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TMI Blog2018 (4) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... ilateral amendment by the Indian Government to the term ‘royalty’ by way of amendment to section 9(1)(vi) of the Act cannot be extended to the meaning of the term ‘royalty’ defined under DTAA. Applying the principle laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (2016 (2) TMI 415 - DELHI HIGH COURT), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act being beneficial and the definition of ‘royalty’ having not undergone any amendment in DTAA, the assessee was not liable to withhold tax on the payments made for purchase of software. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term ‘royalty’ had been defined originally and not amended. As per the definition of ‘royalty’ under the DTAA, purchase of software does not fall in realm of ‘royalty’. Accordingly, there was no liability on the assessee to withhold tax and the assessee cannot be held to be in default. The demand created under section 201(1) and interest under section 201(1A) of the Act is thus, cancelled. X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) has erred in treating the retrospective amendment to Section 9(1)(vi) vide Finance Act 2012 as clarificatory in nature and that the amendment has not created a new charge of withholding tax with a retrospective effect. 6 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding the appellant as 'assessee in default' under Section 201(1) of the Act for not deducting the tax under Section 195 of the Act on the payments made for purchase of software and determining the total tax liability of ₹ 1,794,263 (including interest of ₹ 746,385) under Section 201(1A) of the Act. 7 On the facts and circumstances of the case and in law, the learned Deputy Director of Income tax (International Taxation) - II, Pune ['the learned AO'] erred in initiating proceedings under section 201(1) read with section 201(1A) without issuing show cause notice under section 201(1) read with section 201(1A) on the Company for AY 2007-08 and hence the proceedings initiated and the order passed u/s.201(1) read with section 201(1A) is invalid and bad in law. 8. On the facts and circumstances of the case and in law, the learned AO erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ece entities instead of the applicable beneficial tax rate 10% (plus applicable surcharge and cess) under the Act in the tax demand computation in the order passed under section 201(1) read with section 201(1A)." 5. The ground of appeal No.7 is not pressed and hence, the same is dismissed as not pressed. 6. Briefly, in the facts of the case, as per information available with the Assessing Officer, the assessee had not deducted tax at source while making payments to the Non-resident / foreign companies for purchase of software. The assessee was asked to explain the reasons for said non deduction of tax at source under section 195 of the Act in respect of all foreign payments including software purchases debited during the year along with copies of all relevant documentary evidence in support of his submissions. The said query was raised by the Assessing Officer during assessment proceedings under section 201(1) of the Act. In response thereto, the assessee furnished the information that it had paid the amounts to various Non-resident software suppliers without deduction of tax at source. The details of payments entity-wise along with nature of expenses is provided under para 2 at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial precedents, wherein it was held that the payment for software would not qualify as royalty under the DTAA. The Assessing Officer after considering the submissions of assessee noted that the assessee had not contested the chargeability of licence fees under the provisions of Indian Income Tax Act, 1961 and hence, he was of the view that it could be presumed that the assessee agrees that the payment received for right to use software (licence fees) was taxable as royalty under section 9(1)(vi) of the Act. The Assessing Officer vide para 4.3 at page 13 observed as under:- "4.3 The assessee has not provided the end user licence agreements with the software suppliers. Hence exact nature of software provided and the terms and conditions are not known. In case of payments for licence, the non-resident receives consideration for transfer of all or any right for use or right to use computer software and owns all right, title and interest in the softwares. Therefore, what the supplier parts with to the end-user is only a right to use the software for its applications. So, one of the rights embedded in the intellectual property, that is the software, being a right to copy and use, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to use software and for support services was clearly royalty as defined in Article 12 or Article VII of the respective DTAAs as well as Explanation 2 to section 9(1)(vi) of the Act. Reference was made to the CBDT's Circular issued and also several decisions including the decision of the Hon'ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. in ITA No.2808 of 2005, judgment dated 15.10.2011 and the contentions of assessee were rejected and the payment received by the foreign company for supply of software and support services was held to constitute royalty under DTAA as well as under the Act. The case laws relied upon by the assessee were held to be distinguishable on facts and hence, not relatable. Consequently, the Assessing Officer held that the provisions of section 194(5) of the Act were squarely applicable for payment of licence fees and the assessee was bound by the law to deduct tax before remitting money to non-residents. The assessee was held to have committed default in terms of section 201(1) and 201(1A) of the Act by not deducting or withholding tax and thus, held the assessee in default as per section 201 of the Act. The Assessing Officer thereafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed pursuant to the Agreement entered by the Company with the respective vendors prior to June 1, 2005. I find that the Appellant has not rebutted the learned AO's contention that there is no proof that there was no payment made before 01.06.2005. Therefore, I find no error in the learned AO's decision to tax payment made to the supplier located in Greece @ 20%. Accordingly, as stated, I confirm the AO's decision to tax royalty on payments made on the software suppliers situated in USA, Singapore and Greece." 9. The assessee is in appeal against the order of CIT(A). 10. The learned Authorized Representative for the assessee pointed out that certain payments were made for purchase of software. The Assessing Officer was of view that the payments were in the nature of royalty both under the Act and the DTAA. He further pointed out that Explanation 4 to section 9(1)(vi) of the Act was introduced in 2012 with retrospective effect from 1976. The learned Authorized Representative for the assessee pointed out that in financial year 2006-07, there was no such liability to deduct tax in the year. He further pointed out that the said liability to deduct the tax cannot be applied retrospecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arificatory in nature and hence, was applicable to earlier years. He placed reliance on the ratio laid down by the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. (supra) for the proposition that where the law was not clear, the assessee should have sought clarification. He also referred to the ratio laid down by the Hon'ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO (2014) 361 ITR 575 (Mad) to point out that the amendment was clarificatory in nature. 12. The learned Authorized Representative for the assessee pointed out that the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. (supra) had laid down that on any sum chargeable to tax in 2007 law as it stood then, ought to be applied. He further pointed out that on the basis of judicial precedents, no tax was deducted at source. He referred to the ratio laid down by the Special Bench of Delhi Tribunal in Motorola Inc. Vs. DCIT reported in 147 Taxman 39 (Del) (SB), which decided the issue of deductibility of software and intra-software. He fairly admitted that the decision which was against the assessee in DDIT Vs. Reliance Infocom Ltd. (2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ae Systems S.A 10,53,360 Software license Greece Beta Cae Systems S.A 1,46,300 Software license Greece Parametric Technology Corporation 1,37,009 Software license USA Proforma Corporation 40,329 Software license USA Spicer Corporation 42,437 Software license USA Tata Technologies Pte Ltd 14,17,522 Software license Singapore Total 56,43,917 14. The first issue which is raised in the present appeal is the taxability of software under the provisions of Income Tax Act i.e. section 9(1)(vi) of the Act. The first plea raised by the assessee is that since the said payment had been for purchase of offshore software and the payment has been made to acquire license for the use of shrink wrap software, then the same cannot be treated as 'royalty' under the Income Tax Act under section 9(1)(vi) of the Act. The case of Revenue on the other hand, is that in view of retrospective amendment to section 9(1)(vi) of the Act by Finance Act, 2012, the amount paid for acquisition of software was 'royalty'. The assessee on the other hand, submitted that the said amendment which was brought into effect by the Finance Act, 2012 cannot be applied to payments made by assessee for pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consider the decision of Co-ordinate Bench in the case of Allianz SE Vs. ADIT (2012) 51 SOT 399 (Pune) and also the decision of Hon'ble High Court of Delhi in DIT Vs. Ericsson A.B. & two others (2012) 343 ITR 470 (Del). Thus, the Tribunal vide order dated 06.12.2017 has recalled its order in Cummins Inc. (supra). It may also be noted that Mumbai Bench of Tribunal in bunch of Miscellaneous Applications had also recalled its order in DIT Vs. Reliance Infocom Ltd. / Lucent Technologies Hindustan Ltd., against which the Revenue filed Writ Petition before the Hon'ble Bombay High Court, which was also dismissed by the Hon'ble High Court vide order dated 08.08.2017 and approved the decision of Tribunal in recalling its earlier order in proceeding under section 254(2) of the Act. Once both the decisions on which the CIT(A) had relied on to dismiss the plea of assessee stands recalled, then we need to re-look at the issue. 17. Now, coming to the first aspect of the issue raised is whether the payment made by the assessee for purchase of software was in fact purchase of copyrighted article or thing or was purchase of copyright. The assessee has time and again pointed out that what it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized software was licensed to Indian customer. It was noted that in terms of license agreement, licensee was allowed to make only one copy of software and associated support information for backup purposes with the condition that such copyright would include infrasoft copyright. It was also noted that software was to be used only for licensee's own purpose and without consent of assessee that software could not be lent, rented, sub-licensed or transferred to third parties. The Hon'ble High Court in such facts held that it was case of mere transfer of right of use copyrighted material i.e. software programme and therefore, amount received by the assessee from its Indian customers did not give rise to any royalty income in terms of Article 12(3) of Indo-US DTAA. 19. In the facts of the present case, the assessee has not explained the terms of agreement with different entities from whom the software has been purchased and in the absence of the same, it could not be found that whether the same is for the right to use of copyrighted article or the right to use copyright. Further, we find no merit in observations of Assessing Officer in this regard. The Assessing Officer himself says th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,784 Ajira Technologies Inc, USA Purchase of software License-internet use-pilot testing of BPO 14.11.2007 3,93,800 Ajira Technologies Inc, USA Purchase of software License-internet use-pilot testing of BPO 07.02.2008 22,12,023 Total 1,52,15,205 15. The assessee was found to have defaulted in not deducting tax at source out of such payments and the Assessing Officer held the assessee to have defaulted under section 201(1) and further interest was charged under section 201(1A) of the Act. The plea of the assessee that it had purchased software which was akin to purchase goods and does not fall within the category of royalty or technical know-how, was rejected by the Assessing Officer. As per the Assessing Officer, the amounts paid fell within the definition of royalty or technical know-how and it was also held that these payments were taxable under DTAA. The case of the assessee before us was that when the payments were made for the under-mentioned purposes, there was no liability to deduct tax at source:- i) Purchase or license of computer software ii) Annual maintenance charges iii) Fees for accessing data base iv) Training and implementing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. Vs. ITO (Intr. Taxation) (supra), we hold that no liability can be fastened on the assessee to deduct tax at source on the basis of subsequent amendments made in the Act, in relation to earlier payments made to Non-residents, when the said amendment was not in force. We confirm the order of CIT(A) albeit on different grounds. The grounds of appeal raised by the Revenue are thus, dismissed." 23. Similar proposition has been laid down by the Mumbai Bench of Tribunal in Shinhan Bank Vs. DDIT (supra). It may be pointed out herein itself that on the date when the assessee was alleged to be liable to withhold tax out of payments made to Non-resident entities, the issue was covered in favour of assessee by different decisions of different Benches of Tribunal. Even the decision of the Hon'ble High Court of Karnataka applied by authorities below in CIT Vs. Samsung Electronics Co. Ltd. (supra) is rendered on 15.10.2011. Earlier, the Bangalore Bench of Tribunal had decided the issue in favour of assessee. In such scenario, the assessee cannot be held to be liable to withhold tax out of payments made to Non-resident. Accordingly, we hold that the amendment introduced by the Finance Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment was clarificatory in nature as held by the Hon'ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO (supra). The learned Authorized Representative for the assessee in this regard, pointed out that the Hon'ble High Court of Madras analyzed the applicability of Explanations 5 and 6 to section 9(1)(vi) of the Act. However, the applicability of Explanation 4 to section 9(1)(vi) of the Act was not before the Hon'ble High Court of Madras. Further, the clarificatory nature of amendment to section 9(1)(vi) of the Act was neither questioned nor decided, but was applied to assessment year pre-dating the amendment. However, reliance was placed on the decision of the Hon'ble High Court of Delhi in DIT Vs. New Skies Satellite BV (supra), wherein it was held that the amendment to section 9(1)(vi) of the Act by insertion of Explanation 4 would not have any effect on the interpretation of the term 'royalty' under the respective DTAAs. 26. We have already adjudicated similar issue in the case of M/s. T-3 Energy Services India Pvt. Ltd. Vs. JCIT in ITA No.826/PUN/2015, relating to assessment year 2010-11, order dated 02.02.2018 and held as under:- "16. The secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions were clarificatory and it had settled the matter i.e. reasoning in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) could not stand because the basis of that ruling had been undone. The second proposition which was raised was whether DTAA applied and resulted rendering activity non taxable was also argued by the Revenue would not arise, since the DTAA predated the amendment. The Counsel for the assessee therein however, contended that the matter was no longer res integra. It was argued that the Revenue could not contend that any change in the substantive law would automatically result any like change in respect of taxability of transaction or service which was otherwise taxed in terms of DTAA, or which was subject to lower rate of tax mandated by a treaty. Reliance in this regard was placed on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Seimens Aktiongesellschaft (2009) 310 ITR 320 (Bom) and the Hon'ble High Court of Andhra Pradesh in Sanofi Pasteur Holding SA Vs. Dept. of Revenue and Others (2013) 354 ITR 316 (AP). Reliance was also placed on the ratio laid down by the Hon'ble High Court of Delhi in DIT Vs. Nokia Networks OY (2013) 358 ITR 259 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this court, indefensible." 18. Referring to the decision of Apex Court in Union of India Vs. Azadi Bachao Andolan & Arn. (2003) 263 ITR 706 (SC) and The Vienna Convention on the Law of Treaties, 1969, the Hon'ble High Court held the amendments to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore, categorically prohibited. The Hon'ble High Court held that the words in the treaty would be controlled by definition of those 'words' in the treaty, if they are so provided. In case they are not provided, then the domestic law shall mandatorily supply the import to be given to the 'word' in question. The Hon'ble High Court concluded by holding that the amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It was thus, held that mere amendment to section 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and 6 have been added, which interalia, amends the definition of 'royalty' with retrospective effect. We hold that the same need not to be gone into since the issue otherwise stands decided in favour of assessee. The Hon'ble High Court of Delhi in DIT Vs. New Skies Satellite BV & Ors. (supra) have held that even though the term 'royalty' as used in section 9(1)(vi) of the Act has been amended by introducing Explanation retrospectively, but in view of no change in the definition of 'royalty' in DTAA, the beneficial provisions of DTAA would apply. The amendment made under the Act does not affect the terms of DTAA unless and until the same is amended by two Contracting States." 27. In the present case before us the Assessing Officer has held that the payment made by the assessee was 'royalty' as per definition of 'royalty' under the DTAA also. We find no merit in the said stand of Assessing Officer, in view of the issue being so held in DIT Vs. Infrasoft Ltd. (supra). We further hold that payment made for purchase of software was not royalty as per definition of 'royalty' under the DTAA between India and USA, Germany and Singapore, since the term 'royalty' under the DTAA with thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, and applying the ratio in CIT Vs. Seimens Aktiongesellschaft (supra), we hold that once a term has been defined in DTAA, then the said term is to be applied unless and until the parties to the DTAA amend the same. The Hon'ble High Court of Delhi in DIT Vs. Nokia Networks OY (supra) had applied the proposition laid down by the Hon'ble Bombay High Court in CIT Vs. Seimens Aktiongesellschaft (supra) and held that the amendments could not be read into the treaty. Unilateral amendment by the Indian Government to the term 'royalty' by way of amendment to section 9(1)(vi) of the Act cannot be extended to the meaning of the term 'royalty' defined under DTAA. 30. Applying the principle laid down by the Hon'ble High Court of Delhi in DIT Vs. New Skies Satellite BV (supra), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act being beneficial and the definition of 'royalty' having not undergone any amendment in DTAA, the assessee was not liable to withhold tax on the payments made for purchase of software. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended ..... X X X X Extracts X X X X X X X X Extracts X X X X
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