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2016 (9) TMI 1566 - AT - Income TaxTaxability of receipt as 'Royalty - remuneration received by Microsoft regional sales Corporation (MRSC ) from Indian distributors for sale of software is taxable as royalty in the hands of GraceMac - India USA DTAA - retrospective amendment effect - HELD THAT - The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of royalty in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the 'royalty' has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty. As decided in of Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT DIT v. Erisson 2011 (12) TMI 91 - DELHI HIGH COURT and DIT v. Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. In ALCATEL LUCENT CANADA 2015 (5) TMI 431 - DELHI HIGH COURT has held that sale of software is a sale of copyrighted article and ultimately held that the payment for the same is not in the nature of royalty With respect to the retrospective amendment by the Finance Act 2012, it has been held by Hon ble Delhi high court in case of DIT versus New Skies Satellite BV 2016 (2) TMI 415 - DELHI HIGH COURT wherein it has been held that unless Double Taxation Avoidance Agreement is jointly amended by both the countries to incorporate particular income partaking the nature of royalty or amend definition in a manner so that such income automatically becomes royalty, The Finance Act, 2012 which inserted several explanations to section 9 (1) (vi) by itself would not affect the meaning of the term royalty as mentioned in article 12 of the Double Taxation Avoidance Agreement.Therefore, the retrospective amendment made to the Income tax Act will not apply in deciding the issue of taxability of income of the assessee in present case. where the provisions of the Double Taxation Avoidance Agreement are more beneficial to the assessee, the treaty would prevail over the act. Accordingly the retrospective amendment made to the Income Tax Act, if are not beneficial to an assessee, who is also entitled to the benefit of the Double Taxation Avoidance Agreement, then whatever is less rigorous to the assessee should be followed for the purpose of the taxation in case of that assessee. In the present case therefore Double Taxation Avoidance Agreement between India and USA is required to be seen and applied, if by retrospective amendment to the Income Tax Act the taxation regime with respect to the royalty and fees for technical service have become more stringent. In view of the above facts it is apparent that after rendering of the decision of the tribunal based on which the reopening has been initiated by revenue and addition has been made in the hands of the appellant, the decision of the Hon ble Delhi high court in case of DIT V versus Infrasoft limited covers the issue in favour of the assessee 2013 (11) TMI 1382 - DELHI HIGH COURT . As the lower authorities did not have any benefit of the decision of the Hon ble Delhi high court while deciding the issue about the taxation of copyrighted article i.e. the software being sold by the appellant but have solely relied upon the decision of the coordinate bench in case of M/s Gracemac Corporation, it would be in the interest of the Justice to set the whole issue back to the file of the Ld. assessing officer to decide it afresh after considering the decision of Hon ble Delhi high court DIT versus Infrasoft Ltd (supra), applying it to nature of the software of the appellant, which covers the issue with respect to the sale of software holding that according to article 12 (3) of the Indo US DTAA, is a sale of copyrighted article , and is not chargeable to tax as royalty .
Issues Involved:
1. Validity of reassessment proceedings. 2. Taxability of income as 'Royalty' under the Income Tax Act, 1961. 3. Taxability of income as 'Royalty' under the Double Taxation Avoidance Agreement (DTAA) between India and the USA. 4. Factual inaccuracies and legal contentions regarding the nature of transactions. 5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. 6. Levying of interest under Section 234B of the Income Tax Act. Detailed Analysis: 1. Validity of Reassessment Proceedings: The appellant challenged the reassessment proceedings initiated under Section 148 of the Income Tax Act, contending that the reasons to believe recorded by the Assessing Officer (AO) were based on existing material and no new material had come to his notice. The AO's decision to reopen the assessment was based on the ITAT's order in the case of Microsoft Regional Sales Corporation, which held that remuneration received from Indian distributors for the sale of software is taxable as 'royalty'. The Dispute Resolution Panel (DRP) upheld the AO's decision, relying on the Supreme Court's decision in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (291 ITR 500), stating that the reopening was valid as the assessee had not filed any return of income. 2. Taxability of Income as 'Royalty' under the Income Tax Act, 1961: The AO and DRP held that the payments received by the appellant from licensing and distribution rights to Microsoft Operations Pte Ltd. (MO) were taxable as 'royalty' under Section 9(1)(vi) of the Income Tax Act. The AO observed that the appellant received income from a source in India, as the software licenses were distributed in India. The DRP also relied on the ITAT's decision in the case of Gracemac Corporation, which held that such payments constituted 'royalty'. 3. Taxability of Income as 'Royalty' under the DTAA between India and the USA: The appellant argued that the income received should not be taxed as 'royalty' under the DTAA, as the definition of 'royalty' in the DTAA is different from the Income Tax Act. The appellant relied on the Delhi High Court's decision in DIT vs. Infrasoft Ltd. (ITA No. 1034-2009), which held that payments for the use of software are not 'royalty' under the DTAA. The appellant also cited the decision in New Skies Satellite BV (382 ITR 114), which held that amendments to the Income Tax Act by the Finance Act, 2012, do not affect the interpretation of 'royalty' under the DTAA unless the DTAA is jointly amended by both countries. 4. Factual Inaccuracies and Legal Contentions: The appellant contended that the AO and DRP failed to appreciate that the payments received were for the sale of 'copyrighted articles' and not for the transfer of 'copyright'. The appellant argued that the software licenses were for internal business use and did not grant any rights to exploit the copyright. The appellant also highlighted that the AO's reliance on the retrospective amendments to Section 9(1)(vi) by the Finance Act, 2012, was misplaced, as these amendments do not impact the DTAA interpretation. 5. Initiation of Penalty Proceedings under Section 271(1)(c): The appellant challenged the initiation of penalty proceedings under Section 271(1)(c) on the grounds that the additions made by the AO were not justified. The appellant argued that the issue of taxability of income as 'royalty' was a matter of interpretation and not a case of concealment or furnishing inaccurate particulars of income. 6. Levying of Interest under Section 234B: The appellant contended that the AO erred in levying interest under Section 234B, disregarding the provisions of the Act and judicial precedents. The appellant argued that as a non-resident, it was not liable to pay advance tax, and therefore, the interest under Section 234B was not applicable. Judgment: The Tribunal set aside the assessments for all the years under appeal to the file of the AO to decide afresh in light of the Delhi High Court's decision in DIT vs. Infrasoft Ltd. The Tribunal directed the AO to consider whether the payments received by the appellant for the sale of software constituted 'royalty' under the DTAA and the Income Tax Act, considering the nature of the software and the legal principles established by the Delhi High Court. The Tribunal also directed the AO to reconsider the initiation of penalty proceedings and the levy of interest under Section 234B based on the final assessment.
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