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TMI Blog2016 (10) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... i for the quantum of assessment passed under section 150. In the grounds of appeal, revenue has raised following grounds:- 1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the data processing cost paid by the assessee does not amount to Royalty and is only business income of the Head Office. 2. On the facts and in the circumstances of the case and in law, CIT(A) erred in holding that Indian branch of the assessee was not obliged to deduct tax at source while making payment of data processing cost to the Head Office and that section 40(a)(i) of the Act is not applicable to this payment. 3. On the facts and in the circumstances of the case and in law, CIT(A) has erred in holding that the definition of the Income Tax Act in sec.9(1)(vi) read with explanation 4 5 would not be applicable in case where Royalty has been defined under the treaty. 4. On the facts and in the circumstances of the case and in law, CIT(A) was not justified in holding that interest payable by the Indian Permanent Establishment of the foreign bank to its HO and is deductible while computing the total income. 5. On the facts and in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act are being sought to be read into DTAA by virtue of Article 3(12) of the modern treaties; v) Section 9(1)(vi) up to and including Explanation 2 are substantive provisions as inserted by Finance Act 1976 and thereafter, Explanation 3 to 6 are only clarificatory provisions inserted subsequently; and vi) It is not disputed by the revenue that the provisions of DTAA if beneficial to the assessee shall be preferred over the provisions of the Income-tax Act. He further submitted that, the Hon ble Bombay High Court decision in the case of Siemens Aktiongesellschaft (supra) would reveal that, i) Nowhere in the said order, the High Court has held that Amendments/Explanations cannot be read into DTAA as it was not question before the Hon ble High Court; ii) The natures of services rendered in the said case were found to be not Royalty under the DTAA though found to be Royalty under the Act. Those services were found to fall under the expression commercial or industrial profits as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. The provisions of DTAA being the beneficial to the assessee were preferred over the provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the world. When the Mumbai Branch was set up, the Branch was allowed to use the said software by making it assessable through servers located at Belgium. The Branch sends its data to the Belgium server from where the data gets processed as per the requirement of the banking operations. As per the terms of agreement between the Branch and the Head Office for the usage of software by the Branch, which has been incorporated above, it is evident that the Head Office only has the non exclusive non transferrable rights to use the computer software brought for personal use and clause 16 of the said agreement specifically provides that the Head Office does not have any right to assign, sub license or otherwise transfer the license of this agreement. Thus, the payment by the Branch for use of computer software is not the right in the copy right but only for doing the work from the said software which subsist in the copy right of the software. The branch is using the computer software and the I.T. resources installed at Belgium for which the payment is made by the Head Office towards the use of such software license. Since the Branch is using the same software for the purpose of business op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusive and independent use or right to use the software and for such usage, payment has to be made in consideration thereof. It is not the case of the Revenue that the Head Office has provided any copy right of software or any copyrighted article developed by the Head Office for the exclusive use of the assessee for, which the assessee is making the payment along with the mark up exclusively for the purpose of royalty. If the payment for license for the software which is installed in the Head Office is being made by the Head Office, then any allocation of cost and reimbursement thereof by the Branch to the Head Office cannot be termed as independent payment for the purpose of royalty. To fall within the ambit of royalty under Article, the payment should be exclusively qua the use or the right to use the software exclusively by the Branch. The character of the payment under the royalty transactions depends upon the rights that the transferee acquires in relation to the use and exploitation of the software programme. Here, there is no such right which has been acquired by the Branch in relation to the usage of software, because the Head Office alone has the exclusive right of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the .hands of the Australian company either. It is also by now settled that the payment for software is for a copyrighted article and not copyright per se, and, therefore, is not covered by the scope of payment for copyright. The authority for this proposition is contained in Special Bench decision in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (Del)(SB), Samsung Electronics Company Ltd. v. ITO (2005) 94 ITD 91 (Bang), and Lucent Technologies Hindustan Ltd. v. ITO (2005) 92 ITD 366 (Bang). It is not even the revenues case that the payment in question is not (sic) for the use of, or right to use of, patent, design or model, plan, secret formula or process, or trade mark. In any event, having perused these classifications and having considered the facts before us, we are of the considered view that the payment does not fit into any of these classifications. It is, however, contended that the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use of, the mainframe computer, nor is it permissible to allocate a part of the impugned payment, as attributable to use of, or right to use of, mainframe computer. Accordingly, the provisions of article 12(3)(b) cannot have any application in the matter. 18. Insofar as the reliance placed by the learned Departmental Representative on the decisions of the Madras High Court and also the scope of royalty as given in Explanation 4 and 5 to section 9(1)(vi) brought in statute by the Finance Act, 2012 are concerned, we find that the same is not tenable for the reason that once the assessee has opted for the benefit of the DTAA, then there is no requirement for resorting to the definition and the scope of royalty as given in section 9(1)(vi). The said amendment cannot be read into the treaty and will not influence the definition of royalty , as given in Article 12(3). This proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression laws in force . ********** ********* ********* While considering the Double Tax Avoidance Agreement the expression laws in force would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article 1(2). Considering the express language of article 1(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the Double Tax Avoidance Agreement was entered into. 49. It is essential to note the context in which this judgment was delivered. There, the Court was confronted with a situation where the word royalty was not defined in the German DTAA. Following from our previous discussion on the bifurcation of terms within the treaty, in situations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic laws in force . It was in this context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Hon ble Special Bench in the case of the Sumitomo Mitsui Banking Corpn., wherein, the assessee was also one of the party. Since the aforesaid issues has been decided consistently in favour of the assessee, therefore, in the present case without there being any change in the material facts, we are bound to follow the said judicial precedence and accordingly, grounds No.4 to 6 are treated as dismissed. 7. So far as the alternative plea taken by the Ld. CIT DR that, the disallowance under section 14A should be made on the interest expenditure if the interest income is treated as exempt, we are unable to admit the said additional plea for the reason that, firstly, it is neither the case or disallowance made by the Assessing Officer nor there is any discussion or the case of the Ld. CIT(A). Therefore, the Department without seeking permission to raise the additional ground based on foundational fact before us, such a altogether new issue cannot be roped in when there is no discussion on the foundational fact. Thus, such plea taken by Ld. CIT DR stands dismissed. 8. In the result, appeal of the Department is dismissed. Order pronounced in the open court on 26th October, 2016. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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