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TMI Blog2011 (8) TMI 497X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has called into question correctness of CIT(A)'s order dated 24-2-2010, in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2006-07. 2. In the first ground of appeal, the Assessing Officer has raised the following grievance: On the facts and in the circumstances of the case and in law, 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. 3. While there is no dispute that the grievance so raised by the Assessing Officer is fully covered by decision of a coordinate bench in assessee's own case in a preceding assessment year, for the reasons we will set out in a short while, it is perhaps appropriate and desirable to deal with the issue at some length. 4. The relevant material facts, as culled out from the material on record before us, are like this. The assessee is a company incorporated in, and tax resident of, the State of Israel. The assessee-company has its registered office at 12 Amal Street, Afek Park, Rosh H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of jurisdictional Tribunal's decision in the case of Dy. CIT v. UHDE GmbH [1996] 54 TTJ 355 (Bom.), the amount so invoiced is not taxable in this assessment year. The Assessing Officer took note of these submissions as also of assessee's reliance on a large number of judicial precedents, including in the cases of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 (SC), Sonata Information Technology Ltd. v. Dy. CIT [2006] 7 SOT 465 (Mum.), Samsung Electronics Co. Ltd. v. ITO [2005] 93 TTJ 658/94 ITD 91 (Bang.), Lucent Technologies Hindustan Ltd. v. ITO [2005] 92 ITD 366 (Bang.), Hawlett Packard India (P.) Ltd. v. ITO(International Taxation) [2006] 5 SOT 660 (Bang.), Lotus Development (Asia Pacific) Pte. Ltd. Unreported ITAT Delhi Bench decision [IT Appeal Nos 564 to 566/Delhi/05], Sonata Information Technology Ltd. v. Addl. ACIT [2006] 103 ITD 324 (Bang.), ISBC Consultancy Services v. Dy. CIT [2004] 88 ITD 134 (Mum.), and the Assessing Officer further noted the fact that in the assessment year 2003-04, the same issue has been decided in favour of the assessee by the CIT(A). However, as the Assessing Officer noted, since the order of the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of copy rights. We are in agreement with the findings of the CIT(A), who has correctly come to the conclusion that the supply of software to Reliance does not amount to any transfer of copyright and payment can be only for purchase of copyrighted article and does not amount to royalty within the meaning of Article 12(3) of the DTAA. Consequently the order of the CIT(A) is upheld. Revenue appeal is dismissed. 6. When this appeal was called out for hearing, learned Departmental Representative fairly accepted that the issue is covered in favour of the assessee by Tribunal's order in assessee's own case, but he nonetheless dutifully relied upon the order of the Assessing Officer and justified the same. Learned counsel for the assessee, on the other hand, took us though the order of the co-ordinate Bench in assessee's own case and submitted that the issue in appeal before us was squarely covered by the same. It was also pointed out that the contract for supply of software was the same, as in the assessment year 2003-04, and the income in the assessment years 2003-04 and 2006-07, i.e., assessment year before us, was on the same set of material facts. It was submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Motorola Inc. (supra), which is a binding precedent for us, learned Departmental Representative submitted that the later division Bench in Gracemac Corpn.'s case (supra) has followed Hon'ble Supreme Court's judgments (in the cases of Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey AIR 1984 SC 667 and CIT v. PVAL Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460 (SC) which have greater binding force than the decision of a Special Bench, we must follow the co-ordinate Bench's order in Gracemac Corporation's case (supra) in preference over the Special Bench decision in the case of Motorola Inc. (supra). He submits that the law laid down by Hon'ble Supreme Court in these cases, i.e., Gramophone Co. of India Ltd. (supra) and PVAL Kulandagan Chettiar's case (supra), must prevail over the Special Bench decision. Learned Departmental Representative, who had almost given up his case in his first round of arguments, was now vehement in his reliance on the stand of the Assessing Officer and supportive of the line of reasoning adopted by the co-ordinate Bench in Gracemac Corpn.'s case (supra). None of these decisions, learned Departmental Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. 9. As evident from a plain reading of section 90, as also the esteemed views of Hon'ble Supreme Court, it is wholly immaterial whether the provisions of the Income-tax Act are later provisions or whether these provisions were legislated prior to the tax treaty having been entered into. Once a tax treaty is entered into, and is notified by the Central Government, the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed recording of a record (which, for short, adopting trade parlance, we may call a pirated work), whose importation into India may be prohibited, but whose importation into Nepal is not prohibited, be taken across Indian territory to Nepal? These are some of the questions which arise for consideration in this appeal. [Emphasis supplied] 10. It was in this context, and particularly in a situation in which an international convention and a bilateral treaty was being given effect to without there being any enabling provisions for such convention and treaty overriding the domestic legislation, that Justice O Chenappa Reddy, in his inimitable manner, observed as follows: There can be no question that nations must march with the international community and the Municipal law must respect rules of International law even as nations respect international opinion. The comity of Nations requires that Rules of International law may be accommodated in the Municipal Law even without express legislative sanction provided they do not run into conflict with Acts of Parliament. But when they do run into such conflict, the sovereignty and the integrity of the Republic and the supremacy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral principles of extending respect to international conventions and treaties, that the provisions of the tax treaty override the provisions of the Income-tax Act. The observations made by Hon'ble Supreme Court, in the case of Gramophone Co. of India Ltd. (supra), are thus wholly irrelevant in the present context. As we say so, we are alive to the fact that a co-ordinate Bench has indeed observed that the later domestic tax legislation may override tax treaty provisions wherever there is irreconcilable conflict and, in support of this proposition, relied upon Gramophone judgment. However, these observations were in the nature of obiter dicta , i.e., things said by the way, inasmuch as the co-ordinate Bench was only dealing with a situation, as the Bench put it, there was no conflict between the provisions of the treaty and the Income-tax Act, but, assuming there was indeed a conflict, we would like to deal with such a hypothetical situation . It is well settled in law that obiter dicta of co-ordinate Benches are not binding (unlike the ratio), but they may be regarded as persuasive in a future decision. In observed by Hon'ble Bombay High Court, in the case of CIT v. Than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstein that Germany secures and shares that have no bearing upon the matters that are covered by the double taxation agreement between the two countries ; (b) there is no absolute bar of secrecy. Instead the agreement specifically provides that the information may be disclosed in public court proceedings, which the instant proceedings are , and (c) that the last sentence in Article 26(1) permitting disclosure of such secret information in public court proceedings or in judicial proceedings must be so construed as not limiting it to disclosure in the Income-tax proceedings only because such an approach will come in conflict with the scheme of the Constitution of India, granting every person a power to seek remedy against infringement of fundamental right under Part III of the Constitution, as in order that the right guaranteed by Clause (1) of Article 32 be meaningful, and particularly because such petitions seek the protection of fundamental rights, it is imperative that in such proceedings the petitioners are not denied the information necessary for them to properly articulate the case and be heard, especially where such information is in the possession of the State . Their Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.-(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. (3) The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (4) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or perform in that other State independent personal services from a fixed base situated therein, and the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r use of, or right to use of, a process . Let us examine these two aspects of the definition of 'royalty' under the India Israel tax treaty. 16. As regards the question whether the payment for software could be treated as payment for use of, or the right to use, any copyright of literary, artistic or scientific work , we find that this issue directly came up for consideration of a Special Bench of this Tribunal in the case of Motorola Inc. (supra). That was a case in which the Special Bench had an occasion to decide whether payment for software amounts to 'royalty', for the purposes of India Sweden tax treaty which incidentally is the same as in Indo Israel tax treaty and which also defines royalty as payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience . The Special Bench, after a very erudite discussion on various facets of the issue before them, concluded that we hold that the software su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention that in the case of Gracemac Corpn. (supra), a contrary view has been taken but that conclusion is arrived at in the light of the provisions of clause (v) in Explanation 2 to section 9(1)(vi) which also covers consideration for transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work a provision which is clearly larger in scope than the provision of Article 12(3) of the Indo Israel tax treaty. The word of between 'copyright' and 'literary, artistic or scientific work' is also missing in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statutory provision, and, by the virtue of section 90(2) of the Act, the provisions of India Israel tax treaty clearly override this statutory provision. In Gracemac Corpn. case (supra), the coordinate bench was of the view that the provisions of the applicable tax treaty and the Income-tax Act are identical a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac Corpn. case (supra). The next issue that we need t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act. However, when this decision came up for scrutiny of Hon'ble Delhi High Court, in the case reported as Asia Satellite Telecommunications Co. Ltd. v. CIT [2011] 332 ITR 340/197 Taxman 263. Their Lordships, after a very erudite and detailed discussion, concluded that we are unable to subscribe to the view taken by the Tribunal in the impugned judgment on the interpretation of section 9(1)(vi) of the Act . It cannot, therefore, be open to us to approve the stand of the revenue to the effect that the payment for software is de facto a payment for process. That is a hyper technical approach totally divorced from the ground business realities. It is also important to bear in mind the fact that the expression 'process' appears immediately after, and in the company of, expressions any patent, trade mark, design or model, plan, secret formula or process . We find that these expressions are used together in the treaty and as it is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent conclusion by opining that payment for software is in fact a payment for a process, but the view so expressed, being contrary to earlier decisions of the other coordinate benches and in accordance with the law laid down by Hon'ble Andhra Pradesh High Court in the case of CIT v. B.R. Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473 (FB) does not constitute a binding judicial precedent. In our considered view, even a coordinate bench decision, which is admittedly contrary to earlier precedents on that issue from other coordinate benches, does not bind the subsequent coordinate benches. We have all the respect and admiration for the coordinate bench decision, but, in our considered view, this decision does not constitute a binding judicial precedent, and we leave it at that. The other aspect of the matter is that the issue of taxability of software, as a copyrighted article, is directly covered by a Special Bench of this Tribunal and the said decision, coming from a bench of larger strength, prevails over the division bench decision. As laid down by the Apex Court in the case of Ambika Prasad Mishra v. State of Uttar Pradesh AIR 1980 SC 1762 (p. 1764 of AIR 1980 SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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