2018 (2) TMI 99 - AT - Income Tax

Receipts from sale of software taxable as Royalty - application for constitution of Special Bench - Held that - As per the list of 21 cases placed on record wherein in the hands of recipients / deductees, the High Courts / Tribunals have held that receipts from sale of software were not taxable as Royalty‟. The issue was settled by the High Courts and various benches of the Tribunal and did not warrant constitution of Special Bench. If the application for constitution of Special Bench of the revenue be accepted by the Bench then all 21 cases where in hands of deductees the Hon ble High Courts / Tribunal has already held that income from sale of software is not royalty will be affected. Thus if the application for constitution of Special Bench of the Revenue be accepted by the Bench then 44 Special Benches need to be constituted, as there are 44 separate agreements entered by the assessee for which payment was made for purchase of software. Since, some agreements contain purchase of independent software and some of the agreement contains purchase of software alongwith hardware, every agreement would have to be examined for which 44 Special Benches would have to be constituted. Application for constitution of Special Bench made by the Revenue ought to be rejected and the appeals be heard by the regular Bench of the Hon ble Tribunal. We direct accordingly.

Summary

Issues Involved:
1. Request for constitution of Special Bench by the Revenue.
2. Conflicting decisions of non-jurisdictional High Courts.
3. Validity of the reference to Special Bench based on judicial hierarchy and discipline.
4. Tax effect and relevance of CBDT Circular No. 21/2015.
5. Impact of existing High Court and Tribunal decisions on the issue of software sale being classified as "Royalty."

Issue-wise Detailed Analysis:

1. Request for Constitution of Special Bench by the Revenue:
The Revenue requested the Hon'ble President of the Income Tax Appellate Tribunal, Mumbai, to constitute a Special Bench to decide the appeals pending before the Tribunal. This request followed an order by the Tribunal allowing Miscellaneous Applications against an Original Order dated September 06, 2013. The Hon'ble President, on December 12, 2017, directed the Registry to present the matter before the Division Bench for recommendations on the necessity of a Special Bench.

2. Conflicting Decisions of Non-Jurisdictional High Courts:
The Revenue argued that due to conflicting decisions of non-jurisdictional High Courts, a Special Bench should be constituted. They cited the CEGAT decision in Shri Ram Rayons vs. Collector of Central Excise. However, the Tribunal noted that judicial discipline requires following earlier decisions unless there are compelling reasons such as inconsistency with Supreme Court or jurisdictional High Court judgments, or if the earlier decision is per incuriam.

3. Validity of the Reference to Special Bench Based on Judicial Hierarchy and Discipline:
The Tribunal emphasized that the reference to constitute a Special Bench must originate from the members, not the parties. Such a reference is appropriate only if the members disagree with an earlier Tribunal decision. The Tribunal cited the case of Homi K. Bhabha v. ITO, stressing that consistency in Tribunal decisions is crucial, and any deviation should be exceptional and well-justified.

4. Tax Effect and Relevance of CBDT Circular No. 21/2015:
The Tribunal noted that out of 127 appeals, about 50 had a tax effect of less than 10 lakhs, which should be dismissed per CBDT Circular No. 21/2015. This circular directs the dismissal of appeals with a tax effect below a specified threshold, aiming to reduce litigation.

5. Impact of Existing High Court and Tribunal Decisions on the Issue of Software Sale Being Classified as "Royalty":
The Tribunal observed that various High Courts and Tribunal benches had already held that receipts from the sale of software were not taxable as "Royalty." Accepting the Revenue's application for a Special Bench would necessitate re-examining numerous agreements, potentially leading to the constitution of multiple Special Benches, which is impractical and contrary to judicial efficiency.

Conclusion:
The Tribunal concluded that the reference for constituting a Special Bench should be rejected. The appeals should be heard by the regular Bench, adhering to judicial hierarchy and discipline. The Tribunal also emphasized that the Revenue could argue the merits of the case before the regular Bench, considering favorable or unfavorable decisions from other jurisdictions. The application for a Special Bench was thus disposed of, and the regular Bench was directed to hear the appeals.

Order Pronouncement:
Order pronounced in the open court on January 03, 2018.