9911796707
TMI Blog2016 (9) TMI 1566X X X X Extracts X X X X X X X X Extracts X X X X ..... its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty. As decided in of Infrasoft Ltd. [ 2013 (11) TMI 1382 - DELHI HIGH COURT] DIT v. Erisson [ 2011 (12) TMI 91 - DELHI HIGH COURT] and DIT v. Nokia Networks OY [ 2012 (9) TMI 409 - DELHI HIGH COURT] concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. In ALCATEL LUCENT CANADA [ 2015 (5) TMI 431 - DELHI HIGH COURT] has held that sale of software is a sale of copyrighted article and ultimately held that the payment for the same is not in the nature of royalty With respect to the retrospective amendment by the Finance Act 2012, it has been held by Hon ble Delhi high court in case of DIT versus New Skies Satellite BV [ 2016 (2) TMI 415 - DELHI HIGH COURT] wherein it has been held that unless Double Taxation Avoidance Agreement is jointly amended by both the countries to incorporate particular income partaking the nature of royalty or amend definition in a manner s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014, ITA No. 1615/Del/2015, 1970/Del/2014 - - - Dated:- 26-9-2016 - Shri H.S.Sidhu, Judicial Member And Shri Prashant Maharishi, Accountant Member Assessee by : Sh. Nageswar Rao, Adv Revenue by: Sh. Dheeraj Batnagar, CIT DR ORDER Prashant Maharishi, 1. These are the six appeals filed by the assessee on identical issue and therefore are disposed off by this common order. Parties have agreed to argue and submit on appeal for assessment year 2007 08 as a lead case and therefore the facts noted for that year are later on applied in other appeals which are for subsequent years in case of the same assessee and reasons and decision is applied accordingly. 2. This appeal for assessment year 2007-08 is preferred by assessee against the order dated 30/10/2012 of Additional Director of Income Tax (International Taxation), range 3 , New Delhi [hereinafter referred to as Ld. assessing officer or Ld. AO ] passed under section 143 (3) read with section 147 of the Income Tax Act [hereinafter referred to as The Act ] pursuant to direction dated 24/09/2012 under section 144C (13) of the Ld. Dispute Resolution Panel [hereinafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitiation of such proceedings; 3.3.2 All the material facts and legal position in relation to the transactions undertaken by the Appellant were on record with the office of Director of Income-tax, International Taxation, New Delhi which is evident from the letter dated 4 November 2008 received from the Authority of Advance Rulings (AAR). 3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the amount received by the Appellant fulfilled the conditions of section 9(1)(vi) of the Act and hence is taxable as Royalty in India. 3.6 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by placing reliance on the order passed by the Hon'ble Income-tax Appellate Tribunal (ITAT) in case of Gracemac Corporation (now MOLC) for Assessment Years 1999-00 to 2004-05. 3.7 That on the facts and in law the Learned AO has erred in observing that: ..... 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India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions of Article 12(2) and Article 12(3}(a) of the India US tax treaty. 4.2 That on facts and in law, the Hon'ble DRP and Learned AO has erred in not appreciating that: 4.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 4.2.2 the benefits available under the India US tax treaty would still be available to the Appellant as the amendments in the Finance Act 2012 would not impact the treaty interpretation of the term royalty. 4.3 That on facts and in law, the DRP and the Learned AO erred in placing reliance on the decision in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on facts the Hon'ble DRP and the Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following: 4.13.1 that the payment received by the Appellant is related to number of software that is ultimately licensed and distributed in India; 4.13.2 that the payment of royalty is directly related to the source in India and, therefore it is taxable in India; 4.13.3 that the source of revenue derived by the Appellant is from licensing of software and utilisation/ exploitation of the license granted to the users in India; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tailers of Microsoft Corporation and subsidiary of Microsoft Corporation. Microsoft operations PTE Ltd, Singapore company has entered into a distribution agreement with Microsoft regional sales Corporation allowing it to distribute Microsoft software products in India amongst other countries. Microsoft regional sales Corporation makes payment to Microsoft operations PTE Ltd, a Singapore company, on the basis of the number of license it distributes and sells to end-users in India. In nutshell, the appellant receives royalty from Microsoft operations PTE Ltd, a Singapore company, on the basis of licensing of the software products of Microsoft in the territory of India by Microsoft regional sales Corporation and Microsoft regional sales Corporation to Microsoft operations PTE Ltd on the basis of the volume of licensing of such products distributors in India and Microsoft operations PTE Ltd in turn pays to the assessee. Thus the ultimate beneficiary of the licensing of Microsoft software products to end-users in India is the appellant. 5. On the basis of the above facts Learned assessing officer issued notice under section 148 of the Income Tax Act dated 25th of November 2010 req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 08. This is a fit case for initiating proceedings under section 148. Accordingly, notice under section 148 is issued to the assessee. 6. Against the above reasons recorded for reopening, assessee vide letter dated 24/01/2011, filed its detailed objection against the reassessment proceedings initiated by Ld. assessing officer wherein it is contended that reassessment proceedings are not valid and the amount received by the assessee is not taxable as royalty in India. The objections of the assessee were disposed of by an order dated 28/01/2011 by the Ld. assessing officer. 7. Subsequently Ld. assessing officer issued a show cause notice to the appellant stating that why the amount received by Microsoft regional sales Corporation of ₹ 7999960616/-from various distributors received for the period 02/10/2006 to 31- March - 2007 should not be taxed in the hands of the assessee as royalty . In response to that assessee contended that such amount is not chargeable to tax in the hands of the assessee in India. The Ld. assessing officer after considering the submissions of the appellant passed draft assessment order under section 143 (3) on 28/12/2011 wherein he propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Double Taxation Avoidance Agreement between India and USA. Ground No. 3.3 is also against validity of the reopening of the proceedings under section 148 of the act where in it is contended that that the reason to believe recorded by the Ld. assessing officer were based on the existing material available with the office of the Ld. AO and no new material has come to his notice for initiation of such proceedings. 10. On the merits of the case the Ld. authorized representative submitted that that the issue is now squarely covered in favour of the appellant in view of the decision of the Hon ble Delhi high court in case of DIT versus Infrasoft Ltd in ITA No. 1034 2009 dated 22nd of November 2013. He further referred to the various paragraphs of that decision of Hon ble Delhi high court and submitted that now the issue is squarely covered in favour of the appellant. He further referred to para No. 95 of that order to state that Hon ble high court has not examined the effect of the subsequent amendment to section 9 of The Income Tax Act as assessee is covered by the Double Taxation Avoidance Agreement, the provisions of which are more beneficial. Therefore he submitted that accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances of the case therefore the decision of the coordinate bench in assessee s own case should be followed. He further submitted that the decision of Hon ble Delhi high court now relied upon by the appellant in case of CIT versus Infrasoft Ltd does not apply to the facts of the case of the appellant. 12. In rejoinder, the Ld. authorized representative submitted that if there is a subsequent decision of the Hon ble high court then that decision should be followed and not the decision of the Hon ble tribunal. For this proposition he relied upon the decision of coordinate bench in Asit C Mehta versus DCIT (2006) 10 SOT 36 (Mum). He further relied up on para No. 21 of that decision and impressed upon us that decision of the coordinate bench should not be followed. He further referred to the decision of coordinate bench in case of ADIT versus TII Team Telecom International private limited (supra) wherein it is held that even the coordinate bench decision which is admittedly contrary to the earlier precedents on that issue from the other coordinate benches does not bind the subsequent coordinate benches. 13. We have carefully considered the rival contentions. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by end users is chargeable to tax as royalty u/s 9(1)(vi) of the Act. As per paragraph 7(a) royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. If the person paying royalty has a permanent establishment or a fixed base there in connection with which the liability to pay the royalties is incurred and the liability is borne by such establishment or base the royalty is deemed to arise in state in which the permanent establishment or fixed base is situated. As per Paragraph 7(b) the royalties relate to the use of, or the right to use, the right of property, in one of the Contracting States, the royalties shall be deemed to arise in that Contracting State. We have already held in paragraphs 75 to 82 of our order that a copyrighted article is one in which copyright subsists. We have also held that the considerations received by the non-resident assessee are for the use of, or the right to use copyright, patent, invention or process in India and consequently liable to tax in India u/s 9(1)(vi) of the Income tax Act, 1961. Further, we have also held that per Explanation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the Indian Income Tax Act and the Double Taxation Avoidance Agreement. 14. Comparing the software which was in issue before honourable high court in case of DIT V Infrasoft Limited we note that in that decision the issue was with respect to a customized software where as in the present case it is shrink wrapped software. Honourable High court classified the characteristic of software as a customized software to be used for designing highways, railways, airports, ports, mines, etc. The software so customized was licensed to an Indian customer and the branch office of the assessee in India performed services involving interface to peripheral installation and training etc. In the present case it is off the shelf / shrink wrapped software. According to us when the revenue from customized software is not considered as Royalty the issue in case of shrink wrapped or off the shelf software stands on much better footings. We also draw support from the recent decision of Coordinate bench Mumbai in ADIT V Baan Global BV 2016 71 Taxmann.com 213 (Mum wherein after considering all the decisions on the issue it is held as under that revenue from shrink wrapped software is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;. Under the terms of the agreement, as noted by the CIT (A), there is no transfer of any copyright in the software product. The payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT (A) in his order is reckoned as admitted facts. 11. Now, on these facts, we have to decide, whether the payment received by the assessee can be reckoned as royalty within the terms of article 12(4) of DTAA. Before that, the relevant paragraph of Article 12 dealing with the definition of royalty reads as under:- '4. 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, ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstanding the concept. Section 14 of the said Act defines the 'copyrights' to mean as under:- '14. Meaning of copyright - For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely:- (a) in the case of a literary, dramatic or musical work, not being a computer programme, - (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (a); (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling the software. The agreement also provides that the end user shall use the software only for the operation and shall not sublicense or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT (A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of shrink wrapped software off the shelf and hence, cannot be considered as a royalty within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright. 12. One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of 'royalty' as given therein should be read into the DTAA. We are unable to appreciate this contention of the Ld. DR because the retrospective amendment brought in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for copyrighted article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA. 92. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sublicence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software . The ratio of the above decision clearly clinches the issue which is applicable in the case of the assessee also. This ratio and principle has been followed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC), wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- In our view, the term goods as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as goods because the Code definition includes specially manufactured goods. 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. 6. This Court also noticed that the ITAT had in addition relied upon other judgment of this Court i.e. Director of Income Tax v. M/s. Nokia Networks, (2013) 358 ITR 259 (Delhi)'. Similar view has been reiterated in other decisions also as relied upon by the Ld. Counsel. Now that there are catena of decisions and case laws in favour of the assessee including that of the Delhi High Court on several occasions, we are inclined to follow the decision and proposition laid down by the Hon'ble Delhi High Court. Thus, in view of the finding given above, we uphold the order of the CIT (A) that the payment received by the assessee for sums amounting to ₹ 3,75,25,291/- does not amount to royalty within the meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA. 92. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been held by Hon ble Delhi high court in case of DIT versus New Skies Satellite BV 382 ITR 114 wherein it has been held that unless Double Taxation Avoidance Agreement is jointly amended by both the countries to incorporate particular income partaking the nature of royalty or amend definition in a manner so that such income automatically becomes royalty, The Finance Act, 2012 which inserted several explanations to section 9 (1) (vi) by itself would not affect the meaning of the term royalty as mentioned in article 12 of the Double Taxation Avoidance Agreement. Though Hon ble high court was concerned with the Double Taxation Avoidance Agreement between India and Thailand, however the principle laid down makes clear vide para No. 60 as under :- 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger remains a good law. 18. In view of the above facts it is apparent that after rendering of the decision of the tribunal based on which the reopening has been initiated by revenue and addition has been made in the hands of the appellant, the decision of the Hon ble Delhi high court in case of DIT V versus Infrasoft limited covers the issue in favour of the assessee. As the lower authorities did not have any benefit of the decision of the Hon ble Delhi high court while deciding the issue about the taxation of copyrighted article i.e. the software being sold by the appellant but have solely relied upon the decision of the coordinate bench in case of M/s Gracemac Corporation, it would be in the interest of the Justice to set the whole issue back to the file of the Ld. assessing officer to decide it afresh after considering the decision of Hon ble Delhi high court DIT versus Infrasoft Ltd (supra), applying it to nature of the software of the appellant, which covers the issue with respect to the sale of software holding that according to article 12 (3) of the Indo US DTAA, is a sale of copyrighted article , and is not chargeable to tax as royalty . In view of above, ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable in India in the hands of the Appellant under the provisions of the section 9(1)(vi) of the Act. 3.3 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion of the Learned AO in the Draft assessment order that the reassessment proceedings initiated against the Appellant were valid without appreciating that: 3.3.1 the reasons to believe recorded by the Learned AO were palpably perverse as the same were based on the existing material available with the office of the Learned AO and no new material had come to his notice for initiation of such proceedings; 3.3.2 All the material facts and legal position in relation to the transactions undertaken by the Appellant were on record with the office of Director of Income-tax, International Taxation, New Delhi which is evident from the letter dated 4 November 2008 received from the Authority of Advance Rulings (AAR). 3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term Royalty as defined in section 9(1)(vi) of the Ac. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is erroneous both in taw and on facts. Therefore, the additions made by the Learned AO are liable to be deleted. 4 Tax on revenue alleged as 'Royalty' under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant. 4.9 That on facts and in law, the Learned AO has erred in observing that even grant of one right in respect of a copyright or work would amount to transfer of the use of copyright. 4.10 That on facts and in law, the Learned AO has erred in observing that the Appellant has not received royalty in respect of any manufacturing rights. 4.11 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in ITA No.6091/Del/2012 as under:- 1. That on facts and in law, while passing the assessment order, the Additional Director of Income Tax, Range - 3, International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 23,305,639,377 as against 'Nil' income returned by the Appellant and therefore, the order of the Learned AO is bad in law and needs to be annulled; 2. Without prejudice to the below mentioned grounds of appeal, the Hon'ble Dispute Resolution Panel ('DRP') and Learned AO erred on the facts of the case and in law, in determining the income of the Appellant for the subject Assessment Year at INR 23,305,639,377 thereby completely ignoring the fact that the payments received by the Appellant from licensing of manufacturing and distribution rights to Microsoft Operations Pte Ltd. ('MO') pertaining to India was INR 13,983,383,626. 3. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act') and the recent jurisprudence 3.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, as the licences were sent to India in hard discs in large volumes; 3.7.2 the agreement between MO and MRSC clearly establishes that the Appellant is getting royalty out of licensing of software carried out in India; 3.7.3 the Appellant has given the license to end users in India to use the software which is sort of a lease of a software and the payments received against the same would constitute lease rentals and hence taxable as Royalty: 3.7.4 the consideration received by the Appellant is payment for a 'process' and is thus covered under section 9(1)(vi) of the Act; 3.7.5 the consideration received for use of software is towards consideration for use of patented article and inventions; 3.7.6 as per the provisions of section 9 of the Act, the payments made for import of software are royalty payments and the only exception provided is for computer software supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under policy of Computer Software Export, Software Development and Training, 1986 of the Government of India; 3.7.7 the Appellant possesses right in copyright, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that domestic tax legislation of later date can over-ride treaty provisions if there is an irreconcilable conflict. 4.4 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 4.5 That on facts and in law, the Hon'ble DRP and Learned AO erred in disregarding OECD commentaries, US IPS regulations, International tax commentaries, UN model convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 4.6 That on facts and in law, the Learned AO has erred in interpreting the ratio laid down in the decision of P.V.A.L. Kulandagan Chettiar in an incorrect manner on relevance of OECD commentaries / US IRS regulations / International tax commentaries for interpretation of treaties. 4.7 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease of software / software renting. 4.14 The Learned AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant. 4.15 Without prejudice to the above grounds, the Learned AO has erred in levying interest under section 234B of the Act while completely disregarding the provisions of the Act and the various judicial precedents decided in favour of taxpayers on this issue. 26. It was submitted before us that the issue involved in the present appeal are identical to the appeal of the assessee for assessment year 2007 08. The mainly ground No. 3 and ground No. 4 of the above appeal are against the action of the Ld. Assessing officer in charging the income of the appellant as Royalty . It was further submitted that argument of the parties remains the same as arguments advanced by them for assessment year 2007-08. 27. We ve carefully considered the rival contentions. The only issue involved in the appeal of the assessee is that that whether the income received by it is chargeable to tax as royalty. We have decided this issue in the appeal of the assessee for assessment year 2007 08 wherein we set aside the whole issue to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valid without appreciating that: 3.3.1 the reasons to believe recorded by the Learned AO were palpably perverse as the same were based on the existing material available with the office of the Learned AO; 3.3.2 the reassessment proceedings were initiated by the office of the Learned AO since no action had been taken by your office within the time limit provided under section 143(2) of the Act.3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the amount received by the Appellant fulfilled the conditions of section 9(1)(vi) of the Act and hence is taxable as Royalty in India. 3.6 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by placing reliance on the order passed by the Hon'ble Income-tax Appellate Tribunal (ITAT) in case of Gracemac Corporation (now MOLC) for Assessment Years 1999-00 to 2004-05. 3.7 That on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions of Article 12(2) and Article 12(3}(a) of the India US tax treaty. 4.2 That on facts and in law, the Hon'ble DRP and Learned AO has erred in not appreciating that: 4.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 4.2.2 the benefits available under the India US tax treaty would still be available to the Appellant as the amendments in the Finance Act 2012 would not impact the treaty interpretation of the term royalty. 4.3 That on facts and in law, the DRP and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in confirming the conclusion drawn by Learned AO in the Draft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on facts the Hon'ble DRP and the Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following: 4.13.1 that the payment received by the Appellant is related to number of software that is ultimately licensed and distributed in India; 4.13.2 that the payment of royalty is directly related to the source in India and, therefore it is taxable in India; 4.13.3 that the source of revenue derived by the Appellant is from licensing of software and utilisation/ exploi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order by holding that the revenue earned by the Appellant from sale of Microsoft Retail Products to distributors in India is royalty under Article 12 of the India US tax treaty; 2.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not appreciating that: 2.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 2.2.2 the benefits available under the India US tax treaty have not been impacted by the amendments in the Finance Act, 2012 in any manner. 2.3 That on facts and in law, the Hon'ble DRP and the Learned AO grossly erred in not following the judgment of the Hon'ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd (ITA 1034/2009) which is binding on the lower tax administrative bodies and the other judicial precedents as they are squarely applicable to the facts of the Appellant. 2.4 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not following the decisions of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A.B. and Metapath (ITA 504 / 2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relie ..... 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Appellant was engaged in only distribution of Microsoft software products to distributors / resellers outside India and no right has been passed by the Appellant to distributors in the entire transaction; 3.3.7 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term Royalty as defined in section 9(1)(vi) of the Act. 3.4 That on the facts and in law, the Learned AO erred in placing reliance on the Explanations 4, 5 and 6 inserted by Finance Act 2012 completely disregarding the detailed submission filed by the Appellant that the said explanations did not have any bearing on the position of non-taxability of revenue earned by Appellant in the Act as well as the Double Taxation Avoidance Agreement between India and US ('India US tax treaty'}. 3.5 That on the facts and in law, the Learned AO erred in placing reliance on the judgment of Hon'ble Supreme Court in the case of Swadeshi R Anjan Sinha vs. Hardev Banerjee (AIR 1992 SC 1590). 4 That on facts and in law, the Learned AO gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al raised by the assessee in ITA No.1970/Del/2015 as under:- 1. That on facts and in law, the Dy. Director of Income Tax, Circle - 3(2), International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 23,730,653,027 as against the returned income of INR 278,410,925. 2. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act'): 2.1 That on facts and in law, the Hon'ble Dispute Resolution Panel (DRP) has erred in confirming the variations proposed by the Learned AO in the draft assessment order as against the Returned Income by holding that the revenue earned by the Appellant from the Indian Distributors is taxable in the hands of the Appellant as royalty under the provisions of section 9(1)(vi) of the Act. 2.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the payment made by the Indian distributors to the Appellant is towards the use of copyright and not for the purchase of copyrighted article and therefore, the same is royalty under section 9(1)(vi)of the Act. 2.3 That on facts and in law, the Learned AO has erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the variations proposed by the Learned AO in the Draft assessment order by holding that the revenue earned by the Appellant from sale of Microsoft Retail Products to distributors in India is royalty under Article 12 of the India US tax treaty; 3.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not appreciating that: 3.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 3.2.2 the benefits available under the India US tax treaty have not been impacted by the amendments in the Finance Act, 2012 in any manner. 3.3 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not following the judgments of the Hon'ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd (ITA 1034/2009) and the judgment of the jurisdictional ITAT in the case of Convergys Customer Management Group Inc. vs. ADIT (ITA No. 1443 I 2012)(Del ITAT) which are squarely applicable to the facts of the Appellant. 3.4 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not following the decisions of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A.B. and Metapath (ITA 504 / 2 ..... 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