SHINHAN BANK, MUMBAI V. DDIT (IT) RG 2(1), MUMBAI

ITA 1936/MUM/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3521 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 30-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 21-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Double taxation relief; Retrospective amendment
• Section: 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE S/SHRI G.S.PANNU (AM) AND AMIT SHUKLA, (JM) ./ I.T.A. NO. 1936 / / MUM/20 1 4 ( / ASSESSMENT YEA R : 20 0 9 - 1 0 ) SHINH AN BANK, WOCKHARDT TOWERS, 5 TH FLOOR, WEST WING, BANDRA - KURALA - COMPLEX, BANDRA (E), MUMBAI - 400051 / VS. DY . DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) - 2 (1), 13 3 , 1 ST FLOOR, SCINDIA HOUSE, BALLARD PIER, MUMBAI - 400038 ( / APPELLAN T ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AA ACC2144A / APPELLANT BY SHRI DHANESH BAFNA AND MS.HIRALI DESAI / RSPONDENT BY SHRI JASBIR CHAUHAN / DATE OF HEARING : 07/04/2016 / DATE OF PRONOUNCEMENT : 4 /07/ 201 6 / O R D E R PER AMIT SHUKLA ( J M) THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 17.1.2014 , PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE INCOME TAX ACT, 1961 (THE ACT) IN PURSUANCE OF THE DIRECTION GIVEN BY THE DISPUTE RESOLUTION PANEL - II, MUMBAI , VIDE ORDER DATED 9.12.2013 . I N THE GROUND S OF APPEAL THE ASSESSEE HAS RAISED F OLLOWING GROUNDS : - ITA NO. 1936 / MUM/20 1 4 2 GROUND - APPLICABLE RATE OF TAX THE DDIT (IT) - 2(1), MUMBAI ['AO'] ERRED IN LAW AND ON FACTS IN REJECTING THE APPELLANT'S CLAIM FOR THE BENEFIT OF THE NON - DISCRIMINATION CLAUSE OF THE INDIA - KOREA DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA') AND TAXING THE APPELLANT'S INCOME @ 40% (PLUS SURCHARGE AND EDUCATION CESS) INSTEAD OF AT THE RATE APPLICABLE TO A RESIDENT TAX PAYER. THE APPELLANT THEREFORE, PRAYS THAT THE BENEFIT OF THE ARTICLE 25 OF THE DTAA BE GRANTED AND THAT ITS INCOME B E TAXED @ 30% INSTEAD OF 40% (PLUS SURCHARGE AND EDUCATION CESS). GROUND II - NONE DEDUCTION OF TAXES ON SOFTWARE CHARES THE AO ERRED IN LAW AND ON FACTS IN DISALLOWING SOFTWARE CHARGES PAID BY THE BANK AMOUNTING TO RS.5,05,715 FOR NON DEDUCTION OF TAX A T SOURCE. THE APPELLANT PRAYS THAT THE DISALLOWANCE MADE IN RESPECT OF SOFTWARE CHARGES PAID BY THE APPELLANT BE DELETED 2 . AT THE OUTSET, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT SO FAR AS THE ISSUE RAISED IN GROUND NO. 1 , IS CONCERNED, THAT IS WHETHER THE TAX RATE SHOULD BE APPLIED AT THE RATE OF 30% OR 40% , T HIS ISSUE STANDS DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE RIGHT FR OM THE ASSESSMENT YEARS 1997 - 98 TO 2006 - 07. THUS, THIS ISSUE WILL BE DECIDED AGAINST THE ASS ESSEE. TLD.DR ALSO ADMITTED THE SAME. 3 . AFTER CONSIDERING THE AFORESAID STATEMENT OF THE ASSESSEES COUNSEL AND ON PERUSAL OF THE TRIBUNAL ORDER IN ASSESSEES OWN CASE, ITA NO. 1936 / MUM/20 1 4 3 FOR THE EARLIER YEARS, FIND THAT THIS ISSUE HAS BEEN CONSISTENTLY DECIDED AGAINST TH E ASSESSEE WHEREIN IT HAS BEEN HELD THAT ASSESSEES INCOME WOULD BE TAXED A T THE RATE OF 40% PLUS SURCHARGE AND EDUCATION CESS , INSTEAD OF AT THE RATE APPLICABLE TO RESIDENT TAX PAYERS. THE TRIBUNAL DISCUSSED THE ENTIRE ISSUE IN DETAIL AFTER CONSIDERING THE ASSESSEES SUBMISSIONS ON ARTICLE 25 OF THE DTAA BETWEEN INDIA AND KOREA AND HELD THAT RATE OF TAX WOULD BE @ 40% . ACCORDINGLY , GROUND NO.1 IS DISMISSED . 4 . IN GROUND NO.2, THE ASSESSEE IS CHALLENGING THE DISALLOWANCE OF SOFTWARE CHARGES PAID BY THE BANK , AMOUNTING TO RS.5,05,715 FOR NON DEDUCTION OF TAX AT SOURCE UNDER SECTION 40(A)(I) OF THE ACT. 5 . BRIEF FACTS OF THE CASE ARE THAT , THE ASSESSEE HAS MADE PAYMENT TOWARDS SOFTWARE CHARGES TO COMAS INC , A KOREAN ENTITY WITHOUT DEDUCTION OF TAX AT SOURCE. COMAS INC , IS AN IT SOLUTION PROVIDER TO BANKS AND OFFERS SOLUTIONS IN THE AREAS OF BANKING, ELECTRONIC TRADING, INTERNET BANKING , CASH AND TREASURY MANAGEMENT. IT HAS PROVIDED A SOFTWARE OPTION CALLED EXIT SIGNON WHEREIN S WIFT MESSAGES CONTA INING TERRORIST NAMES ARE AUTOMATICALLY DEFLECTED TO ANOTHER QUEUE FOR THE OFFICER TO FURTHER CHECK ABOUT THE GENUINENESS OF THE TRANSACTION. THE BANK HAS BEEN PROVIDED WITH LOGIN AND ITA NO. 1936 / MUM/20 1 4 4 PASSWORD TO ACCESS THE SOFTWARE LOADED ON SERVERS IN KOREA. THE AO HELD THAT THE RELEVANT TRANSACTION RELATED TO A TRANSFER OF LICENSE TO USE OF THE SOFTWARE AND NOT SA LE AND ACCORDINGLY , PROVIS I ONS OF CLAUSE (VI) TO SUB - SECTION (1) TO SECTION 9 ARE ATTRACTED THAT IS, ANY PAYMENT MADE BY A RESIDENT TO ANY PERSON OUTSIDE IN DIA IS DEEMED TO BE INCOME OF THE RECIPIENT IN INDIA AS PAYMENT OF ROYALTY . HE FURTHER HELD THAT THE RELEVANT PAYMENTS , FALL WITHIN THE CATEGORY INCORPORATED IN EXPLANATION - 2 TO SEC. 9(1)(VI) . ON THE OTHER HAND, THE ASSESSEES CASE FOR NON - DEDUCTION OF TDS WAS THAT, THE LICENSE WAS FOR SALE OF THE SOFTWARE PRODUCT TO THE BANK AND WAS NON - RECURRING NATURE AND NOT FOR PROVISION OF SERVICES OF TECHNICAL NATURE. FURTHER, THE REMITTANCE HAS BEEN MADE ON ACCOUNT OF LICENCE SOFTWARE SOLD BY THE NON - RESID ENT COMPANY AND IS NOT IN THE NATURE OF ROYALTY, ALSO THEREFORE, NO TDS WAS DEDUCTIBLE. THE AO, AFTER DETAILED DISCUSSION AND CONSIDERING THE EXPLANATION 4 TO SUB - SECTION 9(1)(VI) OF THE ACT WHICH HAS BEEN BROUGHT IN THE STATUTE BY THE FINANCE A CT, 2012 WITH RETROSPECTIVE EFFECT FROM 1.6.1976, HELD THAT THE SAID PAYMENT FALLS WITHIN THE AMBIT AND SCOPE OF ROYALTY AS DEFINED U/S 9(1)(VI) AND ACCORDINGLY, THE ASSESSEE WAS OBLIGED TO ITA NO. 1936 / MUM/20 1 4 5 DEDUCT TAX AT SOURCE AT THE TIME OF PAYMENT AND THEREFORE , N ON DEDUCTION OF TAX AT SOURCE WILL ENTAIL THE DISALLOWANCE U/S 40( A)(I). 6. BEFORE US, THE LD.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT EXPLANATION 4 TO SECTION 9(1)(VI) WAS BROUGHT BY FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1.6.1976 , BY WHICH TH E SCOPE OF ROYALTY HAS BEEN EXPANDED , S PECIFICALLY TO INCLUDE THE USE OR RIGHT TO USE COMPUTER SOFTWARE INCLUDING GRANTING OF LICENSE IRRESPECTIVE OF M EDIUM THROUGH WHICH SUCH RIGHT IS TRANSFERRED HAS ALSO BEEN INCLUDE D IN THE AMBIT OF ROYALTY. THUS, AT THE TIME OF MAKING OF SUCH PAYMENT THERE WAS NO SUCH PROVISION UNDER THE ACT AND THEREFORE THE ASSESSEE COULD NOT HAVE WITHHELD THE TAX. IN SUPPORT OF THIS CONTENTION THAT NO LIABILITY CAN BE FA STEN O N T HE AS S E S SEE TO DEDUCT TAX AT SOURCE ON THE BASIS OF SUBSEQUENT AMENDMENT MADE IN THE ACT, HE RELIED UPON THE FOLLOWING DECISIONS: A) CHANNEL GUIDE INDIA LIMITED V/S ACIT (2013) 153 TTJ 432/(2013) 139 ITD 49 B) NEW BOMBAY PARK HOTEL PVT LD V/S ITO (2014) 61 SOT 105 (MUM ); C) DCIT V/S IG ATE COMPUTER SYSTEMS LTD (ITA NO.1174/PN/2013 AND D) STERLING ABRASIVES LTD V/S ITO HE FURTHER SUBMITTED THAT A T THE TIME OF PAYMENT THERE WAS A DECISION OF HONBLE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITA NO. 1936 / MUM/20 1 4 6 MOTOROLA INC. V/A ACIT 95 ITD 269 (SB) DELHI, H OLDING THAT SUCH KIND OF PAYMENT FOR LICENSE OF SOFTWARE IS NOT TO BE TREATED AS ROYALTY. ON MERITS, HE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD (DELHI HIGH COURT) [2013] 39 TAXMANN.COM 88/[2014] 220 TAXMAN 273 . 7 . THE LD. DR STRONGLY RELIED UPON THE ORDERS OF THE AO AND DRP AND SUBMITTED THAT THE AMENDMENT BROUGHT IN THE STATUT E BY WHICH EXPLANTION - 4 HAS BEEN ADDED TO SECTION 9(1)(VI) , ONLY CLARIFIES THE INTENTION OF THE LEGISLATURE AND THAT IS WHY, IT HAS BEEN BROUGHT WITH RETROSPECTIVE EFFECT FROM 1.6.1976 . M OREOVER, HERE IN THIS CASE, THE ASSESSEE HAS BEEN PROVIDING LICENSE TO USE THE SOFTWARE FOR WHICH THE PAYMENT HAS BEEN MADE , T HEREFORE, IT CLEARLY FALLS WITHIN THE AMBIT OF ROYALTY. HE FURTHER RELIED UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CA S E OF COMMISSIONER OF INCOME - TAX V/S SAMSUNG ELECTRONIC S CO . LTD . [2012] 17 TAXMANN.COM 250 ( KARNATAKA ) . 8 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER. THE PAYMENT TOWARDS SOFTWARE CHARGES TO M/S COMAS INC FOR PROCUREMENT OF SOFTWARE HAS BEEN TREAT ED AS ROYALTY BY THE AO. REVENUES STAND BEFORE US ITA NO. 1936 / MUM/20 1 4 7 IS THAT, NOW IN THE WAKE OF E XPLANATION 4 TO SECTION 9(1)(VI) THE PAYMENT ON ACCOUNT OF COMPUTER SOFTWARE INCLUDING GRANTING OF LICENSE WHICH HAS BEEN BROUGHT IN THE STATUTE BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1.6.1976 BRINGS SUCH TYPE OF PAYMENT WITHIN THE SCOPE AND AMBIT OF ENLARGED DEFINITION OF ROYALTY. ADMITTEDLY, AT THE TIME OF PAYMENT TO M/S COMAS INC FOR THE SOFTWARE CHARGES IN MAY 2008 BY THE ASSESSEE THERE WAS N O SUCH PROVISION UNDER THE ACT THAT TRANSFER OF ANY RIGHT FOR USE OR RIGHT TO USE THE COMPUTER SOFTWARE INCLUDED GRANTING OF LIC E NSE IRRESPECTIVE OF MEDIUM THROUGH WHICH SUCH RIGHT IS TRANSFERRED WAS NOT THERE IN THE STATUTE. THE CASE OF THE ASSESSEE HAS BE E N THAT IT HAS ONLY PURCHASED SOFTWARE FOR ITS BANKING BUSINESS AND LICENSE WAS GIVEN ONLY FOR USING THE SOFTWARE. THERE IS NO TRANSFER OF ANY COPY RIGHT ALBEIT IT WAS THE TRANSFER OF THE COPY RIGHTED ARTICLE. WITHOUT GOING INTO THE MERITS WHETHER T HE SAID PAYMENT WILL FALL WITHIN THE NATURE OF ROYALTY UNDER THE NEWLY AMENDED PROVISION BROUGHT WITH RETROSPECTIVE EFFECT OR NOT, W E ARE OF THE OPINION THAT , AT THE TIME OF MAKING OF THE PAYMENT THERE WAS NO SUCH PROVISION UNDER THE LAW TO TAX SUCH P AYMENT OF COMPUTER SOFTWARE AS ROYALTY. IN FACT, AS POINTED OUT BY THE LD. CIT(A) , THE DECISION OF SPECIAL BENCH IN THE ITA NO. 1936 / MUM/20 1 4 8 CASE OF MOTOROLA INC (SUPRA) WAS THERE WHEREIN IT WAS HELD THAT IF THE LICENSEES IS NOT ALLOWED TO EXPLOIT THE COMPUTER SOFT WARE COMMERCIALLY WHICH THEY HAD ACQUIRED REQUIRED UNDER THE LICENSE AGREEMENT AND ONLY THE COPY RIGHTED SOFTWARE WHICH BY ITSELF WAS AN ARTICLE AND NOT ANY COPY RIGHT THEREIN, THE N , THE PAYMENT MADE FOR COPY RIGHTED ARTICLE WHICH REPRESENTED THE PURCHASE PRICE CANNOT BE CONSIDERED AS ROYALTY UNDER THE PROVISION S OF SECTION 9(1)(VI) OF THE ACT. ONCE THAT IS SO, THEN IT IS VERY DIFFICULT TO HOLD THAT THE ASSESSEE SHOULD HAVE DEDUC T ED TDS ON SUCH PAYMENT WHEN THERE WAS NO CLEAR CUT LAW THAT SUCH A PAYME NT WOULD BE TAXABLE IN INDIA. HERE, THE MAXIM OF ' LEX NON COGIT AD IMPOSSPLIA , THAT IS, THE LAW OF THE POSSIBLY COMPELLING A PERSON TO DO SOMETHING WHICH IS IMPOSSIBLE, THAT IS, WHEN THERE IS NO PROVISION FOR TAXING AN AMOUNT IN INDIA THEN HOW IT CAN BE EX PECTED THAT A TAX SHOULD BE DEDUCTED ON SUCH A PAYMENT. THIS VIEW HAS BEEN UPHELD BY THE ITAT MUMBAI BENCH IN THE CASE OF CHANNEL GUIDE INDIA LIMITED (SUPRA) AND CATENA OF OTHER DECISIONS AS CITED BY LD.COUNSEL , WHEREIN IT H AS BEEN HELD THAT, ASSESSEE CAN NOT HELD TO BE LIABLE FOR DEDUCTING TDS IN VIEW OF THE RETROSPECTIVE AMENDMENT WHICH HAS COME AT A MUCH LATER DATE . THUS, WE HOLD THAT THE ASSESSEE WAS NOT OBLIGED TO DEDUCT TDS AT ITA NO. 1936 / MUM/20 1 4 9 THE TIME OF MAKING THE PAYMENT AND THE LAW WHICH HAS COME INTO STATUTE AFTE R FOUR YEARS FROM THE DA T E OF PAYMENT CANNOT BE HELD TO BE APPLIED RETROSPECTIVELY AT BEST FOR DEDUCTION OF TDS. THUS, WE HOLD THAT DISALLOWANCE U/S 40(A)(I) FOR NON DEDUCTION OF TDS CAN NOT BE UPHELD. SO FAR AS THE RELIANCE PLACED BY THE LD.DR IN THE DE CISION OF HONBLE KARNATAK A HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO . LTD . (SUPRA), WE FIND THAT THE HONBLE DELHI HIGH COURT IN SEVERAL CASES LIKE , DIT V/S NOKIA NET WORKS AND DIT V/S INFRASOFTW ARE LTD H A S CONSIDERED THE SAID ISSUE AND HAS N OT FOLLOW ED THE RATIO LAID DOWN BY THE KARNATAKA HIGH COURT IN SAMSUNG ELECTRONICS CO . LTD . (SUPRA) . SINCE, THE DELHI HIGH COURT IS THE LATEST DECISION, WHEREIN THE DECISION OF HONB LE KARNATAKA HIGH COURT HAS BEEN CONSIDERED , THEREFORE, WE ARE INCLINED TO FOLLOW THE SAME. THE FINDING OF THE HONBLE DELHI HIGH COURT IN THE CASE OF INFRASOFT LTD (SUPRA) ARE REPRODUCED BELOW: 97. WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT IN THE SOFTWARE NOR THE USE OF THE COPYRIGHT IN THE SOFTWARE, BUT WHAT IS TRANS FERRED IS THE RIGHT TO USE THE COPYRIGHTED MATERIAL OR ARTICLE WHICH IS CLEARLY DISTINCT FROM THE RIGHTS IN A COPYRIGHT. THE RIGHT THAT IS TRANSFERRED IS NOT A RIGHT TO USE THE COPYRIGHT BUT IS ONLY LIMITED TO THE RIGHT TO USE THE COPYRIGHTED MATERIAL AND THE SAME DOES NOT GIVE RISE TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME . 98. WE ARE NOT IN AGREEMENT WITH THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS ITA NO. 1936 / MUM/20 1 4 10 CO. LTD (SUPRA) THAT RIGHT TO MAKE A COPY OF THE SOFTWARE AND STORI NG 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 LICE NSE 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 PURPO SE. 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 DELHIHIGH COURT IN NOKIA NETWORKS OY (SUPRA) AS NOT AMOUNTING TO ACQUIRING A COPYRIGHT IN THE SOFTWARE. THUS, RESPECTFULLY FOLLOWING THE PROPOSITION LAI D DOWN BY THE HONBLE DELHI HIGH COURT , WE HOLD THAT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TDS ON SUCH PAYMENT. THEREFORE , NO DISALLOWANCE U/S 40(A)(I) IS CALLED FOR IN THE PRESENT CASE . 9 . THE GROUND NO.2 RAISED BY THE AS SESSEE IS ALLOWED . 10 . RESULTANT LY, THE APPEAL FILED BY T HE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 4 TH JULY, 2016 4 TH JULY, 2016 S D SD (G.S.PANNU) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 4TH JULY, 2016 . . . ./ SRL , SR. PS ITA NO. 1936 / MUM/20 1 4 11 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, T RUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI