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TMI Blog2018 (1) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Delhi High Court decision which is in favour of the assessee. As against this there are decisions of Hon ble Karnataka High Court which are in favour of revenue. In this regard we note that Hon ble Apex Court in the case of vegetable products 88 ITR 192 [ 1973 (1) TMI 1 - SUPREME COURT] had held that if two constructions are possible one in favour of the assessee should be adopted. Accordingly respectfully following the precedent we follow the Hon ble Delhi High Court decision. Accordingly we set aside the order of authority below. We hold that the transfer / sale of software in this case is not taxable as royalty. Hence the assessee was not liable to deduct tax at source u/s 195 of the Incometax Act, before remitting the money to the US supplier. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of CIT Vs Samsung Electronics Co Ltd and Others (ITA No 2808 of 2006 and others). 6. The learned CIT(A) has erred in law and in facts, by upholding the order of the learned A.O., deeming the Appellant as an assessee - in -default for nondeduction of taxes at sources under section 195 of the Act. 7. The learned CIT(A) has erred in law and in facts, by confirming a sum of ₹ 5499,090 (# 1) as payable the appellant under section 201(1) of the Act for A.Y. 2009-10. 8. The learned CIT(A) has erred in law and in facts, by confirming the amount of ₹ 14,74,990 (# 2) as interest under section 201(1A) of the Act for A.Y. 2009-10. (# 1) - ₹ 4926,310/- for A.Y. 2010-11 (# 2) - ₹ 9,66,000/- for A.Y. 2010-11 3. During the financial years 2008-09 and 2009-10, the assessee company had made payments towards purchase of licensed software from the following foreign companies, collectively known as Shell Overseas entities: Sl. No. Name of the foreign company to whom payments were made F.Y. Total payment in Rs. 01 Shell International BV 2008-09 25,43,600 02 Shell International BV 2009-10 21,70,256 03 Shell Global Solutions Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reproduce the work in any material form or to make any translation of the work or to make any adaptation of the work it would be construed as the grant of a right to use the copy right in the computer program. The right granted to the assessee to use the software should not be regarded as the right to use the copyright since it involves only a mere transfer of user right of a copyrighted article to another person and does not to allowing the use of the copyright by such other person. In support of its claim that the payments in question are not fees for technical services, it is submitted that no managerial, technical or consultancy services were received. It was also submitted that as the sum paid to the above companies not taxable in India, there is no liability to deduct tax in respect of the same. The assessee quoted several case laws in support of its claim wherein it has been held that the payments for the import of software is not royalty. 5. However assessing officer was not convinced. He elaborately considered the issue and concluded as under; From the above discussion, it has been proved that the payment made by the assessee to the Suppliers, as listed above, du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of ail or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. "Explanation 5:- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- a) the possession or control of such right, property or information is with the payer; b) such right, property or information is used directly by the payer; c) the location of such right, property or information is in India. In view of the above, tax u/s. 201(1) and consequential interest u/s. 201(1A) of the Income Tax Act, 1961 imposed by the Assessing Officer for the above assessment years is upheld. 8. Against above order, the assessee is in appeal before us. 9. We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the issue is covered in favour of the assessee by several decisions of the ITAT, Mumbai. He s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents made by the Appellant to Non-Resident ('NR') entities in the financial years 2008-09 and 2009-10. In the instant case, the order under section 201 (1) & 201 (1A) of the Income-tax Act, 1961 ('the Act') was passed I* the Officer in Bangalore on 11 March 2011 and the 'CIT(A)' order was passed by the CIT(A), Bangalore on 30 May 2012. The Appellant against the order passed by the CIT(A), Bangalore, filed an appeal before the Bangalore Income Tax Appellate Tribunal ('ITAT') on 24 July 2012. The Appellant filed an application for the transfer of files to the Mumbai jurisdiction before the AO vide letter dated 30 July 2012 (enclosed as Annexure 2). Subsequently, the AO passed an order dated 24 August 2012 (enclosed as Annexure 3) for transfer of files from Bangalore to Mumbai as the Appellant (amalgamated company) is assessed to tax in Mumbai. On receipt of the order, the Appellant filed an application for transferring the captioned appeals from Bangalore ITAT to Mumbai ITAT on 29 August 2012 (enclosed as Annexure 4). Considering the application filed by the Appellant, the President of the Tribunal transferred the optioned appeals to Mumbai ITAT vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the submission of the ld. Counsel of the assessee that there is no Hon'ble Bombay High Court decision on this issue. In such circumstances, the co-ordinate bench of this tribunal in National Stock Exchange of India Ltd. (in ITA no.7735/Mum./2011 dated 18.05.2017) has considered identical issue as under: 6. We have heard both the counsel and perused the records. 7. Ld. Counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by decision of Hon'ble Delhi High Court. He further referred to several other case laws of tribunal in favour of the assessee. The submissions of the Ld. Counsel of the assessee which were also before the Ld. CIT-A in brief are as under: "The appellant has purchased software for the internal use and is operational software. The appellant was granted non-exclusive & perpetual license to use the software enumerated in the agreement solely for internal operation. The general terms and conditions and the restrictions under which the said software is provided to the appellant, under the license agreement are as follows: (i) The appellant has no right to use, copy, duplicate or display the software except as speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of all or any rights (including the granting of a license), inter-alia, in respect of any copyright is treated as royalty income. Thus, transfer of rights in respect of copyright is envisaged and unless the transferee does not acquire and enjoy the same rights as that of the transferor, it cannot be said that there is any such transfer as envisaged in clause (v) of Explanation (2) to section 9(1)(vi). In the instant case nonexclusive and non-transferable license has been granted to the appellant. As licensee, the appellant is allowed to use the software only for its own business without any liberty to loan, rent, sell, sub-license or transfer the said software or any rights therein. Therefore, it cannot be said that there is any transfer of all or any rights in the software purchased by the appellant. The definition of the term "Royalty" under the Indo-USA D.T.A.A. is as under: The term "Royalties" as used in this Article 12(3) means: "a) Payments of any kind received as consideration for the use of, or right to use, any copyright of a literary, artistic to use, any copyright of a literacy, artistic or scientific work, including cinematograph, film ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, no operations have been carried in India i.e. no part of the business activities is carried in India by the non-resident sellers. Therefore, the income does not accrue or arise in India and hence there being no liability to income-tax in India, there is no withholding tax liability on such payments." 8. Various decisions relied upon by the Ld. Counsel of the assessee are as under: (a) DIT vs Infrasoft Ltd. (264 CTR 329) (Del He) (b) DIT vs Nokia Networks QY (358 ITR 259) (Del He) (c) DIT vs Ericsson A. B. (343 ITR 470) (Del He) (d) CIT vs Halliburton Export Inc (ITA No 363 of 2016) (Del He) (e) DDIT vs Reliance Industries Ltd (159 ITO 208) (Mum ITAT) (f) Capgimini Business Services (India) Ltd Vs ACIT (158 ITD 1) (MUM ITAT) (g) ADIT vs. Baan Global BV (ITA No 7048/Mum/2010) (Mum ITAT) (h) Galatea Limited vs CIT (157 ITD 938) (Mum ITAT) (i) ADIT (IT) vs First Advantage (P) Ltd (77 taxmann.com 195) (Mum ITAT) 9. Per contra Ld. DR submitted that though the Hon'ble Delhi Court has decided the similar issue in favour of the assessee there are Hon'ble Karnataka High Court decisions which are in favour of the revenue. He submitted that the Hon'ble Karnataka High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that: ".....The Bombay High court seems to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of "law in force". We express no opinion in this regard since it is not in issue before this court...." 12. Hence Ld. DR pleaded that in view of the above pleadings this issue should be decided in favour of the revenue. 13. We have carefully considered the submissions and perused the records. Before proceeding further we may refer to the relevant law and clauses of DTAA - Section 9(1)(vi) : The following income shall be deemed to accrue or arise in India. Income by way of Royalty payable by (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in Para 1 or article 8 (Shipping and Air Transport) from activities described in Para 2(c) or 3 article 8." We find that identical issue was considered by this tribunal in ADIT (IT) Vs. First Advantage P. Ltd (77.Taxmann.com 195). Where similar item and same DTAA with USA was under consideration. The tribunal vide order dated 11.01.2017 had held as under, in favour of the assessee "We have heard rival contentions and perused the record. The Ld D.R placed his reliance on various case laws including the decision rendered by Hon'ble Karnataka High Court in the case of Cit Vs. CGI Information Systems & Management Consultants (P) Ltd (2014)(275 CTR 72), Synopsis International Old Ltd (2013)(212 Taxman 0454) and CIT Vs. Samsung Electronics Co Ltd (2011)(245 CTR 0481) in order to support the order passed by the AO. On the contrary, the Ld A.R submitted that the assessee has obtained only license to use the software. He submitted that the assessee is entitled to use the software for its internal business operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de in the Income tax Act. We notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V (supra) has considered an identical issue and rendered its decision as under: "10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of "royalty" or business income. In case, if it is a 'business' income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India and if it is a "royalty", then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within the terms of "royalty" under Article 12(4) of IndiaNetherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo Netherland DTAA, therefore, the payment received by the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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". From the plain reading of the article it can be inferred that, it refers to 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. Thus, in order to tax the payment in question as "royalty", it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting 'royalty' in Para 4 are for a consideration for the 'use of' or the 'right to use' any copyright.......... The key phrases "for the use" or "the right to use any copyright of'; "any patent.......; "or process", " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental." (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) In the case of cinematograph film, (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the treaty has not been correspondingly amended in line with new enlarged definition of 'royalty'. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of "royalty" in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the 'royalty' has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter 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." Identical view has been expressed in the following cases also:- (a) M/s Quaolcomm India P Ltd Vs. ADIT (ITA Nos. 1664 to 1667/Hyd/2011) (b) Reliance Industries Ltd & Ors (47 CCH 94)(Mum-Trib) (c) Capgemini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ischief of clause (vi) the Explanation to section 9(1) would have no application. The payment received by the assessee was towards the title and GSM system of which soft- ware was an inseparable part incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment, therefore could be classified as payment towards royalty." 16. From the above case laws it is amply clear that it has been held that the software sold by M/s. Minitab Inc USA to the assessee fell into the category of "copyrighted article" against acquisition of "copyright" which qualified as royalty payment. Furthermore Hon'ble Delhi High Court had held that even if the item was regarded as royalty payment as defined in explanation to Section 9(1)(vi) nevertheless the DTAA would prevail where royalty is dependent upon the use of the copyrights and not a lump sum as was in the present case. That once the payment in question was not royalty which would, within the mischief of clause (vi) the explanation to section 9 (1) would have no application. 17. In this regard we have noted that Hon'ble Karnataka High Court has taken a contrary view as under in the case of CIT vs. Samsung E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue Service. He had also submitted that this interpretation is supportive of internal revenue of the USA as majority of the software and the copyrights originate from USA. By terming such transfer of software which are under copyright in the USA as copyrighted article the software sellers of the USA where taken out of the ambit of taxation of the other countries which were purchasing/acquiring the software. Furthermore Ld. Counsel of the assessee has pleaded that after the insertion of explanation iv to Section 9(i)(iv), this software sale has also come under the ambit of royalty. However Hon'ble Delhi High Court has applied the static approach under which domestic law as at the time of the entering of the DTAA is applied and not the domestic law as prevailing as which the ambulatory approaches mandates. He has further submitted that eminent author Klaus vogel has also favoured the ambulatory approach. He has further mentioned the Hon'ble jurisdictional Bombay High Court has also favoured ambulatory approach in some other decisions. We also note the Ld. CIT-A has referred to a decision of Federal Court of Australia in the case of IBM vs. CIT (supra) which held that similar paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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