M/s Bodhi Professional Solutions Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 419/BANG/2011

• Counselvise Citation: 41921114 RSA 2011
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 13-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Business income; Permanent establishment; Question of law; TDS; Set aside
• Section: 143(1); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO.419/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S. BODHI PROFESSIONAL SOLUTIONS PVT. LTD., NO.92-94, 8 TH CROSS, MALLESHWARAM, BANGALORE-560 003 . APPELLANT. PAN AABCB 5574 E VS. INCOME TAX OFFICER, WARD 11(1), BANGALORE. .. RESPONDENT. APPELLANT BY : SHRI PADAMCHAND KHINCHA. RESPONDENT BY : SHRI ETWA MUNDA. DATE OF HEARING : 13.03.2012. DATE OF PRONOUNCEMENT : 13.03.2012. O R D E R PER SHRI JASON P. BOAZ, A.M . : THIS APPEAL IS FILED BY THE ASSESSEE, DIRECTED AG AINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, BANGALORE D ATED 18.02.2011 FOR THE ASSESSMENT YEAR 2007-08. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 2.1 THE ASSESSEE IS AN INDIAN COMPANY, IN THE BUSIN ESS OF PROVIDING BUSINESS PRINTING SOLUTIONS. THE ASSESSEE SELLS BOXES CONTAINING A CD , DONGLE AND USER MANUAL TO VARIOUS CUSTOMERS IN INDIA ENGAGED IN NEWSPAPERS, PUBLICATI ONS, MAGAZINES, ETC. THE CD SOLD BY 2 ITA NO.419/BANG/2011 THE ASSESSEE CONTAINS SOFTWARE USED BY THE PRINTING INDUSTRY FOR PROVIDING PRINTING SOLUTIONS. THE DONGLE IS AN ELECTRONIC DEVICE THAT MUST BE ATTACHED TO A COMPUTER IN ORDER TO USE THE SOFTWARE. THE USER MANUAL CONTAINS THE INSTRUCTIONS TO USE THE SOFTWARE AND DONGLE. THE BOXES CONTAINING THE CD, DONGLE AND TH E USER MANUAL ARE IMPORTED BY THE ASSESSEE FROM VARIOUS CONCERNS OUTSIDE INDIA FROM W HOM IT HAS TAKEN DISTRIBUTORSHIP TO SELL THEM IN INDIA. ON THEIR IMPORT INTO INDIA, THE ASSESSEE PAYS CUSTOM DUTY. THE ASSESSEE ALSO SELLS THE HARDWARE I.E. THE INTERFAC E CARD AND DATA CABLES AND OTHER CONNECTED ACCESSORIES REQUIRED FOR THE PRINTING IND USTRY. THE HARDWARE IS IMPORTED ALONG WITH THE CD BOXES AND CUSTOMS DUTY IS PAID THEREON. THE ASSESSEE HAS TAKEN DISTRIBUTORSHIPS FROM NON-RESIDENT ENTITIES SITUATE D IN VARIOUS COUNTRIES SUCH AS USA, TAIWAN, MALAYSIA, HONGKONG AND IS BASICALLY A RESE LLER OF HARDWARE AND SOFTWARE. 2.2 IN THE PERIOD RELEVANT TO ASSESSMENT YEAR 2007- 08, AS PER DETAILS ON PAGES 13 TO 15 OF PAPER BOOK FILED, THE ASSESSEE IMPORTED SOFTW ARE (VIZ. BOXES CONTAINING CD, DONGLE AND USER MANUAL) AMOUNTING TO RS.96,40,196; HARDWAR E AMOUNTING TO RS.58,91,407 AND PAYMENT OF RS. 46,514 FOR CERTAIN SERVICES AVAILED TO A NON-RESIDENT TOTALLY AMOUNTING TO RS.1,55,78,117 (VIZ. RS.96,40,196 + 58,91,407 + 46, 514) THIS SUM OF RS.1,55,78,117 WAS SHOWN AS IMPORT OF SOFTWARE UNDER SCHEDULE 12 OF FINANCIAL STATEMENTS FOR THE YEAR UNDER CONSIDERATION AND THE SAME AMOUNT WAS PAID TO NON-RESIDENTS FROM WHOM THEY WERE IMPORTED WITHOUT DEDUCTION OF TAX AT SOURCE UNDER S ECTION 195 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED AS 'THE ACT'). 3 ITA NO.419/BANG/2011 2.3 THE ASSESSEE FILED IN ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2007-08 ON 30.10.2007 ADMITTING INCOME OF RS.2,67,500. THE RE TURN WAS PROCESSED UNDER SECTION 143(1) AND WAS TAKEN UP FOR SCRUTINY BY ISSUE OF NO TICE UNDER SECTION 143(2) DT.9.9.2008 WHICH WAS ISSUED AND SERVED. IN THE COURSE OF ASSE SSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED FROM SCHEDULE 12 OF THE FINANCIAL STATEMENTS THAT THE ASSESSEE HAD IMPORTED SOFTWARE AMOUNTING TO 1,55,78,117. THE AS SESSING OFFICER ISSUED A SHOW CAUSE NOTICE DT.8.12.2009 TO THE ASSESSEE TO EXPLAIN AS T O WHY THE SUM OF RS. 1,55,78,117 SHOULD NOT BE DISALLOWED UNDER SECTION 40(A)(I) FOR NON-D EDUCTION OF TAX AT SOURCE. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE DISAL LOWANCE UNDER SECTION 40(A)(I) WAS TO BE MADE IN THE LIGHT OF THE DECISION OF THE HON'BLE KA RNATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD & OTHERS DT.24.9.20 09 (ITA NO.2808/2005 DT.15.10.2011) THE ASSESSEE IN ITS REPLY DT.16.12. 2009 EXPLAINED THAT PURCHASE OF SHRINK WRAPPED SOFTWARE FOR RE-SALE AMOUNTED TO PURCHASE O F GOODS AND THUS PAYMENT FOR THE SAME IS NOT LIABLE TO TDS UNDER SECTION 195 OF THE ACT. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH (2004) 271 ITR 401 IN SUPPORT OF THE CONTENTION THAT THERE IS A DIFFERENCE BETWEEN COPY RIGHT AND COPY RIGHTED ARTI CLES AND THAT PAYMENT FOR A COPY RIGHTED ARTICLE IS NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE UNDER SECTION 195. THE ASSESSING OFFICER DID NOT ACCEPT THIS CONTENTION PU T FORTH BY THE ASSESSEE AND HELD THAT PAYMENT MADE BY THE ASSESSEE AMOUNTED TO ROYALTY UNDER SECTION 9(I)(VI) OF THE ACT. PAGES 3 TO 28 OF THE ASSESSMENT ORDER CONTAIN THE R EASONS OF THE ASSESSING OFFICER FOR TREATING THE PAYMENT AS ROYALTY. THE ASSESSING OFF ICER HELD THAT PAYMENT FOR IMPORT OF 4 ITA NO.419/BANG/2011 SOFTWARE AMOUNTS TO PAYMENT TOWARDS COPYRIGHT AS AL SO FOR PATENT, INVENTION, SCIENTIFIC WORK, SECRET FORMULA OR PROCESS THEREBY ATTRACTING THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT. THE ASSESSING OFFICER ALSO CONCLUDED THAT SOFTWARE CANNOT BE CONSIDERED AS GOODS AS UNDERSTOOD GENERALLY AND NOW SPECIFICALL Y IN TERMS OF THE DEFINITION GIVEN IN THE INCOME TAX ACT, 1961 AND THAT EVEN IF SOFTWARE IS C ONSIDERED AS GOODS, THE DEFINITION OF ROYALTY DOES NOT EXCLUDE GOODS FROM ITS AMBIT. ACCORDINGLY, THE ASSESSING OFFICER HELD THAT THE IMPUGNED PAYMENTS CONSTITUTED ROYALTY AN D HENCE LIABLE FOR DEDUCTION UNDER SECTION 195 OF THE ACT SINCE THE PAYMENT TO NON-RES IDENTS WERE MADE WITHOUT DEDUCTION OF TAX AT SOURCE, THE ASSESSING OFFICER DISALLOWED THE ENTIRE SUM OF RS. 1,55,78,117 UNDER SECTION 40(A)(I) OF THE ACT. 2.4 AGGRIEVED WITH ORDER OF THE ASSESSING OFFICER, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) WHO VIDE HIS ORDER DT.18.2.2011 CONCURRE D WITH THE VIEWS OF THE ASSESSING OFFICER AND DISMISSED THE ASSESSEES APPEAL. THE A SSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL AGAINST THE ORDER OF THE CIT(A). 3.1 AT THE OUTSET THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT PAYMENTS MADE FOR IMPORT OF HARDWARE AMOUNTING TO RS.58,91,407 AN D PAYMENT FOR SERVICES AMOUNTING TO RS.46,514 HAD ALSO BEEN TREATED AS ROYALTY BY THE ASSESSING OFFICER. IT WAS SUBMITTED THAT THE SAID PAYMENTS CANNOT BE REGARDED AS ROYALT Y UNDER SECTION 9(1)(VI) AS THE DEFINITION OF THE TERM ROYALTY THEREIN DOES NOT C OVER PAYMENTS TOWARDS IMPORT OF HARDWARE WHICH CAN BE TAXED ONLY AS BUSINESS INCOME . IT WAS ARGUED BY LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE ABSENCE OF A BUSINESS CONNECTION OR PERMANENT ESTABLISHMENT 5 ITA NO.419/BANG/2011 (PE) IN INDIA, THE PAYMENT TO NON-RESIDENTS FOR IM PORT OF HARDWARE IS NOT CHARGEABLE TO TAX IN INDIA. LIKEWISE, IT WAS SUBMITTED THAT PAY MENTS TO NON-RESIDENTS FOR SERVICES IS NOT CHARGEABLE TO TAX IN INDIA AS ROYALTIES. THE L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PAYMENTS MADE TOWARDS IMPORT OF HARDWARE AND FOR SERVICES CANNOT BE REGARDED AS ROYALTY AND AS A RESULT OF WHICH THER E WAS NO LIABILITY TO DEDUCT TAX AT SOURCE IN RESPECT OF THE SAID PAYMENTS. CONSEQUENTLY, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE DISALLOWANCE UNDER SECTION 40(A) (I) SHOULD BE DELETED IN RESPECT OF THE EXPENDITURE COVERING PAYMENTS TOWARDS IMPORT OF HAR DWARE AMOUNTING TO RS.58,91,407 AND PAYMENT FOR SERVICES AMOUNTING TO RS.46,514. 3.2 THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED THAT AS PER SECOND PROVISO TO SECTION 9(1)(VI), LUMP SUM PAYMENT MADE BY A PER SON, WHO IS A RESIDENT, FOR THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A L ICENCE) IN RESPECT OF COMPUTER SOFTWARE SUPPLIED BY A NON-RESIDENT MANUFACTURER ALONG WITH A COMPUTER OR COMPUTER BASED EQUIPMENT UNDER ANY SCHEME APPROVED UNDER THE POLIC Y ON COMPUTER SOFTWARE EXPORT, SOFTWARE DEVELOPMENT AND TRAINING, 1986 OF THE GOV T. OF INDIA CANNOT BE REGARDED AS ROYALTY. THE LEARNED AUTHORISED REPRESENTATIVE D REW OUR ATTENTION TO THE SECOND PROVISO TO SECTION 9(1)(VI) WHICH READS AS UNDER : PROVIDED FURTHER THAT NOTHING CONTAINED IN THIS C LAUSE SHALL APPLY IN RELATION TO SO MUCH OF THE INCOME BY WAY OF ROYALTY AS CONSISTS OF LUMP SUM PAYMENT MADE BY A PERSON, WHO IS A RESIDENT, FOR THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF COMPUTER SOFTWARE SUPPL IED BY A NON-RESIDENT MANUFACTURER ALONG WITH A COMPUTER OR COMPUTER-BASE D EQUIPMENT UNDER ANY SCHEME APPROVED UNDER THE POLICY ON COMPUTER SOFTWA RE EXPORT, SOFTWARE DEVELOPMENT AND TRAINING, 1986 OF THE GOVERNMENT OF INDIA. 6 ITA NO.419/BANG/2011 IT WAS SUBMITTED THAT THE BOXES CONTAINING THE CD A RE IMPORTED ALONG WITH THE DONGLES AND OTHER HARDWARE ITEMS, WHICH ARE COMPUTER BASED EQUIPMENTS AND THEREFORE EVEN IF THE IMPUGNED PAYMENTS CONSTITUTE ROYALTY WITHIN T HE MEANING OF THE DEFINITION OF THE SAID TERM, AS PER EXPLANATION 2 TO SECTION 9(1)(VI), THE SAID PAYMENTS WOULD BE OUTSIDE THE SCOPE OF SECTION 9(1)(VI) OF THE ACT BY VIRTUE OF T HE SECOND PROVISO TO SECTION 9(1)(VI). TO SUPPORT THE FACT/CLAIM THAT THE IMPORT OF SOFTWARE WAS ALONG WITH HARDWARE, THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO A S AMPLE OF INVOICES AT PAGES 22, 24 AND 26 OF THE PAPER BOOK. HE SUBMITTED THAT TO FALL W ITHIN THE SECOND PROVISO TO SECTION 9(1)(VI), WHAT IS REQUIRED TO BE SHOWN IS THAT THE SOFTWARE IS IMPORTED ALONG WITH HARDWARE. THE LEARNED AUTHORISED REPRESENTATIVE C ONTENDED THAT THE ACCOMPANYING OF THE SOFTWARE ALONG WITH HARDWARE IS SUFFICIENT AND IT IS NOT A FURTHER REQUIREMENT THAT THE SOFTWARE HAS TO BE EMBEDDED IN OR FORM AN INTRI NSIC PART OF THE HARDWARE. 3.3 IN RESPECT OF THE ISSUE AS TO WHETHER PAYMENT T OWARDS IMPORT OF SOFTWARE WOULD CONSTITUTE ROYALTY, THE ARGUMENTS OF THE LEARNED AU THORISED REPRESENTATIVE WERE AS FOLLOWS : A) THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE DEFINITION OF ROYALTY UNDER EXPLANATION 2 TO SECTION 9(1)(VI) WHICH IS AS UNDER : EXPLANATION 2 : FOR THE PURPOSES OF THIS CLAUSE, 'ROYALTY' MEANS CONSIDERATION (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 GR ANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; 7 ITA NO.419/BANG/2011 B) IN SECTION 9(1)(VI), PAYMENTS ASSOCIATED WITH I NTELLECTUAL PROPERTIES ARE CLASSIFIED AS ROYALTIES. THE INTELLECTUAL PROPERTIES ARE CLAS SIFIED INTO TWO SEGMENTS THE DEFINITION OF WHICH HAVE SEPARATE CLAUSES. IN ONE SEGMENT, TH ERE IS A BUNCHING AND GROUPING OF IPRS LIKE PATENTS, INVENTION, MODEL, DESIGN, SECRET FORM ULA, PROCESS OR SIMILAR PROPERTY ETC. THE OTHER SEGMENT IS COPYRIGHT, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILM OR VIDEO TAPES. CLAUSES (I), (II) AND (III) DEAL WITH PATENT ETC. CLAUSE (IV) DEALS WITH COPY RIGHT ETC. CLAUSE (I) AND (V) ARE IDENTICAL. HOWEVER, THE CONTENTS OF CL AUSE (II) AND (III) RELATING TO IMPARTING OF ANY INFORMATION RELATING TO PATENTS OR USE OF ANY P ATENTS, ETC HAVE NOT BEEN INCORPORATED IN THE LIMB (V) OF THE DEFINITION DEALING WITH COPY RIGHT. ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE, THIS DISTINCTION IS MATE RIAL. FURTHER, AS A SPECIFIC CLAUSE OF THE DEFINITION DEALS WITH COPYRIGHT, ONE SHOULD NOT IMPORT MECHANICALLY, WIDER ATTRIBUTES OF THE PATENT ETC DEALT WITHIN OTHER CLAUSES OF THE DEFINITION (I.E. IMPARTING OF ANY INFORMATION RELATING TO PATENTS OR USE OF ANY PATEN T). THUS, IT WAS SUBMITTED THAT PAYMENT FOR IMPORTING ANY INFORMATION REGARDING THE USE OF COPY RIGHT ETC OR FOR USE OF COPY RIGHT ETC CANNOT BE REGARDED AS ROYALTY. C) CLAUSE (V) OF THE DEFINITION OF THE TERM ROYAL TY DEALS WITH THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANT OF A LICENCE) IN RESPEC T OF ANY COPYRIGHT ETC. IN THE PRESENT CASE, THE ASSESSEE IS A RESELLER OF THE SOFTWARE AND DOES NOT SECURE ANY RIGHT OR LICENCE IN THE SOFTWARE. THE NON-RESIDEN T DOES NOT TRANSFER ANY RIGHT OR GRANT LICENCE IN RESPECT OF THE SOFTWARE TO THE ASSESSEE. THE ASSESSEE IMPORTS BOXES CONTAINING THE CD AND SELLS THE SAME WITHOUT EVEN OPENING THE BOXES. THERE IS NO TRANSFER OF ANY 8 ITA NO.419/BANG/2011 RIGHTS OR GRANT OF LICENCE IN FAVOUR OF THE ASSESSE E. THE TRANSFER OF RIGHTS OR GRANTING OF LICENCE IN THE SOFTWARE IS IN FAVOUR OF THE END USE R WHO INSTALLS THE CD IN HIS COMPUTER IN THE PROCESS OF WHICH, HE HAS TO AGREE TO THE TERMS AND CONDITIONS OF THE END USER LICENCE AGREEMENT. IT WAS SUBMITTED THAT THERE WAS A TRA NSFER OF RIGHT OR GRANT OF LICENCE DIRECTLY BY THE NON-RESIDENT IN FAVOUR OF THE END U SER AND THERE IS NO TRANSFER OF ANY RIGHT OR GRANT OF ANY LICENCE IN FAVOUR OF THE ASSE SSEE. THEREFORE, IT WAS SUBMITTED THAT PAYMENTS TOWARDS IMPORT OF SOFTWARE CANNOT BE REGAR DED AS ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. D) THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT ASSUMING WITHOUT ADMITTING THAT THE IMPUGNED PAYMENTS CONSTITUTED ROYALTY UN DER THE ACT, THE SAID PAYMENTS WOULD NOT BE REGARDED AS ROYALTY UNDER THE TREATIES, S INCE ONLY USE OF COPY RIGHTS GIVES RISE TO ROYALTY UNDER THE TREATIES. SINCE THE ASSESSEE IN THE INSTANT CASE WAS A RESELLER OF THE SOFTWARE AND THERE BEING NO TRANSFER OF ANY RIGHT I N COPY RIGHT OR GRANT OF LICENCE IN ITS FAVOUR, THE QUESTION OF USE OF COPY RIGHT BY THE ASSESSEE DID NOT ARISE. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO TH E OECD COMMENTARY ON THIS ASPECT, THE RELEVANT QUOTE OF WHICH IS AS UNDER : ARRANGEMENTS BETWEEN A SOFTWARE COPYRIGHT HOLDER AND A DISTRIBUTION INTERMEDIARY FREQUENTLY WILL GRANT TO THE DISTRIBUT ION INTERMEDIARY THE RIGHT TO DISTRIBUTE COPIES OF THE PROGRAM WITHOUT THE RIGHT TO REPRODUCE THAT PROGRAM. IN THESE TRANSACTIONS, THE RIGHTS ACQUIRED IN RELAT ION TO THE COPYRIGHT ARE LIMITED TO THOSE NECESSARY FOR THE COMMERCIAL INTER MEDIARY TO DISTRIBUTE COPIES OF THE SOFTWARE PROGRAM. IN SUCH TRANSACTIO NS, DISTRIBUTORS ARE PAYING ONLY FOR THE ACQUISITION OF THE SOFTWARE COPIES AND NOT TO EXPLOIT ANY RIGHT IN THE SOFTWARE COPYRIGHTS. THUS, IN A TRANSACTION WH ERE A DISTRIBUTOR MAKES PAYMENTS TO ACQUIRE AND DISTRIBUTE SOFTWARE COPIES (WITHOUT THE RIGHT TO REPRODUCE THE SOFTWARE), THE RIGHTS IN RELATION TO THESE ACTS OF DISTRIBUTION 9 ITA NO.419/BANG/2011 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 PROFITS IN ACCORDANCE WITH ARTICLE 7. THI S WOULD BE THE CASE REGARDLESS OF WHETHER THE COPIES BEING DISTRIBUTED ARE DELIVERED ON TANGIBLE MEDIA OR ARE DISTRIBUTED ELECTRONICALLY (WITHOUT TH E DISTRIBUTOR HAVING THE RIGHT TO REPRODUCE THE SOFTWARE), OR WHETHER THE SO FTWARE IS SUBJECT TO MINOR CUSTOMIZATION FOR THE PURPOSE OF ITS INSTALLATION. IN SUPPORT OF THE ABOVE, THE LEARNED AUTHORISED REP RESENTATIVE SUBMITTED THAT THE IMPUGNED PAYMENTS BY THE ASSESSEE DO NOT CONSTITUTE ROYALTY UNDER THE TREATIES. 3.4 DURING THE COURSE OF HEARING, THE BENCH RAISED A QUERY REGARDING THE APPLICABILITY OF THE DECISIONS OF THE JURISDICTIONAL HIGH COURT IN THE CASES OF M/S. SAMSUNG ELECTRONICS CO. LTD. (ITA NO.2808/2005 DT.15.10.2011) AND M/S. SYNOPSYS INTERNATIONAL OLD LTD. DECISION DATED 3.8.2010. THE SUBMISSION OF THE LEA RNED AUTHORISED REPRESENTATIVE IN RESPECT OF THE ABOVE WERE AS FOLLOWS : A) THE FACTS OF THE CASE BEFORE THE KARNATAKA HIGH COURT IN SAMSUNG ELECTRONICS CO. LTD. & OTHER GROUP CASES WERE NOT IDENTICAL. THE IMPORT ED SOFTWARE WAS USED IN TESTING THE SOFTWARE DEVELOPED BY THE RESPONDENT TO ENSURE THAT THE SOFTWARE DEVELOPED CONFORMED TO THE REQUIREMENTS OF ITS PARENT COMPANY (PAGE 127 OF THE DECISION). IN ITA NO.609/2006 AND CONNECTED MATERS, THE RESPONDENT WA S A DISTRIBUTOR OF SOFTWARE WHEREIN AFTER TAKING ORDERS FROM CUSTOMERS, THE RES PONDENT IMPORTS THE SOFTWARE AND SUPPLIES THE SAME TO CUSTOMERS (PAGE 132 OF THE DEC ISION). IN ITA NO.1056/2006 AND CONNECTED MATTERS, THE RESPONDENT WAS A DISTRIBUTOR PLACING BACK TO BACK ORDERS ON THE NON-RESIDENT FOR SUPPLY OF THE SOFTWARE AND IN CONS IDERATION THEREOF RECEIVED COMMISSION OF 2% (PAGE 137 OF THE DECISION). 10 ITA NO.419/BANG/2011 B) REVENUES ARGUMENTS BEFORE THE HON'BLE KARNATA KA HIGH COURT WERE IN RESPECT OF LICENCE TO USE THE SOFTWARE BY AN INDIAN ENTITY BY COPYING THE SOFTWARE ON THE HARD DISC OF THE COMPUTER (PAGE 124 OF THE DECISION). APART FROM THIS, REVENUE ALSO ARGUED ON THE NON-APPLICABILITY OF THE DECISION OF THE HON'BLE AP EX COURT IN THE CASE OF TATA CONSULTANCY SERVICES (PAGE 126 OF THE DECISION) AND THE APPLICA BILITY OF SECTION 9(1)(VI) EVEN IN THE ABSENCE OF A PERMANENT ESTABLISHMENT (PAGE 138 OF T HE DECISION). IN OTHER WORDS, THE LEARNED AUTHORISED REPRESENTATIVE ARGUED THAT REVEN UE DID NOT SUBSTANTIATE AS TO HOW PAYMENTS MADE BY A RE-SELLER OR DISTRIBUTOR OF SOFT WARE AND IN THE INSTANT CASE OF THE ASSESSEE, FOR IMPORT OF SOFTWARE, WOULD CONSTITUTE ROYALTIES. C) THE FINDINGS OF THE HON'BLE KARNATAKA HIGH COUR T FROM PAGES 139 TO 160 OF THE DECISION CONTAIN THE DISCUSSIONS ON THE OBSERVATION S OF THE APEX COURT WHILE REMANDING THE CASE BACK TO THE HIGH COURT AND THE DECISION IN THE CASE OF SUN ENGINEERING WORKS P. LTD. (198 ITR 297). PAGES 168 TO 170 OF THE DECISI ON CONTAIN THE DISCUSSION ON THE CONTENTS OF VARIOUS AGREEMENTS ENTERED INTO BY THE RESPONDENTS BEFORE THE HON'BLE HIGH COURT. AT PAGE 171 OF THE DECISION, THE HON'BLE HI GH COURT CONCLUDED THAT UNDER THE TERMS OF THE AGREEMENTS, WHAT IS TRANSFERRED IS A L ICENCE TO USE THE COPY RIGHT, WHICH AUTHORIZES THE END USER I.E. THE CUSTOMER TO MAKE U SE OF THE COPY RIGHTED SOFTWARE. PAGES 172 TO 174 OF THE DECISION DISCUSSES THE APPLICABIL ITY OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERV ICES. PAGES 175 TO 180 OF THE DECISION DISCUSS THE PROVISIONS OF THE COPY RIGHT ACT. AT P AGES 181 TO 183 OF THE DECISION, THE HON'BLE HIGH COURT CONCLUDES THE RIGHT TO COPY THE SOFTWARE ON THE HARD DISC OF THE COMPUTER AMOUNTS TO USE OF COPY RIGHT. 11 ITA NO.419/BANG/2011 D) AT PAGE 184 OF THE DECISION, THE HON'BLE HIGH CO URT CATEGORICALLY HELD THAT UNLESS LICENCE IS GRANTED PERMITTING THE END USER TO COPY AND DOWN LOAD THE SOFTWARE, THE DUMB CD CONTAINING THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE END USER AS THE SOFTWARE WOULD BECOME OPERATIVE ONLY IF IT IS DOWNL OADED TO THE HARDWARE OF THE DESIGNATED COMPUTER AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT. THE HON'BLE HIGH COURT CONTINUED TO HOLD THAT AS FAR AS THE SOF TWARE STORED IN THE DUMB CD WAS CONCERNED, THE TRANSFER OF THE DUMB CD BY ITSELF WO ULD NOT CONFER ANY RIGHT UPON THE END USER AND THE PURPOSE OF THE CD IS ONLY TO ENABLE TH E END USER TO TAKE A COPY OF THE SOFTWARE AND TO STORE IT IN THE HARD DISC OF THE DE SIGNATED COMPUTER. THE HON'BLE HIGH COURT OBSERVED AS FOLLOWS : THEREFORE, THE AMOUNT PAID TO THE NON-RESIDENT SU PPLIER TOWARDS SUPPLY OF SHRINK-WRAPPED SOFTWARE OR OFF-THE-SHELF SOFTWARE I S NOT THE PRICE OF THE CD ALONE NOR SOFTWARE ALONE NOR THE PRICE OF LICENCE G RANTED. THIS IS A COMBINATION OF ALL AND IN SUBSTANCE, UNLESS LICENCE IS GRANTED PERMITTING THE END USER TO COPY AND DOWNLOAD THE SOFTWARE, THE DUMB CD CONTAIN ING THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE END USER AS SOFTWA RE WOULD BECOME OPERATIVE ONLY IF IT IS DOWNLOADED TO THE HARDWARE OF THE DES IGNATED COMPUTER AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT AND THAT MAKE S THE DIFFERENCE BETWEEN THE COMPUTER SOFTWARE AND COPYRIGHT IN RESPECT OF B OOKS OR PRERECORDED MUSIC SOFTWARE AS BOOK AND PRERECORDED MUSIC CD CAN BE US ED ONCE THEY ARE PURCHASED, BUT SO FAR AS SOFTWARE STORED IN DUMB CD IS CONCERNED, THE TRANSFER OF DUMB CD BY ITSELF WOULD NOT CONFER ANY RIGHT UPON THE END USER AND THE PURPOSE OF THE CD IS ONLY TO ENABLE THE END USE R TO TAKE A COPY OF THE SOFTWARE AND TO STORE IT IN THE HARD DISC OF THE DE SIGNATED COMPUTER IF LICNECE IS GRANTED IN THAT BEHALF AND IN THE ABSENCE OF LIC ENCE, THE SAME WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT, WHICH IS EXCLUSIVELY OWNED BY NON-RESIDENT SUPPLIERS, WHO WOULD CONTINUE TO BE THE PROPRIETOR OF COPYRIGHT. 3.5 THE LEARNED AUTHORISED REPRESENTATIVE EMPHASIZI NG THE CONCLUSION OF THE HON'BLE HIGH COURT AT PAGES 184 (SUPRA) OF THE DECISION SUB MITTED THAT IN THE PRESENT CASE, THE ASSESSEE WAS SELLING DUMB CDS TO END USERS SINCE T HE BOXES CONTAINING THE CD, DONGLE AND 12 ITA NO.419/BANG/2011 THE USER MANUAL ARE NEVER OPENED BUT SOLD TO END U SERS AS IT IS. IT IS SUBMITTED THAT IT IS THE END USER WHO ENTER INTO END USER LICENCE AGREEM ENTS WITH THE NON-RESIDENT IN THE PROCESS OF COPYING THE SOFTWARE TO THE HARD DISC OF THE COMPUTERS. THE LEARNED AUTHORISED REPRESENTATIVE THUS ARGUED THAT THE CON CLUSIONS OF THE HON'BLE HIGH COURT AT PAGE 184 OF THE DECISION (SUPRA) SUPPORT THE CASE O F THE ASSESSEE AND AS A RESULT, IT IS CONTENDED THAT THE PAYMENT MADE TO NON-RESIDENT BY THE ASSESSEE CANNOT BE REGARDED AS ROYALTY. IT WAS SUBMITTED BY THE LEARNED AUTHORI SED REPRESENTATIVE THAT EVEN THOUGH ALL THE APPEALS FILED BY REVENUE WERE ALLOWED BY THE HO N'BLE HIGH COURT, IN THE LIGHT OF THE ABOVE DISCUSSION, THE DECISION OF THE HON'BLE HIGH COURT IN SAMSUNG ELECTRONICS (SUPRA) IS NOT APPLICABLE TO A RESELLER / DEALER OF SOFTWARE. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THE KARNATAKA HIGH COURT ISS UED A CONSOLIDATED/COMMON ORDER FOR ALL THE APPEALS INVOLVED THEREIN. IN THE CONCLUDIN G PARAGRAPH, IT HELD THAT ALL THE APPEALS ARE ALLOWED. THE ORDER PASSED BY ITAT, BANGALORE B ENCH A IMPUGNED IN THESE APPEALS IS SET ASIDE AND THE ORDER PASSED BY THE CIT(A) CONFIR MING THE ORDER OF ASSESSING OFFICER (TDS)-1 IS RESTORED. IT IS IMPORTANT TO NOTE THAT THOUGH ALL THE APPEALS WERE FILED ON THE IDENTICAL ISSUE OF LAW BUT WERE DIFFERENT IN TERMS OF THEIR FACTUAL BACKGROUND. IN OTHER WORDS, THERE ARE DIFFERENT CLASSES OF PERSONS APPEA LING ON THE SAME COMMON ISSUE. A JUDGMENT ON COMMON ISSUES OF A CLASS BINDS EVERY ME MBER OF SUCH CLASS. IT CANNOT TRAVEL BEYOND SUCH CLASS OF PERSONS. IT CANNOT BE HELD AS A CONCLUSION FOR ALL THE CASES INVOLVED THEREIN. DIFFERENT APPEALS CAN BE DISPOSED OFF THR OUGH A COMMON ORDER. SUCH ORDER CAN BE BINDING ONLY IF THE APPEALS INVOLVE COMMON QUEST ION OF LAW AND FACTS. SIMILARITY IN QUESTION OF LAW AND FACTS IN EVERY CASE IS CRITICAL WHILE DISPOSING THROUGH A COMMON ORDER. 13 ITA NO.419/BANG/2011 EVEN A SINGLE DETAIL MAY DISTINGUISH THE CASES SO H ELD TO BE SIMILAR. LORD DENNING WHILE DEALING WITH THE LAW OF PRECEDENT HAS OBSERVED - EACH CASE DEPENDS ON ITS OWN FACTS AND A CLOSE SIMILARITY BETWEEN ONE CASE AND ANOTHER IS NOT ENOUGH BECAUSE EVEN A SINGLE SIGNIFICANT DETAIL MAY ALTER THE ENTIRE ASPECT, IN DECIDING SUCH CASES, ONE SHOULD AVOID THE TEMPTATION TO DECIDE CASES (AS SAID BY CORDOZO) BY MATCHING THE COLOUR OF ONE CASE AGAINST THE COLOUR OF ANOTHER. TO DECIDE THEREFORE, ON WHI CH SIDE OF THE LINE A CASE FALLS, THE BROAD RESEMBLANCE TO ANOTHER CASE IS NOT AT ALL DEC ISIVE. HE FURTHER SUBMITTED THAT THERE IS NO SPECIFIC PROVISION IN THE CIVIL PROCEDURE COD E FOR CONSOLIDATION OF SUITS. IT IS UNDER THE INHERENT POWERS, THAT SUITS ARE CONSOLIDATED BY THE COURT. THE WHOLE OBJECT BEHIND CONSOLIDATION IS TO AVOID MULTIPLICITY OF PROCEEDIN GS, UNNECESSARY DELAY AND EXPENSES. WHERE IT APPEARS THAT THERE IS SUFFICIENT UNITY OR SIMILARITY IN THE MATTER IN ISSUE IN THE SUITS OR THAT THE DETERMINATION OF THE SUITS RESTS MAINLY ON A COMMON QUESTION, IT IS OPEN TO THE COURT TO TRY THEM AS ANALOGOUS CASES. WHEN CONSOLIDATED FOR THE PURPOSE OF TRIAL, THE PRIMARY CONSIDERATION IS CONVENIENCE AND FOR AV OIDING CONFLICTING DECISIONS INVOLVING IDENTICAL QUESTIONS. HE FURTHER SUBMITTED THAT BE FORE THE HON'BLE HIGH COURT THE ISSUE INVOLVED FOR DETERMINATION WAS COMMON BUT THE FACTU AL BACKGROUND WAS DIFFERENT. IN SUCH CASES, IT IS IMPORTANT TO DECIDE THE MATTERS ONE BY ONE OR ATLEAST GROUP BY GROUP. AS DISCUSSED EARLIER, THE VARIOUS APPEALS INVOLVED CON CERNED THREE CLASSES/ SEGMENTS. THEY WERE DISTINCT. THEIR RESPECTIVE MODUS OPERANDI WAS NOT UNIFORM. CONSOLIDATION OF THESE DIVERSE CLASSES FOR A DECISION WAS INAPPROPRIATE. A SINGLE CONCLUSION MAY NOT HOLD GOOD FOR ALL THE CASES IN CONSIDERATION. IN VIEW OF THE ABOV E SUBMISSION, THE LEARNED AUTHORISED 14 ITA NO.419/BANG/2011 REPRESENTATIVE ARGUED THAT THE DECISION IN SAMSUNG ELECTRONICS CASE (SUPRA) WAS NOT APPLICABLE TO THE INSTANT CASE OF THE ASSESSEE. 3.6 THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SYNOPSY S INTERNATIONAL OLD LTD. (ITA NOS.11 TO 15 OF 2008 AND 17 OF 2008) DT.3.8.2010, IS DISTI NGUISHABLE FOR THE REASON THAT IN THE SAID DECISION, THE ASSESSEE RECEIVED LICENCE FEES F ROM INDIAN CUSTOMERS UNDER THE END USER LICENCE AGREEMENTS FOR THE USE OF SOFTWARE. I T WAS SUBMITTED THAT SINCE IN THE INSTANT CASE, THE ASSESSEE DOES NOT ITSELF USE THE SOFTWARE BUT RE-SELLS THE SOFTWARE, THE DECISION IN THE SYNOPSIS INTERNATIONAL (SUPRA) IS D ISTINGUISHABLE. THE LEARNED AUTHORISED REPRESENTATIVE ALSO FILED WRITTEN SUBMISSIONS AS TO HOW AND WHY THE DECISION OF THE JURISDICTIONAL HIGH COURT IS NOT APPLICABLE. 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, RELIED ON THE ORDERS PASSED BY THE ASSESSING OFFICER AND THE CIT(A). IN WRITTEN SUBMISSIONS FILED, THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE DECISIONS OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASES OF CIT VS. SAMSUNG ELECTRON ICS (ITA NO.2808/2005) DATED 15.10.2011 AND CIT VS. SURVEY COMPUTERS (P) LTD (20 12) 204 TAXMAN 6 (KAR) AND THE DECISION OF THE HON'BLE ITAT, BANGALORE IN THE CASE OF ING VYSYA BANK LTD. VS. DDIT (INTERNATIONAL TAXATION) 143 TTJ (BANG TRIB) 249. THE LEARNED DEPARTMENTAL REPRESENTATIVE, FINALLY PRAYED FOR DISMISSAL OF THE ASSESSEES APPEAL. 15 ITA NO.419/BANG/2011 5. WE HAVE CAREFULLY PERUSED AND CONSIDERED THE SU BMISSIONS AND ARGUMENTS PUT FORTH BY BOTH THE PARTIES AND THE MATERIAL ON RECOR D. AS DETAILED EARLIER IN THIS ORDER, THE ASSESSEE HAS FILED A PAPER BOOK CONSISTING OF T HE MATERIAL ON RECORD BEFORE THE ASSESSING OFFICER AND THE CIT(A). FURTHER, IN COMP LIANCE WITH OUR DIRECTIONS, THE ASSESSEE HAS FILED COPIES OF AGREEMENTS AND DETAILS OF IMPORTS OF SOFTWARE AND HAS ALSO SUBMITTED A WRITE UP AS TO HOW THE DECISION IN THE SAMSUNG ELECTRONICS CASE (SUPRA) IS NOT APPLICABLE IN THE CASE OF A RE-SELLER OF SOFTWARE A S IN THE PRESENT CASE. FROM THE FACTS OF THE CASE AND MATERIAL ON RECORD, IT IS EVIDENT THAT THE ASSESSING OFFICER HAS CONSIDERED PAYMENTS MADE FOR IMPORT OF HARDWARE AMOUNTING TO R S.58,91,407 AND PAYMENT FOR SERVICES AMOUNTING TO RS.46,514 ALSO AS ROYALTY. THIS IS APART FROM CONSIDERING PAYMENTS MADE FOR IMPORT OF SOFTWARE AS ROYALTY. AS RIGHT LY SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE, PAYMENT MADE FOR IMPORT OF HARDWARE AND PAYMENT FOR SERVICES CANNOT BE REGARDED AS ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT BECAUSE NONE OF THE LIMBS OF THE DEFINITION OF THE TERM ROYALTY WOULD BE APPLICABL E AS THEY CANNOT BE REGARDED AS PAYMENTS MADE TOWARDS USE OF PATENT, DESIGN, COPY R IGHT, ETC. THUS, PAYMENT MADE FOR IMPORT OF HARDWARE AND PAYMENT FOR SERVICES ARE OUT SIDE THE PURVIEW OF SECTION 9(1)(VI) OF THE ACT. 5.2 WE FIND THAT THE ASSESSING OFFICER AND THE CIT( A) HAVE NOT EXAMINED WHETHER PAYMENTS TO NON-RESIDENTS IN THE INSTANT CASE CONSI STED ONLY FOR IMPORT OF SOFTWARE OR WHETHER PAYMENTS WERE ALSO MADE FOR IMPORT OF HARDW ARE. EVEN THOUGH THE FIGURES OF IMPORT OF HARDWARE AND PAYMENT FOR SERVICES ARE ON RECORD, WE ARE OF THE OPINION THAT THE ASSESSING OFFICER IS REQUIRED TO EXAMINE THE DETAIL S OF IMPORT OF HARDWARE, SOFTWARE AND 16 ITA NO.419/BANG/2011 PAYMENT FOR SERVICES. IT IS ALSO SEEN TH AT THE ASSESSING OFFICER HAS NOT PROPERLY EXAMINED PROVISIONS OF THE TREATIES IN DECIDING WHE THER THE IMPUGNED PAYMENTS CONSTITUTE ROYALTY. IN VIEW OF THE FOREGOING, WE ARE OF THE CONSIDERED OPINION THAT UNLESS THE FACTS OF THE CASE ARE CLEARLY EXAMINED BY THE ASSESSING O FFICER, THE QUANTUM AND TO WHETHER PAYMENT FOR IMPORTS OF SOFTWARE AMOUNTS TO ROYALTY CANNOT BE DECIDED. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND REMIT THE MAT TER BACK TO THE FILE OF THE ASSESSING OFFICER WITH THE FOLLOWING DIRECTIONS : I) THE ASSESSING OFFICER SHALL THOROUGHLY VERIFY TH E DETAILS OF IMPORT OF SOFTWARE, HARDWARE AND PAYMENT FOR SERVICES. AS WE HAVE HELD AT PARA 5.2 ABOVE THAT PAYMENT TOWARDS IMPORT OF HARDWARE AND PAYMENT FOR SERVICES CANNOT BE REGARDED AS ROYALTY NO DISALLOWANCE SHALL BE MADE UNDER SECTION 40(A)(I) I N RESPECT OF SUCH PAYMENTS. II) THE ASSESSING OFFICER SHALL THOROUGHLY VERIFY THE CLAIM OF THE ASSESSEE THAT THE BOXES CONTAINING THE CD ARE IMPORTED ALONG WITH DON GLES AND OTHER HARDWARE ITEMS, WHICH ARE COMPUTER BASED EQUIPMENTS AS IT IS SEEN THAT TH IS ASPECT HAS NOT BEEN EXAMINED BY THE LOWER AUTHORITIES. THE ASSESSING OFFICER SHALL ACCORDINGLY DECIDE ON THE APPLICABILITY OF THE SECOND PROVISO TO SECTION 9(1)(VI) IN THE IN STANT CASE. III) THE ASSESSING OFFICER IS ALSO REQUIRED TO EX AMINE ON MERITS THE ISSUE OF WHETHER PAYMENT FOR IMPORT OF SOFTWARE AMOUNTS TO ROYALTY AFTER GIVING DUE CONSIDERATION TO THE SUBMISSIONS OF THE ASSESSEE MADE BEFORE US AND AFTE R AFFORDING REASONABLE OPPORTUNITY OF 17 ITA NO.419/BANG/2011 BEING HEARD. THE ASSESSEE IS AT LIBERTY TO SUBMIT RELEVANT DOCUMENTS BEFORE THE ASSESSING OFFICER IN SUPPORT OF ITS CLAIMS. 6. IN THE RESULT THE ASSESSEES APPEAL IS ALLOWE D FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 1 3.03.2012. SD/- SD/- (P. MADHAVI DEVI) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED: 13.03.2012. *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - A BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDE R ASSTT. REGISTRAR, ITAT, BANGALORE .