Appeal Details
Counselvise Citation
[2016] 133 COUNSELVISE.COM (IT) 6429 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 3 month(s) 1 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
14-03-2016
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
B
Next Hearing Date
22-02-2016
Assessment Year
2007-2008
Appeal Filed On
13-12-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : B : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI A.T. VARKEY, JM ITA NO.5651/DEL/2010 ASSESSMENT YEAR : 2007-08 DATAMINE INTERNATIONAL LTD., INDIA BRANCH OFFICE, C-484, SARITA VIHAR, NEW DELHI. PAN: AAACD7600A VS. ADDL. DIT, RANGE-1, INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI V.K. AGGARWAL, AR DEPARTMENT BY : SHRI ANUJ ARORA, CIT, DR DATE OF HEARING : 10.03.2016 DATE OF PRONOUNCEMENT : 14.03.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S 143( 3) READ WITH SECTION 144C(1) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER AL SO CALLED `THE ACT) ON 7.10.2010 IN RELATION TO THE ASSESSMENT YEAR 200 7-08. ITA NO.5651/DEL/2010 2 2. THE FIRST GROUND IS AGAINST TREATING `BUSINESS R ECEIPTS OF RS.1,04,18,783/- TOWARDS SALE OF SOFTWARE AS `ROYAL TY. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, DATAMINE INTERNATIONAL LTD., UK, HAVING AN INDIAN BRANCH, CA LLED DATAMINE INTERNATIONAL LTD., INDIA BRANCH OFFICE, IS A SUBSI DIARY OF DATAMINE CORPORATE LTD., UK ( HEREINAFTER ALSO CALLED `CORPO RATE). THE INDIAN BRANCH IS ENGAGED IN THE ACTIVITY OF PROVIDING SPEC IALIZED MINING SOFTWARE SOLUTIONS, DEVELOPED BY ITS GROUP, TO MINI NG INDUSTRY IN INDIA. THE ASSESSEE, INTER ALIA , DECLARED SOFTWARE SALES OF RS.1,04,18,783/- IN ITS PROFIT & LOSS ACCOUNT AS BUSINESS RECEIPTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO S UBMIT VARIOUS AGREEMENTS INCLUDING THE LICENSE AGREEMENT UNDER WH ICH SOFTWARE WERE CLAIMED TO HAVE BEEN SOLD TO END-USERS. AFTER GOING THROUGH THESE AGREEMENTS, THE AO REJECTED THE ASSESSEES CLAIM OF HAVING SOLD COPYRIGHTED ARTICLES INSTEAD OF COPYRIGHT ITSELF. IN REACHING THIS CONCLUSION, HE NOTICED THAT THE SOFTWARE LICENSED FOR USE BY THE ASSESSEE TO THE END-CONSUMERS WERE SPECIALIZED SOFTWARE HAVI NG SPECIAL PURPOSE ITA NO.5651/DEL/2010 3 USAGE IN MINING ACTIVITY COVERING FULL SCOPE OF MIN ING FROM THE EXPLORATION, DRILL HOLE EXTENDING UP TO SHIPPING. I N ADDITION, HE ALSO HELD THAT THE SOFTWARE SOLD BY THE ASSESSEE WERE MAKING AVAILABLE A PROCESS TO THE CUSTOMER WHO USE THE PROCESS WHILE CARRYIN G OUT THEIR BUSINESS. IN THE BACKDROP OF THIS FACTUAL MATRIX, THE AO HELD THAT THE CONSIDERATION FOR SOFTWARE LICENSE FALLS WITHIN THE DEFINITION OF `ROYALTY UNDER SECTION 9(1)(VI), CLAUSES (I), (III) AND (V) OF EXPLANATION 2 OF THE ACT AND ALSO ARTICLE 13(3)(A) OF INDO-UK DOUBLE TAXATION AVOIDAN CE AGREEMENT (HEREINAFTER CALLED `THE DTAA). THE ASSESSEE FAIL ED TO CONVINCE THE DISPUTE RESOLUTION PANEL (DRP) ON ITS LINE OF REASO NING, WHICH COUNTENANCED THE ACTION OF THE AO IN THE DRAFT ORDE R. IN THE FINAL ORDER, THE AO TREATED `SOFTWARE SALES AMOUNTING TO RS.1.0 4 CRORE AS `ROYALTY WHICH WAS SUBJECTED TO TAX ACCORDINGLY. THE ASSESSE E IS AGGRIEVED AGAINST SUCH TREATMENT. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE IS A TAX RESIDENT OF UK HAVING A PERMANENT ESTABLISHMENT IN THE SHAPE OF BRANCH OFFI CE IN INDIA. IT HAS ITA NO.5651/DEL/2010 4 BEEN TAXED AS A FOREIGN COMPANY IN RESPECT OF INCOM E FROM ITS BRANCH OFFICE IN INDIA. THE SHORT CONTROVERSY BEFORE US IS TO DECIDE THE NATURE OF RECEIPTS AMOUNTING TO RS.1.04 CRORE WHICH THE ASSES SEE CLAIMS AS `BUSINESS RECEIPTS FROM SALE OF SOFTWARE, WHEREAS THE REVENUE HAS HELD IT TO BE `ROYALTY. CHAIN OF TRANSACTION OF SALE O F MINING SOLUTIONS IS THAT THE INDIAN BRANCH RECEIVES ORDERS OF SOFTWARE FROM END USERS; SUCH ORDERS ARE THEN PLACED BY THE INDIAN BRANCH TO ITS HEAD OFFICE; THE HEAD OFFICE, IN TURN, PURCHASES SUCH SOFTWARE FROM DATAM INE CORPORATE LTD., WHICH ARE THEN SUPPLIED BY THE INDIA BRANCH TO THE END USERS. IN THIS ENTIRE SEQUENCE, THERE ARE TWO TYPES OF AGREEMENTS, VIZ., THE DISTRIBUTORS AGREEMENT BETWEEN CORPORATE AND DATAM INE INTERNATIONAL LTD., INCLUDING ITS INDIAN BRANCH OFFICE FOR PURCHA SING SOFTWARE FROM CORPORATE; AND THE END USER AGREEMENT BETWEEN CORPO RATE AND THE END USERS, WHO EVENTUALLY PURCHASE DATAMINE SOFTWARE PR ODUCTS FROM THE ASSESSEE. FIRST, WE PROCEED TO EXAMINE THE DISTRIB UTORS AGREEMENT, A COPY OF WHICH HAS BEEN PLACED AT PAGE 125 ONWARDS O F THE PAPER BOOK. AS PER THIS AGREEMENT, THE DISTRIBUTOR (THE ASSESSE E, DATAMINE INTERNATIONAL LTD., INCLUDING ITS INDIAN BRANCH OFF ICE) PURCHASE LICENSES ITA NO.5651/DEL/2010 5 OF DEFINED SOFTWARE PRODUCTS FROM DATAMINE CORPORAT E FOR RESELLING OR RENTING TO END USERS AND FOR THE SUPPLY OF MAINTENA NCE AND RELATED SERVICES TO THE PRODUCTS. IT HAS BEEN CATEGORICAL LY MENTIONED THAT: THIS AGREEMENT IS NOT ROYALTY AGREEMENT; IT CONFERS NO R IGHTS UPON THE DISTRIBUTOR TO USE OR INCORPORATE IN ANY WAY ANY OF THE IDEAS OR TECHNOLOGY CONTAINED WITHIN THE PRODUCTS. DATAMINE CORPORATE WARRANTS THAT IT HAS THE AUTHORITY TO OFFER THE PRO DUCTS FOR SALE AND RENTAL TO THE DISTRIBUTOR. NEXT PARA OF THE AGREEMENT P ROVIDES THAT CORPORATE GRANTS DISTRIBUTOR THE NON-EXCLUSIVE `RIGHT TO RESE LL AND RENT LICENSES FOR THE PRODUCTS IN THE SPECIFIED TERRITORIES. CLAUSE 3 OF THE AGREEMENT CONTAINS OBLIGATIONS OF DATAMINE CORPORATE. IT PROV IDES THAT THE CORPORATE SHALL MAKE AVAILABLE TO THE DISTRIBUTOR A REASONABLE NUMBER OF NOT-FOR-RESALE COPIES OF THE PRODUCTS TO ALLOW THE DISTRIBUTOR TO MARKET THE PRODUCTS. IT HAS SPECIFICALLY BEEN PROVIDED TH AT: THE DISTRIBUTOR MAY NOT COPY THE SOFTWARE EXCEPT FOR REASONABLE BACK-UP PURPOSES, NOR SHALL THE DISTRIBUTOR SELL OR PASS ON THESE NOT FOR SALE COPIES TO ANY OTHER ORGANIZATION. CLAUSE 4 OF THE AGREEMENT CONTAINS `OBLIGATIONS OF DISTRIBUTOR, WHOSE RELEVANT PART OBLIGES : 4.1. THE DISTRIBUTOR TO ITA NO.5651/DEL/2010 6 INSTALL THE PRODUCTS ON THE CUSTOMERS COMPUTER AND TO CARRY OUT TRAINING COURSES IN THE USE OF THE PRODUCTS. A PERUSAL OF T HIS CLAUSE DIVULGES THAT THE DISTRIBUTOR IS OBLIGED ` TO INSTALL THE PRODUCTS ON THE CUSTOMERS COMPUTER . CLAUSE 8 OF THE AGREEMENT HAS BEEN CAPTIONED AS CONFIDENTIALITY AND INTELLECTUAL PROPERTY RIGHTS. PARA 1 OF THIS CLAUSE INDICATES THAT THE : ` INTELLECTUAL PROPERTY AND OT HER RIGHTS TO THE PRODUCTS REMAIN AT ALL TIMES WITH DATAMINE CORPORATE AND D O NOT PASS IN ANY WAY TO THE DISTRIBUTOR. IT FURTHER PROVIDES THAT THE DISTRIBUTOR AGREES THAT THE PRODUCTS ARE PROPRIETARY INFORMATION AND T RADE SECRETS OF DATAMINE CORPORATE FOR WHICH THE DISTRIBUTOR SHALL MAINTAIN THE CONFIDENTIALITY. PARA 8.2, WHICH IS QUITE RELEVANT FOR OUR PURPOSE, PROVIDES THAT THE : `DISTRIBUTOR SHALL NOT ATTEMPT TO REGISTER ANY TRADE MARK, LOGOS, COMPANY NAME, THAT MAY BE IDENTICAL TO OR CONFUSED WITH THOSE ALREADY OWNED OR REGISTERED BY DATAMINE CORPORATE. THE ABOVE CLAUSES OF THE DISTRIBUTORS AGREEMENT AMPLY MANIFEST THAT THE DISTRIBUTOR, NAMELY, THE ASSESSEE ACQUIRES SIMPLY S OFTWARE PRODUCTS FROM DATAMINE CORPORATE FOR RESELLING TO THE END CU STOMERS. THE PRODUCT IS NOTHING, BUT, CD WHICH HAS TO BE SIMPLY INSTALLED BY THE ITA NO.5651/DEL/2010 7 ASSESSEE IN THE COMPUTERS OF END CUSTOMERS. ALL TH E INTELLECTUAL PROPERTY RIGHTS TO THE PRODUCTS REMAIN WITH DATAMINE CORPORA TE AND THE ASSESSEE CANNOT USE IT OR PASS IT OVER TO ANYONE EXCEPT BY W AY OF SALE OF SOFTWARE PRODUCTS. 5. NOW, WE ESPOUSE THE `END USER AGREEMENT BETWEEN DATAMINE CORPORATE LTD. AND THE END-USER OF THE SOFTWARE PR ODUCTS, WHO PURCHASES SUCH SOFTWARE THROUGH THE ASSESSEE, A DIS TRIBUTOR OF THE SOFTWARE PRODUCT. A COPY OF THIS AGREEMENT IS PLAC ED AT PAGE 122 ONWARDS OF THE PAPER BOOK. CLAUSE USAGE RIGHTS C LEARLY STATES THAT DATAMINE CORPORATE LTD. (DCL) GRANTS TO THE END USE R: THE PERPETUAL RIGHT TO USE THE NUMBER OF SEATS OF THE SOFTWARE PR ODUCTS. IT FURTHER PROVIDES THAT: THE PERPETUAL RIGHT TO USE THE SOFT WARE REFERS ONLY TO THE VERSION OF THE PRODUCT THAT WAS AVAILABLE WHEN THE PURCHASE WAS MADE AND DOES NOT ENTITLE YOU TO RECEIVE FURTHER UPDATES OR ENHANCEMENTS TO THE SOFTWARE... A SIGNIFICANT CLAUSE OF THE AGR EEMENT STATES THAT: THIS AGREEMENT DOES NOT TRANSFER THE INTELLECTUAL PROPERTY RIGHTS TO THE ITA NO.5651/DEL/2010 8 PRODUCTS TO YOU. THEN, THERE HAVE BEEN SPECIFIED C ERTAIN DOS AND DO NOTS, WHICH ARE AS UNDER:- UNDER THIS AGREEMENT YOU MAY: A. INSTALL THE SOFTWARE ON ANY NUMBER OF COMPUTERS OVE R WHICH YOU HAVE CONTROL; B. MAKE COPIES OF THE SOFTW ARE IN MACHINE READABLE FORM FOR BACKUP PURPOSES; C. MAKE COPIES OF ANY DOCUMENTATION FOR YOUR USE ONLY; AND D. EXECUTE AS MANY SIMULTANEOUS COPIES OF THE SOFTWARE PRODUCTS AS YOU HAVE PURCHASED SEATS. YOU MAY NOT: A. CONTRIVE FOR THE SOFTWARE TO BE EXECUTED BY MORE TH AN THE NUMBER OF SIMULTANEOUS USERS FOR WHICH YOU HAVE PURCHASED SEATS; B. MODIFY, TRANSLATE, REVERSE ENGI NEER, DECOMPILE, DISASSEMBLE OR CREATE SIMILAR OR DERIVAT IVE SOFTWARE PROGRAMS BASED ON SOFTWARE PRODUCTS YOU HA VE PURCHASED; OR C. ASSIGN, RENT OR LEASE ANY RIGHTS I N THE SOFTWARE OR ACCOMPANYING DOCUMENTATION IN ANY FORM TO ANY THIRD PARTY WITHOUT THE PRIOR WRITTEN CONSENT O F DCL OR ITS AUTHORIZED CHANNELS WHICH, IF GIVEN, IS SUBJECT TO THE THIRD PARTYS CONSENT TO THE TERMS AND CONDITIONS O F THIS AGREEMENT. 6. THIS CLAUSE FAIRLY INDICATES THAT THE END US ER CAN INSTALL THE SOFTWARE ON ANY NUMBER OF COMPUTERS, MAKE COPIES FOR BACK UP PURPOSES FOR HIS OWN USE ONLY BUT WITH THE QUALIFICATION THAT HE CAN NOT OPERATE/EXECUTE SIMULTANEOUS COPIES OF THE SOFTWARE PRODUCT MORE TH AN THE PURCHASED SEATS. FOR EXAMPLE, IF THREE COPIES OF A PRODUCT A RE PURCHASED, THESE ITA NO.5651/DEL/2010 9 THREE SOFTWARE CAN BE INSTALLED IN ANY NUMBER OF CO MPUTERS, BUT, AT A TIME THE USAGE CANNOT BY OF MORE THAN THREE SEATS. IF ONLY ONE COPY IS PURCHASED, THAT CAN BE INSTALLED BY THE END CUSTOME R ON ANY NUMBER OF COMPUTERS, BUT, AT A TIME ONLY ONE CAN BE USED. TH EN, THERE IS A WARRANTY CLAUSE IN THIS AGREEMENT WHICH PROVIDES THAT THE WA RRANTY DURATION VARIES FROM PRODUCT TO PRODUCT AND DURING SUCH WARR ANTY PERIOD, THE DATAMINE GROUP WILL REPAIR ANY PROGRAMME ERROR THAT MAY HAVE BEEN FOUND. A PERUSAL OF THE ABOVE CLAUSES OF THE END US ER AGREEMENT DIVULGES THAT THE END USER ACQUIRES PERPETUAL RIGHT TO USE THE SOFTWARE AND THE NUMBER OF PERMISSIBLE SEATS TO THE USER IS EQUAL TO THE NUMBER OF COPIES PURCHASED. IT FURTHER SHOWS THAT INTELLECTU AL PROPERTY RIGHTS VEST IN CORPORATE ALONE AND THE END USER HAS SIMPLY A RI GHT TO USE THE PRODUCT, WHICH IS ALBEIT PERPETUAL. 7. UNDER SUCH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHETHER THE SALE OF SOFTWARE CAN BE TREATED AS `ROYALTY AS HELD BY THE AUTHORITIES OR `BUSINESS RECEIPTS AS CANVASSED BY THE ASSESSEE. THE LD. AR WAS FAIR ENOUGH TO CONCEDE THAT EXPLANATION 4 TO SECTION 9(1 )(VI) INSERTED BY THE ITA NO.5651/DEL/2010 10 FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1. 6.1976 BRINGS CONSIDERATION FOR RIGHT TO USE A COMPUTER SOFTWARE WITHIN THE AMBIT OF `ROYALTY. IT WAS, HOWEVER, SUBMITTED THAT THE DTA A HAS NOT BEEN CORRESPONDINGLY AMENDED IN LINE WITH THE SECTION 9( 1)(VI) OF THE ACT, SO AS TO BRING PAYMENT FOR RIGHT TO USE A COMPUTER SOF TWARE WITHIN THE PURVIEW OF ARTICLE 13 OF THE DTAA. THIS ARGUMENT WA S VEHEMENTLY COUNTERED BY THE LD. DR, WHO SUBMITTED THAT INSERT ION OF EXPLANATION 4 TO SECTION 9(1)(VI) SHOULD ALSO BE READ INTO THE DT AA AND THUS GOING BY THE LANGUAGE OF ARTICLE 13 OF THE DTAA AS SO AMENDE D, THE CASE OF THE ASSESSEE FALLS WITHIN THE SAME. 8. 1. WE FIRST TAKE UP THE CONTENTION OF THE LD. DR THAT THE RETROSPECTIVE AMENDMENT TO THE PROVISIONS OF THE ACT SHOULD BE CO NSIDERED FOR DETERMINING THE TAXABILITY OF THE AMOUNT EVEN UNDER THE DTAA. THIS CONTENTION, IN OUR CONSIDERED OPINION, IS PARTLY CO RRECT. ANY AMENDMENT CARRIED OUT TO THE PROVISIONS OF THE ACT WITH RETRO SPECTIVE EFFECT SHALL NO DOUBT HAVE THE EFFECT OF ALTERING THE PROVISIONS OF THE ACT BUT CAN NOT PER SE HAVE THE EFFECT OF AUTOMATICALLY ALTERING THE ANAL OGOUS PROVISION OF ITA NO.5651/DEL/2010 11 THE TREATY. THERE ARE CERTAIN PROVISIONS IN SOME TR EATIES WHICH DIRECTLY RECOGNIZE THE PROVISIONS OF THE DOMESTIC LAW. FOR E XAMPLE, ARTICLE 7 IN CERTAIN CONVENTIONS PROVIDES THAT THE DEDUCTIBILITY OF EXPENSES OF THE PERMANENT ESTABLISHMENT SHALL BE SUBJECT TO THE PRO VISIONS OF THE DOMESTIC LAW. IN SUCH A CASE, IF ANY RETROSPECTIVE AMENDMENT IS MADE TO THE PROVISIONS OF THE ACT GOVERNING THE DEDUCTIBILI TY OF THE EXPENSES, THE SAME SHALL APPLY UNDER THE TREATY AS WELL. 8.2. ARTICLE 3(3) OF THE DTAA PROVIDES THAT ANY TERM NOT DEFINED IN THE CONVENTION SHALL, UNLESS THE CONTEXT OTHERWISE REQUIRES, HAVE THE MEANING WHICH IT HAS UNDER THE LAWS OF THAT STATE C ONCERNING TAX TO WHICH THE CONVENTION APPLIES. THE NITTY-GRITTY OF A RTICLE 3(3) IN THE PRESENT CONTEXT IS THAT IF A PARTICULAR TERM HAS NO T BEEN DEFINED IN THE TREATY BUT THE SAME HAS BEEN DEFINED IN THE ACT AND FURTHER THERE IS A RETROSPECTIVE AMENDMENT TO THAT TERM UNDER THE ACT, THEN IT IS THIS AMENDED DEFINITION OF THE TERM AS PER THE ACT, WHIC H SHALL APPLY IN THE TREATY AS WELL. IF HOWEVER A PARTICULAR TERM HAS BE EN SPECIFICALLY DEFINED IN THE TREATY, THE AMENDMENT TO THE DEFINITION OF S UCH TERM UNDER THE ITA NO.5651/DEL/2010 12 ACT WOULD HAVE NO BEARING ON THE DEFINITION OF SUCH TERM IN THE CONTEXT OF THE CONVENTION, UNLESS THE DTAA IS ALSO CORRESPO NDINGLY AMENDED. A COUNTRY WHICH IS PARTY TO A TREATY CANNOT UNILATE RALLY ALTER ITS PROVISIONS. AN AMENDMENT TO A TREATY CAN BE MADE BI LATERALLY AFTER ENTERTAINING DELIBERATIONS FROM BOTH THE COUNTRIES WHO SIGNED IT. IF THERE IS NO AMENDMENT TO THE PROVISION OF THE TREATY BUT THERE IS SOME AMENDMENT ADVERSE TO THE ASSESSEE IN THE ACT, WHICH PROVISION HAS BEEN SPECIFICALLY DEFINED IN THE TREATY OR THERE IS NO R EFERENCE IN THE TREATY TO THE ADOPTION OF SUCH PROVISION FROM THE ACT, THEN S UCH AMENDMENT WILL HAVE NO EFFECT ON THE DTAA. 8.3. REVERTING TO THE FACTS OF THE EXTANT CASE, W E OBSERVE THAT THE TERM 'ROYALTIES' HAS BEEN DEFINED IN THE DTAA AS PER ART ICLE 13(3). SUCH DEFINITION OF THE TERM 'ROYALTIES' AS PER THIS ARTI CLE IS EXHAUSTIVE. PURSUANT TO THE INSERTION OF EXPLANATION (4) BY THE FINANCE ACT, 2012, WITH RETROSPECTIVE EFFECT, NO CORRESPONDING AMENDM ENT HAS BEEN MADE IN THE DTAA TO BRING THE DEFINITION OF `ROYALTIES AT PAR WITH THAT PROVIDED UNDER THE ACT. SUBJECT MATTER OF THE EXPLA NATION 4 IS OTHERWISE ITA NO.5651/DEL/2010 13 NOT A PART OF THE DEFINITION OF `ROYALTIES AS PE R ARTICLE 13 OF THE DTAA. AS SUCH, IT BECOMES VIVID THAT THE CONTENTIO N OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE RETROSPECTIVE INSERTION OF EXPLANATION 4 TO SECTION 9(1)(VI) SHOULD BE READ IN TO THE DTAA ALSO, CANNOT BE ACCEPTED. 9. NOW WE PROCEED TO EVALUATE THE CONTENTION OF THE LD. AR THAT THE PROVISIONS OF THE DTAA DO NOT PERMIT TAXABILITY OF RECEIPT FROM SALE OF SOFTWARE AS `ROYALTIES, DEFINED AS PER ARTICLE 13 , WHOSE RELEVANT PART READS AS UNDER : - ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ROYALTIES AND FEES FOR TECHNICAL SERVICES ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE M AY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUCH ROYALTIES AND FEES FOR TECHNICAL SER VICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND AC CORDING TO THE LAW OF THAT STATE; BUT IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES IS A RESIDENT OF THE OTHER CONTRACTING STATE, THE T AX SO CHARGED SHALL NOT EXCEED : (3) FOR THE PURPOSES OF THIS ARTICLE, THE TERM 'ROY ALTIES' MEANS : (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILMS, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROA DCASTING, ANY PATENT, ITA NO.5651/DEL/2010 14 TRADEMARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SC IENTIFIC EXPERIENCE; AND (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL OR SCIENTI FIC EQUIPMENT, OTHER THAN INCOME DERIVED BY AN ENTERPRISE OF A CONTRACTING ST ATE FROM THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC. 10. PARA 1 OF THIS ARTICLE PROVIDES THAT `ROYALTIES ARISING IN INDIA AND PAID TO A RESIDENT OF UK MAY BE TAXED IN UK. PARA 2 PROVIDES THAT SUCH ROYALTIES MAY ALSO BE TAXED IN INDIA. AS THE ASSESS EE IS A RESIDENT OF UK, INCOME FROM ROYALTIES ARISING IN INDIA, IS OTHERWI SE CHARGEABLE TO TAX IN INDIA AT THE STIPULATED RATE OF TAX. BUT IN ORDER TO TAX ANY AMOUNT UNDER THIS ARTICLE, IT IS SINE QUA NON THAT THE RECEIPT MUST FALL WITHIN THE SCOPE OF `ROYALTIES AS DEFINED IN PARA 3 OF THE ARTICLE 13. THE AO HAS ENCLOSED THE CASE OF THE ASSESSEE WITHIN SUB-PARA ( A) OF PARA 3. IT IS APPARENT THAT SUB-PARA (B) OF PARA 3 OF ARTICLE 13, DEALING WITH CONSIDERATION FOR THE USE OF ANY INDUSTRIAL, COMMER CIAL OR SCIENTIFIC EQUIPMENT ETC., HAS ABSOLUTELY NO RELEVANCE IN THE PRESENT CONTEXT AS NO EQUIPMENT HAS BEEN TRANSFERRED BY THE ASSESSEE TO T HE END USERS, WHICH IS SIMPLY A SOFTWARE. NOW COMING TO SUB-PARA (A) OF P ARA 3 OF THE ARTICLE, WE FIND THAT THE TERM `ROYALTIES HAS BEEN DEFINED TO MEAN A ITA NO.5651/DEL/2010 15 CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILMS, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADEMARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFO RMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. 11. THE DEPARTMENT HAS COVERED THE CASE WITH IN THE FOUR CORNERS OF THIS ARTICLE ON TWO COUNTS. FIRST IS THAT THE CONSI DERATION FROM THE ALLEGED SALE OF SOFTWARE IS NOTHING, BUT, FOR `USE OF PRO CESS. IN OUR CONSIDERED OPINION, THIS APPROACH IS NOT CORRECT BECAUSE THE A SSESSEE HAS NOT ALLOWED END USERS TO USE ANY `PROCESS. OBVIOUSLY, A `COMPUTER SOFTWARE CANNOT BE TREATED AS A `PROCESS BECAUSE THE END USERS BY USING THE SOFTWARE DO NOT HAVE ANY ACCESS TO THE SOURCE C ODES. WHAT IS AVAILABLE FOR THEIR USE IS SOFTWARE PRODUCT AS SUCH AND NOT THE PROCESSES EMBEDDED IN IT. TO CITE AN EXAMPLE, WHEN WE PURCHA SE A REFRIGERATOR AND PLACE VEGETABLES ETC. INTO IF FOR COOLING, WHA T WE USE FOR COOLING IS REFRIGERATOR AND NOT ITS IN-BUILT PROCESSES OR TECH NOLOGY WHICH FACILITATED ITA NO.5651/DEL/2010 16 IN THE MANUFACTURING OF A REFRIGERATOR. IN THE SAM E MANNER, SEVERAL PROCESSES MAY BE INVOLVED IN MAKING A COMPUTER SOF TWARE, BUT THE CUSTOMER USES THE SOFTWARE AS SUCH AND NOT THE PRO CESSES INVOLVED INTO IT. WE, THEREFORE, REFUSE TO ACCEPT THE VIEW POINT OF THE REVENUE THAT THE ASSESSEE RECEIVED CONSIDERATION FROM END USERS FOR THE USE OF OR THE RIGHT TO USE ANY `PROCESS. 12.1. AS REGARDS SECOND COUNT, THE LD. DR ACCENT UATED ON THE LANGUAGE OF PARA 3(A) OF THE ARTICLE 13 TO CANVASS A VIEW TH AT THE ASSESSEE RECEIVED THE AMOUNT FOR ALLOWING USE OF COPYRIGHT IN THE MIN ING SOFTWARE. A BARE PERUSAL OF THIS PARA DECIPHERS THAT THE TERM ROY ALTIES HAS BEEN DEFINED TO MEAN A CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY `COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK , PATENT, TRADEMARK AND DESIGN ETC. THIS CONTENTION RAISED ON BEHALF OF THE REVEN UE NEEDS TO BE DEALT IN TWO SEGMENTS. FIRSTLY, WE FIND THAT THERE IS NO SPE CIFIC MENTION OF `COMPUTER SOFTWARE IN PARA 3(A) OF THE ARTICLE 13 ALONG WITH LITERARY, ARTISTIC OR SCIENTIFIC WORK, PATENT, TRADEMARK ETC. SUCH LANGUAGE OF THE DTAA IS IN SHARP CONTRAST TO THE SPECIFIC USE OF TH E TERM `COMPUTER ITA NO.5651/DEL/2010 17 SOFTWARE OR `COMPUTER SOFTWARE PROGRAMME TOGETHER WITH LITERARY, ARTISTIC OR SCIENTIFIC WORK, PATENT, TRADEMARK ETC. IN MANY DTAAS. TO ILLUSTRATE, ARTICLE 12 OF THE DTAA BETWEEN INDIA AN D MALAYSIA DEFINES ROYALTIES TO MEAN `PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE ANY COPYRIGHT OF A LITER ARY, ARTISTIC OR SCIENTIFIC WORK.. PLAN, KNOW HOW, COMPUTER SOFTWARE PROGRAMME , SECRET FORMULA OR PROCESS.. SIMILARLY, THE DTAA BETWEEN INDIA AND KAZAKHSTAN DEFINES THE TERM ROYALTIES IN ARTICLE 12(3)(A) TO MEAN : PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION F OR THE USE OF OR THE RIGHT TO USE ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING SOFTWARE , CINEMATOGRAPH FILMS. SIMILARLY, THE DTAA WITH TURKMENISTAN ALSO DEFINES `ROYALTIES IN ARTICLE 1 2 TO MEAN : PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE O F OR THE RIGHT TO USE ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC W ORK, .. COMPUTER SOFTWARE , ANY PATENT, TRADE MARK . IT IS THUS CLEAR THAT WHEREVER THE GOVERNMENT OF INDIA INTENDED TO INCLUDE CONSIDERATI ON FOR THE USE OF SOFTWARE AS ROYALTIES, IT EXPLICITLY PROVIDED SO IN THE DTAA WITH THE CONCERNED COUNTRY. SINCE ARTICLE 13(3)(A) OF THE D TAA WITH UK DOES ITA NO.5651/DEL/2010 18 NOT CONTAIN ANY CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY `COMPUTER SOFTWARE, THE SAME CANNOT BE IMPORTED IN TO IT. 12.2. THE SECOND SEGMENT, WHICH IS QUITE PERTINE NT, IS THAT ARTICLE 13(3)(A) ENCOMPASSES CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK ETC. AS `ROYA LTIES. EVEN IF WE PRESUME FOR A MOMENT, WITH WHICH WE DO NOT AG REE, THAT A COMPUTER SOFTWARE IS COVERED WITH IN ANY OF THE TER MS SPECIFICALLY MENTIONED IN THE ARTICLE, SUCH AS `INFORMATION CONC ERNING COMMERCIAL EXPERIENCE ETC., THEN ALSO THE INSTANT SALE CONSI DERATION CANNOT BE BROUGHT WITHIN THE PURVIEW OF ARTICLE 13. THIS IS FOR THE REASON THAT IN ORDER TO BE COVERED WITH IN THE SCOPE OF THIS ARTIC LE, IT IS NECESSARY THAT USER SHOULD GET A COPYRIGHT OF `INFORMATION CONCERNING COMMERCIAL EXPERIENCE ETC. AND NOT THE OUTPUT OR PRODUCTS OF `LITERARY WORK, OR `INFORMATION CONCERNING COMMERCIAL EXPERIENCE ETC. THERE IS A MARKED DISTINCTION BETWEEN THE USE OF ANY COPYRIGHT OF A LITERARY WORK ETC. AND USE OF A LITERARY WORK ETC. AS SUCH. WHEREAS THE USE OF COPYRIGHT OF LITERARY OR ARTISTIC WORK, ETC., ENABLES THE USER T O TAKE COPIES OF SUCH ITA NO.5651/DEL/2010 19 LITERARY OR ARTISTIC WORK ETC. FOR ITS PURPOSE, THE SIMPLICITOR USER OF SUCH LITERARY OR ARTISTIC WORK, ETC., DOES NOT CONFER IN THE USER ANY SUCH RIGHT TO COPY. 12.3. AT THIS JUNCTURE, IT BECOMES RELEVANT TO SE E AS TO WHETHER THE END CUSTOMERS HAVE BEEN GIVEN A COPYRIGHT OF THE SOFTWA RE OR THE SOFTWARE AS SUCH. THE LD. DR HARPED ON THE RELEVANT PARTS OF TH E ASSESSMENT ORDER TO PUT FORTH THAT IT HAS BEEN SPECIFICALLY MENTIONED I N THE END USER AGREEMENT THAT THE CUSTOMER GETS SIMPLY THE RIGHT T O USE THE PRODUCT UNDER THE LICENSE, WHICH IS NON-TRANSFERRABLE. IT W AS ARGUED THAT THERE ARE SEVERAL RESTRICTIONS PLACED AS PER THE TERMS OF THE LICENSE WHICH PREVENT THE CUSTOMER FROM USING IT AS PER ITS OWN SWEET WIL L. 12.4. THIS CONTENTION OF THE LD. DR CAN BE BETTE R APPRECIATED AFTER HAVING A LOOK AT THE RELEVANT SECTIONS OF THE COPYR IGHT ACT. SECTION 14 OF THIS ACT DEFINES `COPYRIGHT TO MEAN : `THE EXC LUSIVE RIGHT SUBJECT TO THE PROVISIONS OF THIS ACT, TO DO OR AUTHORIZE THE DOING OF ANY OF THE FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBSTANT IAL PART THEREOF, NAMELY :- ITA NO.5651/DEL/2010 20 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 INCLU DING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS, II. TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT B EING 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 RECORDI NG 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 ADAP TATION OF THE WORK, ANY OF THE ACTS SPECIFIED IN RELATION TO THE WORK I N 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) TO SELL OR GIVE ON COMMERCIAL RENTAL OR OFFER FOR SALE OR FOR COMMERCIAL RENTAL ANY COPY OF THE COMPUTER PROGRAMM E : PROVIDED THAT SUCH COMMERCIAL RENTAL DOES NOT APPLY IN RESPECT OF COMPUTER PROGRAMMES WHERE THE PROGRAMME ITSELF IS N OT THE ESSENTIAL OBJECT OF THE RENTAL. . EXPLANATION - FOR THE PURPOSES OF THIS SECTION, A C OPY WHICH HAS BEEN SOLD ONCE SHALL BE DEEMED TO BE A COPY ALREADY IN CIRCULATION. ITA NO.5651/DEL/2010 21 12.5. WHEN WE CONSIDER THE RELEVANT PARTS OF THE END USER AGREEMENT, IT CLEARLY EMERGES THAT THE CUSTOMERS HAVE NOT BEEN ASSIGNED ANY OF THE THINGS WHICH HAVE BEEN MENTIONED IN SECTION 14 OF THE COPYRIGHT ACT, SO AS TO CONSTITUTE AN ASSIGNMENT OF A COPYRIGHT OF THE COMPUTER SOFTWARE TO THE END USER. INSOFAR AS THE VIEW POINT OF THE LD. DR ABOUT THE TAKING OF COPIES OF THE SOFTWARE BY THE END CUSTOMER IS CO NCERNED, WE FIND THAT THE SAME IS FOR SELF USE AND THUS COVERED BY SECTIO N 52 OF THE COPYRIGHT ACT, WHICH ENUMERATES CERTAIN ACTS THAT DO NOT AMOU NT TO INFRINGEMENT OF COPYRIGHT. THE RELEVANT PART OF THIS PROVISION I S AS UNDER : - (1) THE FOLLOWING ACTS SHALL NOT CONSTITUTE AN INF RINGEMENT OF COPYRIGHT NAMELY- AA. THE MAKING OF COPIES OR ADAPTATION OF A COMPUT ER PROGRAMME BY THE LAWFUL POSSESSOR OF A COPY OF SUCH COMPUTER PRO GRAMME, FROM SUCH COPY- I. IN ORDER TO UTILIZE THE COMPUTER PROGRAMME FOR T HE PURPOSES FOR WHICH IT WAS SUPPLIED, OR II. TO MAKE BACK UP COPIES PURELY AS A TEMPORARY PR OTECTION AGAINST LOSS, DESTRUCTION OR DAMAGE IN ORDER ONLY T O UTILIZE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED; 12.6. WE HAVE DISCUSSED SUPRA THE RELEVANT CLAUSES OF THE END USER AGREEMENT AND SEEN WHAT HAS BEEN PRECISELY TRANSFER RED TO THE END USERS ITA NO.5651/DEL/2010 22 OF THE SOFTWARE. IT CLEARLY EMERGES THAT NONE OF TH E ELEMENTS OF `COPYRIGHT AS MENTIONED IN SECTION 14 OF THE COPYR IGHT HAVE BEEN TRANSFERRED TO THE END USER INASMUCH AS HE CANNOT DO ANY OF THE THINGS AS SET OUT IN CLAUSES (A) (I) TO (VI) OF SECTION 14, T O THE EXTENT APPLICABLE, NOR CAN HE SELL OR GIVE ON COMMERCIAL RENTAL ANY CO PY OF THE COMPUTER PROGRAM. ON THE OTHER HAND, WHAT HAS BEEN PERMITTED TO HIM IS ALL THAT IS PERMISSIBLE UNDER SECTION 52 OF THE COPYRIGHT ACT, TO THE EXTENT APPLICABLE, WHICH SIMPLY FACILITATES HIM TO USE THE SOFTWARE WITHOUT INFRINGING COPYRIGHT. THIS CONCLUSIVELY DEMONSTRATE S THAT THE END USERS HAVE PAID CONSIDERATION FOR THE USE OF A COMPUTER SOFTWARE AND NOT COPYRIGHT OF A COMPUTER SOFTWARE . AS THE DTAA TREATS CONSIDERATION FOR THE USE OF COPYRIGHT OF A LITERARY OR ARTISTIC WORK, ETC. AS ROYALTIES, THERE CAN BE NO QUESTION OF INCLUDING CONSIDERATION FOR T HE USE OF A LITERARY OR ARTISTIC WORK, ETC. WITHIN THE AMBIT OF `ROYALTIES AS PER ARTICLE 13(3)(A) OF THE DTAA. 12.7. THERE IS ANOTHER DIMENSION OF THIS ISSUE. WHILE GOING THROUGH THE DISTRIBUTORS AGREEMENT, WE HAVE NOTED THAT THE ASSE SSEE HAS SIMPLY ITA NO.5651/DEL/2010 23 PURCHASED SHRINK-WRAPPED SOFTWARE OR OFF-THE-SHELF SOFTWARE FROM THE CORPORATE. THE ASSESSEE WAS NOT ALLOWED TO USE THE COPYRIGHT OF SUCH SOFTWARE, WHICH OBVIOUSLY VEST IN THE CORPORATE. S INCE THE ASSESSEE ITSELF HAS NOT ACQUIRED ANY COPYRIGHT IN THE MINING SOFTWARE, IT CANNOT RESELL OR TRANSFER ANYTHING MORE THAN WHAT IT HAS A CQUIRED. WE, THEREFORE, HOLD THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE FOR SALE OF SHRINK WRAPPED SOFTWARE CANNOT BE CONSIDERED AS `RO YALTIES WITHIN THE MEANING OF ARTICLE 13 OF THE DTAA AS THE SAME IS A CONSIDERATION FOR SALE OF A COPYRIGHTED PRODUCT AND NOT USE OF ANY CO PYRIGHT. 13.1. NOW WE TAKE UP THE CONTENTION OF THE LD. DR THAT PROVISIONS OF SECTION 9(1)(VI) SHOULD BE APPLIED TO DETERMINE THE TAXABILITY OF THE AMOUNT. IT WAS CONTENDED THAT AS THE LD. AR HAS ADM ITTED THE AMOUNT OF SALE OF SOFTWARE COVERED UNDER EXPLANATION 4 TO SEC TION 9(1)(VI), THE SAME SHOULD BE TAXED AS SUCH. 13.2. IN THIS REGARD, WE FIND THAT SUB-SECTION ( 1) OF SECTION 90 OF THE ACT PROVIDES THAT THE CENTRAL GOVERNMENT MAY ENTER INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY OTHER COUNTRY FOR THE GR ANTING OF RELIEF OF ITA NO.5651/DEL/2010 24 TAX IN RESPECT OF INCOME ON WHICH TAX HAS BEEN PAID IN TWO DIFFERENT TAX JURISDICTIONS. SUB-SECTION (2) OF SECTION 90 UNEQUI VOCALLY PROVIDES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AG REEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA UNDER SUB-S ECTION (1) FOR GRANTING RELIEF OF TAX OR FOR AVOIDANCE OF DOUBLE T AXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APP LIES, ' THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE' . THE CRUX OF SUB-SECTION (2) IS THAT WHERE A DTAA HAS BEEN ENTERED INTO WITH ANOTHER COUNTRY, THEN THE PROVISI ONS OF THE ACT SHALL APPLY ONLY IF THEY ARE MORE BENEFICIAL TO THE ASSES SEE. IN SIMPLE WORDS, IF THERE IS A CONFLICT BETWEEN THE PROVISIONS UNDER TH E ACT AND THE DTAA, THE ASSESSEE WILL BE SUBJECTED TO THE MORE BENEFICI AL PROVISION OUT OF THE TWO. IF THE PROVISION OF THE ACT ON A PARTICULAR IS SUE IS MORE BENEFICIAL TO THE ASSESSEE VIS-A-VIS THAT IN THE DTAA, THEN SUCH PROVISION OF THE ACT SHALL APPLY AND VICE VERSA . THE HONBLE SUPREME COURT IN THE CASE OF CIT V. P.V.A.L. KULANDAGAN CHETTIAR (2004) 267 ITR 654 (SC) HAS HELD THAT THE PROVISIONS OF SECTIONS 4 AND 5 ARE SUBJECT TO THE CONTRARY PROVISION, IF ANY, IN DTAA. SUCH PROVISIONS OF A DT AA SHALL PREVAIL ITA NO.5651/DEL/2010 25 OVER THE ACT AND WORK AS AN EXCEPTION TO OR MODIFIC ATION OF SECTIONS 4 AND 5. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE B OMBAY HIGH COURT IN CIT V. SIEMENS AKTIONGESELLSCHAFT (2009) 310 ITR 32 0 (BOM.) . IN THE LIGHT OF THE ABOVE DISCUSSION, IT BECOMES VIVID THA T IF THE PROVISIONS OF THE TREATY ARE MORE BENEFICIAL TO THE ASSESSEE VIS-A-VIS ITS COUNTERPART IN THE ACT, THEN THE ASSESSEE SHALL BE ENTITLED TO BE RULED BY THE PROVISIONS OF THE TREATY. WE HAVE HELD ABOVE THAT AMOUNT FROM SALE OF SOFTWARE FALLS UNDER ARTICLE 7 (BUSINESS PROFITS) AND NOT UN DER ARTICLE 13 (ROYALTIES). SINCE THE POSITION AS PER THE DTAA IS MORE BENEFICIAL TO THE ASSESSEE IN COMPARISON WITH THAT UNDER THE ACT, IN WHICH THE RECEIPTS ADMITTEDLY FALL UNDER SECTION 9(1)(VI), WE HOLD THA T THE ASSESSEE IS ENTITLED TO EXERCISE OPTION IN HIS FAVOUR BY CHOOSI NG TO BE GOVERNED BY THE DTAA. 14.1. BE THAT AS IT MAY, WE FIND THAT THERE IS ANOTHER ASPECT OF THE MATTER. THIS IS WITHOUT PREJUDICE TO OUR FINDING TH AT CONSIDERATION FOR SALE OF SOFTWARE DOES NOT FALL WITHIN THE SCOPE OF THE TERM `ROYALTIES. EVEN IF THE VIEW POINT OF THE AO IS ACCEPTED FOR A MOMENT, WITH WHICH ITA NO.5651/DEL/2010 26 WE DO NOT REALLY AGREE, THAT SUCH AMOUNT FALLS UND ER PARA 3(A) OF ARTICLE 13, IN OUR CONSIDERED OPINION, EVEN THEN THE AMOUNT CANNOT BE TAXED AS `ROYALTIES BECAUSE OF THE OPERATION OF PARA 6 OF ARTICLE 13, WHICH READS AS UNDER : - 6. THE PROVISIONS OF PARAGRAPHS 1 AND 2 OF THIS ARTICLE SHALL NOT APPLY IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FO R TECHNICAL SERVICES, BEING A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARISE THROUGH A PERMANENT ESTABLISHMENT SI TUATED THEREIN , OR PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL S ERVICES FROM A FIXED BASE SITUATED THEREIN, AND THE RIGHT, PROPERTY OR C ONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISHMENT OR FIXE D BASE. IN SUCH CASE, THE PROVISION OF ARTICLE 7 (BUSINESS PROFITS) OR ARTICLE 15 (INDEPENDENT PERSONAL SERVICES) OF THIS CONVENTION, AS THE CASE MAY BE, SHALL APPLY. 14.2. PARA 6 OF ARTICLE 13, TO THE EXTENT APPLICA BLE, STATES THAT THE PROVISIONS OF PARAGRAPHS 1 AND 2 OF THIS ARTICLE SH ALL NOT APPLY IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHN ICAL SERVICES, BEING A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINES S IN THE OTHER CONTRACTING STATE IN WHICH THE ROYALTIES OR FEES FO R TECHNICAL SERVICES ARISE THROUGH A PERMANENT ESTABLISHMENT SITUATED TH EREIN. IN SIMPLE TERMS, THIS MEANS THAT THE AMOUNT FALLING UNDER PAR A 3 OF ARTICLE 13 ITA NO.5651/DEL/2010 27 CANNOT BE TAXED AS ROYALTIES UNDER PARAS 1 AND 2, I F THE BENEFICIAL OWNER OF THE ROYALTIES, BEING A RESIDENT OF A CONTRACTING STATE (UK), CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE (INDIA) IN WHICH THE ROYALTIES ARISES THROUGH A PERMANENT ESTABLISHMENT SITUATED T HEREIN (INDIA). ONCE THESE CONDITIONS ARE SATISFIED, THEN THE LATER PART OF PARA 6 COMES INTO PLAY, AS PER WHICH THE PROVISION OF ARTICLE 7 (BUSI NESS PROFITS) OF THIS CONVENTION SHALL APPLY. IN OTHER WORDS, ON THE FUL FILLMENT OF THE CONDITIONS IN THE FIRST PART OF PARA 6, THE AMOUNT SHALL NOT BE CONSIDERED AS `ROYALTIES UNDER PARAS 1 AND 2 OF ARTICLE 13, B UT SHALL FALL FOR CONSIDERATION UNDER ARTICLE 7 OF THE DTAA, BEING, ` BUSINESS PROFITS. THERE IS NO DISPUTE ON THE FACT THAT THE ASSESSEE I S A UK COMPANY HAVING ITS BRANCH OFFICE IN INDIA (WHICH IS ITS PERMANENT ESTABLISHMENT) AND THE TRANSACTIONS IN QUESTION ARE SALE OF COMPUTER SOFTW ARE MADE BY SUCH PERMANENT ESTABLISHMENT TO CERTAIN PARTIES IN INDIA . THIS SHOWS THAT ALL THE REQUISITE CONDITIONS FOR THE APPLICABILITY OF F IRST PART OF PARA 6 OF ARTICLE 13 ARE FULLY SATISFIED. ON SUCH FULFILLMENT , THE AMOUNT OF `ROYALTIES IS LIABLE TO BE CONSIDERED UNDER ARTIC LE 7 (BUSINESS PROFITS). ITA NO.5651/DEL/2010 28 AS THE ASSESSEE HAS DECLARED SUCH RECEIPTS UNDER AR TICLE 7, THE VIEW TAKEN BY THE AUTHORITIES IN THIS REGARD, SHIFTING S UCH AMOUNT FROM ARTICLE 7 (BUSINESS PROFITS) TO ARTICLE 13 (ROYALTIES), BEI NG CONTRARY TO THE MANDATE OF THE DTAA, IS LIABLE TO BE AND IS HEREBY SET ASIDE. 15. IN THE FINAL ANALYSIS, WE APPROVE THE ASSESSE ES STAND ON THE SALE OF COMPUTER SOFTWARE AS BUSINESS PROFITS, BY JETTISONI NG THE REVENUES VIEWPOINT OF ROYALTY. THIS GROUND IS ALLOWED. 16.1. THE NEXT ITEM IN DISPUTE IS RECEIPT OF RS. 36,69,021/- TOWARDS ANNUAL MAINTENANCE CONTRACT. THE ASSESSEE DECLARED SUCH AMOUNT AS BUSINESS RECEIPTS AND OFFERED IT ACCORDINGLY. THE A O TREATED THIS AMOUNT ALSO AS `ROYALTIES. THE ASSESSEE WAS UNSUCCESSFU L BEFORE THE DRP AND THAT IS HOW THIS ISSUE HAS COME UP BEFORE US. 16.2. WE FIND FROM PAGE 29 OF THE ASSESSMENT ORD ER THAT THE AO HAS DISCUSSED THE NATURE OF THIS RECEIPT AS ANNUAL MAIN TENANCE CONTRACT PRIMARILY RELATING TO PROVIDING UPDATES AND NEW VER SIONS OF THE SOFTWARE. HE NOTICED THAT: THIS ACTIVITY IS SIMPLY AN EXTENS ION OF ORIGINAL PROCESS AND ITS CHARACTERIZATION WILL BE SAME AS THAT OF TH E ORIGINAL SOFTWARE. ITA NO.5651/DEL/2010 29 HE, THEREFORE, HELD THIS AMOUNT TO BE FALLING UNDER CLAUSE (VI) OF EXPLANATION 2 BELOW SECTION 9(1)(VI) OF THE ACT. IN THE NEXT PARA, HE AGAIN HELD THIS AMOUNT AS `ROYALTIES UNDER THE DTA A. THEREAFTER, HE DISCUSSED THE RELEVANCE OF PARA 4 OF ARTICLE 13 OF THE DTAA, BEING FEES FOR TECHNICAL SERVICES. HE ALSO HELD SUCH RE CEIPTS AS FALLING WITHIN THE DESCRIPTION OF FEES FOR TECHNICAL SERVICES WI THIN THE MEANING OF ARTICLE 13(4)(A) OF THE INDO-UK DTAA. IN THE ULTIM ATE ANALYSIS, HE HELD SUCH RECEIPTS ON PAGE 31 AS ROYALTY AND CLUBBED IT WITH SOFTWARE SALES OF RS.1.04 CRORE TO MAKE `INCOME AS ROYALTY TOTALING RS.1,40,87,804. IT IS THUS DISCERNIBLE THAT THE AO FINALLY TREATED REC EIPTS FROM ANNUAL MAINTENANCE CONTRACT AS PART OF ROYALTY COVERED UND ER SECTION 9(1)(VI) OF ARTICLE 13(3), AS HAVING THE SAME CHARACTER AS T HAT OF THE ORIGINAL SOFTWARE. WHILE DISCUSSING RECEIPTS FROM SALE OF S OFTWARE AMOUNTING TO RS.1.04 CRORE, WE HAVE HELD THAT THE SAME IS IN THE NATURE OF BUSINESS RECEIPTS COVERED UNDER ARTICLE 7 AND NOT ARTICLE 13 OF THE DTAA. GOING BY THE AOS OWN VERSION OF RECEIPTS FROM ANNUAL MAI NTENANCE CONTRACT HAVING THE SAME CHARACTER AS THAT OF SOFTWARE SALES , WE CONSEQUENTLY HOLD SUCH RECEIPTS ALSO FALLING UNDER ARTICLE 7 OF BUSINESS PROFITS. ITA NO.5651/DEL/2010 30 16.3. BEFORE PARTING WITH THIS ISSUE, WE WANT TO CLARIFY THAT WE HAVE NOT INDEPENDENTLY EXAMINED THE CHARACTER OF RECEIPT FROM ANNUAL MAINTENANCE CONTRACT AS `ROYALTIES OR FEES FOR TE CHNICAL SERVICES. IT IS SO BECAUSE OF THE AO HIMSELF FINALLY HOLDING IT TO BE OF THE SAME CHARACTER AS THE SALE OF SOFTWARE, AND THUS ROYALT Y COVERED UNDER ARTICLE 13(3) READ WITH SECTION 9(1)(VI) AND NOT FEES FOR T ECHNICAL SERVICES COVERED UNDER ARTICLE 13(4) READ WITH SECTION 9(1)( VII). 17.1. GROUND NO. 3 IS AGAINST TREATING THE RECEIP TS FROM TRAINING FEES AMOUNTING TO RS.9,62,372/- AS FEES FOR TECHNICAL S ERVICES COVERED UNDER ARTICLE 13(4) OF THE DTAA. THERE IS NO DISCU SSION IN THE ASSESSMENT ORDER ABOUT THE NATURE OF TRAINING RECEI PTS EXCEPT ONE LINE WRITTEN ON PAGE 31 OF THE ASSESSMENT ORDER TREATING TRAINING FEES OF RS.9.62 LAC AS FEES FOR TECHNICAL SERVICES UNDER ARTICLE 13 OF DTAA. THE ASSESSEE IS AGGRIEVED AGAINST THIS TREATMENT GI VEN BY THE AUTHORITIES AS AGAINST ITS CLAIM OF BUSINESS RECEIPT COVERED UN DER ARTICLE 7 OF THE DTAA. ITA NO.5651/DEL/2010 31 17.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. PRIMARY QUESTION IN THIS REGAR D IS TO CONSIDER IF ARTICLE 13(4) IS ATTRACTED ON RECEIPTS FOR IMPARTIN G TRAINING TO THE EMPLOYEES OF END USERS OF THE SOFTWARE SOLD BY THE ASSESSEE. IN THIS REGARD, IT WILL BE APPOSITE TO CONSIDER THE RELEVAN T PARTS OF PARAS 4 AND 5 OF ARTICLE 13, WHICH ARE AS UNDER : - 4. FOR THE PURPOSES OF PARAGRAPH 2 OF THIS ARTICLE , AND SUBJECT TO PARAGRAPH 5, OF THIS ARTICLE, THE TERM 'FEES FOR TE CHNICAL SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDE RATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONN EL) WHICH : (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE IS RECEIVED; OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT O F THE PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECEIVED; OR (C) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSF ER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. 5. THE DEFINITIONS OF FEES FOR TECHNICAL SERVICES I N PARAGRAPH 4 OF THIS ARTICLE SHALL NOT INCLUDE AMOUNTS PAID : (A) FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY, AS WELL AS INEXTRICABLY AND ESSENTIALLY LINKED, TO THE SALE OF PROPERTY , OTHER THAN PROPERTY DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE; ITA NO.5651/DEL/2010 32 (B) TO (E) .. 17.3. PARA 5 EXCLUDES RECEIPTS FROM THE AMBIT OF `FEES FOR TECHNICAL SERVICES. IT IS NOTICEABLE THAT PROVISIONS OF PARA 4 ARE SUBJECT TO PARAGRAPH 5. IT MEANS THAT IF A PAYMENT FALLS UNDER PARA 5, THEN IT SHALL BE REMOVED FROM PARA 4, EVEN IF IT IS COVERED WITHIN T HAT. WHEN WE READ PARA 4 IN JUXTAPOSITION TO PARA 5 OF THE ARTICLE 13 , THE POSITION WHICH FOLLOWS IS THAT WHEREAS ARTICLE 13(4) DEFINES THE T ERM 'FEES FOR TECHNICAL SERVICES' TO MEAN PAYMENTS, INTER ALIA, FOR RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES THAT ARE ANCILLARY AND SUBS IDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE, PARA 5 PROVIDES THAT `FEES FOR TECHNICAL SERVICES IN PARAGRAPH 4 SHALL NOT INCLUDE AMOUNTS PAID, INTER ALIA, FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY, AS WELL AS INEXTRICABLY AND ESSENTIALLY LINKED, TO THE SALE OF PROPERTY, OTHER THAN PROPERTY DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE. THIS SHOWS THAT IN SO FAR AS CONSIDERATION FOR SERVICES THAT ARE ANCILLARY, SUBS IDIARY, AND INEXTRICABLY ITA NO.5651/DEL/2010 33 LINKED TO THE SALE OF PROPERTY DESCRIBED IN PARAGRA PH 3(A) OF THE ARTICLE 13 IS CONCERNED, THE PROVISIONS OF PARA 4 APPLY. I F HOWEVER, CONSIDERATION IS FOR SERVICES THAT ARE ANCILLARY, S UBSIDIARY, AND INEXTRICABLY LINKED TO THE SALE OF PROPERTY OTHER THAN THAT DESCRIBED IN PARAGRAPH 3(A) OF THE ARTICLE 13, THEN IT FALLS IN PARA 5 AND THUS CEASE TO BE `FEE FOR TECHNICAL SERVICES AS PER PARA 4 OF AR TICLE 13. WHILE DISCUSSING THE NATURE OF RECEIPTS FROM SALE OF SOFT WARE ABOVE, WE HAVE HELD IN PRINCIPLE THAT SUCH CONSIDERATION DOES NOT FALL WITHIN THE DEFINITION OF ROYALTIES GIVEN IN PARA 3(A) OF ARTIC LE 13. SINCE THE TRAINING OF PERSONNEL OF END USERS FOR WHICH THIS CONSIDERAT ION HAS BEEN RECEIVED IS ANCILLARY AND SUBSIDIARY TO THE SALE OF SOFTWARE , THE SAME, BEING COVERED UNDER PARA 5, CANNOT BE TREATED AS FEES FO R TECHNICAL SERVICES AS PER PARA 4 OF ARTICLE 13 OF THE DTAA. EX CONSEQUENTI , WE ALLOW THIS GROUND BY APPROVING THE ASSESSEES STAND OF INCLUD ING SUCH RECEIPTS UNDER ARTICLE 7 OF THE DTAA. 18.1. LAST GROUND OF THE APPEAL IS AGAINST THE E STIMATION OF INCOME FROM BUSINESS AT RS.15,585/-, AT THE RATE OF 18% ON CONSULTANCY RECEIPTS ITA NO.5651/DEL/2010 34 AND MISCELLANEOUS INCOME. THE FACTS APROPOS THIS G ROUND ARE THAT THE ASSESSEE DECLARED CONSULTANCY RECEIPTS OF RS.25,000 /- AND MISCELLANEOUS INCOME OF RS.61,584/-. THE AO WORKED OUT NET PROFIT RATE OF 18% FROM THE ASSESSEES PROFIT & LOSS ACCOU NT. THE SAME PROFIT RATE WAS APPLIED TO THESE TWO RECEIPTS TO DETERMINE BUSINESS INCOME OF RS.15,585/-. THE ASSESSEE IS AGGRIEVED AGAINST THI S ADDITION. 18.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE AO HAS ESTIMAT ED INCOME AT THE RATE OF 18% ON CONSULTANCY RECEIPTS AND MISCELLANEOUS IN COME WITHOUT POINTING OUT ANY MISTAKE IN OR REJECTING BOOKS OF A CCOUNT MAINTAINED BY THE ASSESSEE. IT IS TRITE LAW THAT UNLESS THE BOOK S ARE REJECTED AFTER POINTING OUT CERTAIN DEFICIENCIES, THE DECLARED PRO FIT OF THE ASSESSEE CANNOT BE DISTURBED. IN THE ABSENCE OF AN IOTA OF E VIDENCE JUSTIFYING REJECTION OF BOOKS OF ACCOUNT, WE OVERTURN THE IMPU GNED ORDER ON THIS ISSUE AND ORDER FOR THE DELETION OF ADDITION. IT IS ACCORDINGLY HELD THESE TWO AMOUNTS BE INCLUDED IN THE INCOME OF THE ASSESS EE AS ORIGINALLY DECLARED. ITA NO.5651/DEL/2010 35 19. IN THE RESULT, THE APPEAL IS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 14.03.201 6. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 14 MARCH, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI. ITA NO.5651/DEL/2010 36 DATE 1. DRAFT DICTATED ON 10.3.2016 2. DRAFT PLACED BEFORE THE AUTHOR 11.3.2016 3. DRAFT PLACED BEFORE THE OTHER MEMBER 4. APPROVED DRAFT COMES TO THE SR.PS/PS 5. FILE SENT TO THE BENCH CLERK 6. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 7. DATE ON WHICH FILE GOES TO THE AR 8. DATE OF DISPATCH OF ORDER. *
Mehul