the DTAA between India and the USA. The AO relied on the ruling in the case of Airport Authority of India and other precedents to conclude that the receipts from the sale/supply of software were taxable as royalty in India. Dispute Resolution Panel (DRP) Observations: The assessee challenged the AO's observations before the DRP. The DRP held that the assessee failed to provide requisite information to determine whether the software transferred was a sale of goods or a copyright. The DRP inferred that the buyer had the right to create copies using the secret codes provided by the assessee, thus classifying the payments as royalty. Tribunal Proceedings: The assessee contended before the Tribunal that the payments received were not royalty under Article 12 of the India-USA DTAA and were not taxable in India. The assessee cited several cases, including Infrasoft Ltd., Qad Europe B.V., and others, where similar issues were decided in favor of the assessee. Departmental Representative (DR) Arguments: The DR argued that the Tribunal's earlier decisions came before the insertion of Explanation 4 to Section 9(1)(vi) by the Finance Act, 2012, which retrospectively applied from 01/06/1976. The DR contended that if this explanation was applied, the payments would constitute royalty under both the Act and the tax treaty. The DR also referred to the Karnataka High Court decisions in the cases of Synopsis International Old Ltd., Samsung Electronics Co Ltd., and Wipro Ltd., which favored the Department. Tribunal's Analysis: The Tribunal emphasized that a DTAA prevails over the Act unless the Act is more beneficial to the assessee. The Tribunal noted that the issue was already decided in favor of the assessee in the case of Antwerp Diamond Bank NV, where it was held that amendments to the Act could not be read into the DTAA. The Tribunal reiterated that the payments received by the assessee from Reliance were not royalty under the DTAA and upheld the earlier decisions favoring the assessee. Final Judgment: The Tribunal allowed the appeals filed by the assessee for the assessment years 2005-06 and 2007-08, holding that the payments received were not taxable as royalty. The Tribunal dismissed the appeal filed by the AO for the assessment year 2006-07, upholding the First Appellate Authority's decision that the payments were not royalty. Conclusion: The Tribunal concluded that the payments received by the assessee from the supply of software to Reliance Infocom Ltd. were not in the nature of royalty under the provisions of the Income-tax Act and the India-USA DTAA. The Tribunal's decision was based on the principle that amendments to the Act could not be read into the DTAA and followed judicial precedents favoring the assessee. Order Pronounced: The order was pronounced in the open court on 24th May 2017, allowing the assessee's appeals and dismissing the AO's appeal.
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