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TMI Blog2018 (11) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... unds of appeal: I. Ground No. I - Indian subsidiary Considered As Permanent Establishment (PE) of the Appellant 1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that TTI Team Telecom Software Pvt. Ltd. (hereinafter referred to as 'TTI India') is a Dependent Agent PE of the appellant company in India and assessed an amount of INR 39,84,177 as business income without appreciating the fact that the condition prescribed under Article 5(5) of India - Israel Double Taxation Avoidance Agreement (DTAA) are not satisfied. 1.2 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in disregarding the fact that TTI India has independently entered into an agreement with Reliance Communication Limited and held TTI India as a representative of the appellant in India and accordingly PE of appellant. 1.3 The Appellant contends that on facts the learned CIT(A) has erred in wrongly interpreting the facts and clauses of agreements. 1.4 Without prejudice to the above, the appellant contends that even if the income earned is taxable as Business Profits, then the executive and general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r.w.s. 144C(3) on 03.04.2014. The Assessing Officer while passing the assessment order treated the receipt of ₹ 39,84,177/- as Business Income holding that the condition prescribed under Article5(5) of India- Israel Double Taxation Avoidance Agreement (DTAA) are not satisfied. The Assessing Officer while treating the receipt as a Business Income followed the view taken by Assessing Officer in earlier Assessment Years. On appeal before the ld. CIT(A), the action of Assessing Officer/TPO was sustained. Therefore, further aggrieved, the assessee has filed the present appeal before us. 3. We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee submits that the identical issue has been decided in favour of assessee by the Tribunal in assessee s appeal for Assessment Years 2006-07, 2008-09, 2009-10 2010-11. It was further submitted that by following the decision of earlier year, the Tribunal in appeal for Assessment Year 2012-13 followed the earlier year s decision. Thus, the Ground No. 1.1 of the appeal is completely covered in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to M/s. Reliance Infocom Ltd.( subsequently name changed to Reliance Communication Ltd.) constituted payment of royalty within the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA between India and Israel. It is noted by us that as discussed in detail above, the impugned amounts have been received in pursuance to an agreement between the assessee and Reliance dated 27th September, 2002 (entered into the period relevant to A.Y. 2003-04). The AO has contended in the order that an amendment has been made in the said agreement vide supplementary agreement dated 17th September 2007, which has brought out a material change and that is why decision given by the Tribunal in earlier orders needs to be deviated. We have analysed this contention very carefully. It is noted by us that agreement dated 27th September 2002 has been analysed by the Tribunal twice in two separate orders i.e. for A.Y. 2003-04 and A.Y. 2006-07 and detailed orders were passed wherein it was observed, after analyzing various clauses of the agreement and position of law, that the impugned amount did not constitute royalty in the hands of the assessee. Under these circumstances, we shall not repeat t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reless Reliance Network, under the terms and conditions of the limited license as specified herein; or (iv) the transfer or assignment by Reliance of the Software Licenses to a Reliance Affiliate (or vice versa) in conjunction with a transfer of a portion of the wireless Reliance network to be operated in the territory of India only, provided that in each such case specified in (i)-(iv) above, such transferee, assignee, or outsourcee agrees in writing to abide by all the terms and conditions set forth in the software Licenses and the TTI is informed of the same in writing by Reliance and provided further that the rights transferred, assigned or granted to outsources, as the case may be shall be those reasonably necessary, to fulfill the commercial purposes of such transaction. (c) Notwithstanding any statement in this Agreement to the contrary, Reliance may permit use under the limited license of the Software (or any part thereof) under the terms of any agreement between reliance and any third party (Contractor Agreement ) including without limitation, consultant programmers, system integrators, system maintainers, outsourcing or disaster recovery or other service suppliers (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Software, then until such events have occurred Reliance shall be entitle to terminative this agreement by written notice provided that Reliance has given written notice and details of such breach to TTI and has advised TTI of its intention to terminate and TTI has failed to deliver the Source Code to the Escrow Agent within thirty (30) days from Reliance s notice thereof no payment obligation with respect to such software or nay support services (and if Reliance has previously paid any sums in respect thereof, TTI will promptly refund all such sums to Reliance). 11.2. Release of Source Code. Upon occurrence of the conditions described in the Escrow Agreement (each, a Release condition ) the Source Code placed in escrow will be delivered to Reliance for us, copying in connection with Reliance s use, maintenance and support of the software in accordance with its rights under this Agreement. 11.3 License; Ownership. TTI hereby grants and agrees to grant to Reliance a perpetual, non-exclusive, worldwide license to use, copy, and create derivative works the purposes specified in Section 11.2 (the Derivative Works ). Reliance will be the exclusive owner of any modifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentary agreement, though scope of usages of the software for relatively wider range of products has been increased, but all other terms and conditions remained same. We do not find any change much less any material change in the terms and conditions of the original agreement which may have any bearing on the decision which has been taken by the Tribunal in earlier years. One of the main objections which had been prominently discussed by the lower authorities is with respect to transfer of source code by the assessee to Reliance. It is noted by us that firstly, as discussed above, the source code was intended to be provided by the assessee to Reliance only for the limited purpose of enabling it maintenance and support of software in accordance with its rights under the said agreement. Secondly, in any case, it has been informed that the aforesaid Escrow Agreement was never entered into and therefore, there was no question of providing any source code by the assessee to Reliance in this regard. The assessee had submitted on record a copy of declaration which reads as under: Declaration To whomsoever it may concern 1. Exhibit C of the Original Software Supply and Lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paras 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 PE situated therein, or perform in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such PE or fixed base. In such case, the provisions of art. 7 or art. 15, as the case may be, shall a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istic 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 [(1998) 229 ITR (St) 11] 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, trademark, 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 supplied was a copyrighted article and not a copyright right, and the payment received by the assessee in respect of the software cannot, therefore, be considered as royalty either under the IT Act or the DTAA . Right now we are only concerned with the provisions of the tax treaty, and we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , literary, artistic or scientific work a provision which is clearly larger in scope than the provision of art. 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 s. 90(2) of the Act, the provisions of India Israel tax treaty clearly override this statutory provision. In Gracemac decision (supra), the Coordinate Bench was of the view that the provisions of the applicable tax treaty and the IT Act are identical -a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac decision (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for process as a computer program is nothing but a set of instruction lying in the passive state and this execution of instructions is a process or a series of processes . No doubt, in terms of the provisions of s. 2(ffc) of the Indian Copyright Act, 1957, a computer program, i.e. software, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 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 hypertechnical 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, trademark, 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 be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate Bench decision, which is admittedly contrary to earlier precedents on that issue from other Co-ordinate Benches, does not bind the subsequent Co-ordinate Benches. We have all the respect and admiration for the Co-ordinate 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 vs. State of UP AIR 1980 SC 1762 (p. 1764 of AIR 1980 SC ) every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent. A decision does not lose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned.... . Therefore, whatever be the points, right or wrong, which can be put against the Special Bench decisions, the Special Bench decision continues to have a binding force on this Division Bench. In our humble unders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration. Therefore, respectfully following the decision of Coordinate Bench in assessee s own case for assessment year 2008-09, 2009- 10 and 2012-13, the income earned by assessee is not taxable in India. In the result, Ground No. 1.1 of the appeal is allowed. 8. Ground No. 1.2 to 1.5 is in support of Ground No. 1.1, which we have allowed, therefore, the discussion on these grounds become academic. 9. Ground No.2 relates to reimbursement of expenses considered as Fees for Technical Services. The ld. AR of the assessee further submits that this Ground of appeal is also covered by the decision of Tribunal in assessee s own case for Assessment Year 2006-07 which was followed in Assessment Year 2008-09 and further followed in appeal for Assessment Year 2012-13. On the other hand, the ld. DR for the Revenue supported the order of authorities below. 10. We have considered the submission of the parties and perused the material available on record. We have noted that the Co-ordinate Bench in appeal for Assessment Year 2012-13 by following the decision of Tribunal for Assessment Year 2008-09 passed the following order: 13. We have considered rival submissions and peru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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