Mentor Graphics Ireland Ltd., New Delhi V. ACIT (International Taxation), New Delhi

ITA 6693/DEL/2016

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1673 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 27-04-2017
• Assessment Year: 2013-2014
• Appeal Filed On: 29-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G K DHALL
• Keywords: Business income; Double taxation relief; Permanent establishment; Advance ruling
• Section: 90; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER ITA NO.6693/DEL/2016 ASSESSMENT YEAR: 2013-14 MENTOR GRAPHICS IRELAND LTD., B-29, 9 TH FLOOR, HIMALAYA HOUSE, 23, KASTURBA GANDHI MARG, NEW DELHI-110001 (PAN: AAGCM6365H) VS ACIT(INTERNATIONAL TAXATION), CIRCLE 2(2)(1), ROOM NO. 411, 4 TH FLOOR, E-2 BLOCK, PRATYAKSH KAR BHAWAN, CIVIC CENTRE, J.L. NEHRU MARG, NEW DELHI-110002 APPELLANT RESPONDENT APPELLANT BY: SHRI TARANDEEP SINGH, ADV OCATE RESPONDENT BY : SHRI G.K. DHALL, C IT DR DATE OF HEARING : 29.08. 2018 DATE OF PRONOUNCEMENT : 23.11.2018 O R D E R PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: THE ASSESSE HAS FILED THIS APPEAL, BEING AGGRIEVED BY THE FINAL ORDER OF ASSESSMENT DATED 31 ST OCTOBER, 2016 PASSED BY THE ACIT, CIRCLE 2(2)(1), INTERNATIONAL TAX, NEW DELHI U/S 144C(1)/143 OF THE INCOME TAX ACT, 1961 (HEREINAFTE R CALLED THE ACT). FINAL ORDER OF ASSESSMENT HAS BEEN PASSED BY THE ASSESSING ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 2 OFFICER (AO) PURSUANT TO THE DIRECTIONS ISSUED BY L D. DISPUTE RESOLUTION PANEL (DRP) VIDE ORDER DATED 6 TH SEPTEMBER, 2016. 2.0 BRIEFLY STATED, THE RELEVANT FACTS ARE THAT TH E ASSESSEE IS A COMPANY INCORPORATED IN IRELAND AND DURING THE YEAR UNDER CONSIDERATION IT WAS IN RECEIPT OF CERTAIN SUM TOWA RDS SALE OF SOFTWARE AND PROVISION FOR SUPPORT SERVICES FROM ITS INDIAN DISTRIBUTORS. IT IS UNDISPUTED THAT THE AMOUNT RECE IVED BY THE ASSESSEE FROM PROVISION OF SUPPORT SERVICES WAS B EEN OFFERED TO TAX ON GROSS BASIS AS PER ARTICLE 12 OF INDIA-IRELA ND DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA). IT IS ALSO NOT IN DISPUTE THAT THERE IS NO PERMANENT ESTABLISHMENT (PE) OF TH E ASSESSEE IN TERMS OF ARTICLE 5 OF DTAA IN INDIA. IN THE PRESENT APPEAL, THE DISPUTE PERTAINS TO THE TAXABILITY OF AMOUNT RECEIV ED BY THE ASSESSEE FROM SALE OF SOFTWARE. DURING THE COURSE OF ASSESSMENT, THE AO DIRECTED THE ASSESSEE TO SUBMIT AS TO WHY THE RECEIPTS ON ACCOUNT OF SALE OF SOFTWARE MAY NOT B E TAXED AS INCOME FROM ROYALTY AS PER THE PROVISIONS OF SECTIO N 9(1)(VI) OF THE ACT AND ARTICLE 12 OF THE AGREEMENT FOR AVOIDANCE O F DOUBLE TAXATION BETWEEN INDIA AND IRELAND. IN RESPONSE, TH E ASSESSEE SUBMITTED COPIES OF DISTRIBUTOR AGREEMENTS EXECUTED BY IT WITH ITS INDIAN DISTRIBUTOR AND COPIES OF END USER LICEN CE AGREEMENTS. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 3 THE ASSESSEE ALSO SUBMITTED COPIES OF INVOICES RAIS ED BY IT ON ITS INDIAN DISTRIBUTORS. BEFORE THE AO, IT WAS SUBMITTE D BY THE ASSESSEE THAT NEITHER THE DISTRIBUTOR NOR THE END U SER HAD A RIGHT TO REVERSE ENGINEER, REVERSE-COMPILE OR OTHER WISE RE- ENGINEER SOFTWARE PRODUCTS. THE INCORPOREAL RIGHT T O THE SOFTWARE I.E., COPYRIGHT REMAINED WITH THE ASSESSEE AND THE SAME WAS NOT TRANSFERRED IN ANY WAY BY THE ASSESSEE TO ITS DISTR IBUTORS OR THE END USERS. IT WAS SUBMITTED BEFORE THE AO THAT THE RIGHT TO USE A COPYRIGHT IN THE PROGRAMME WAS TOTALLY DIFFERENT FR OM THE RIGHT TO USE A PROGRAMME EMBEDDED IN A FLOPPY/DISK/CD/DONGLE WHICH MAY BE A SOFTWARE AND THE PAYMENT MADE FOR THE SAME CANNOT BE SAID TO BE HAVE BEEN RECEIVED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE OF ANY COPYRIGHT TO BRING IT WITHIN TH E DEFINITION OF ROYALTY AS GIVEN IN THE DTAA. THE ASSESSEE FURTHER CLARIFIED AND SUBMITTED THAT WHAT THE DISTRIBUTORS ACQUIRED WAS O NLY A COPY OF THE COPYRIGHTED ARTICLE AND THE COPYRIGHT REMAINED WITH IT. IN SUPPORT OF ITS CLAIM, THE ASSESSEE RELIED UPON FOLL OWING JUDICIAL PRONOUNCEMENTS:- (I) DIRECTOR OF INCOME TAX VS. INFRASOFT LTD. REPOR TED IN 220 TAXMAN 273 (DEL) (II) COMMISSIONER OF INCOME TAX VS. DYNAMIC VERTICA L SOFTWARE INDIA (P) LTD. REPORTED IN 332 ITR 222 (DE L) ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 4 (III) CIT VS M. TECH INDIA P. LTD. REPORTED IN 381 ITR 31(DEL) (IV) CIT VS ERICSSON A.B., REPORTED IN 343 ITR 470 (DEL) (V) DASSAULT SYSTEMS K.K. REPORTED IN 322 ITR 125 (AAR) (VI) NOVEL INC. VS. DDIT REPORTED IN 49 SOT 45 (MUM ) (VII) M/S CAPGEMINI BUSINESS SERVICES (INDIA) REPOR TED IN 158 ITD 1(MUM) (VIII) TII TEAM TELECOM INTERNATIONAL PVT. LTD. REP ORTED IN 47 SOT 76 (MUM) (URO) 2.1 THE AO, HOWEVER, WAS NOT CONVINCED AND IN THE PROPOSED DRAFT ORDER OF ASSESSMENT HE HELD THAT THE ASSESSEES RECEIPTS ON ACCOUNT OF SALE OF SOFTWARE WAS CHARG EABLE TO TAX AS INCOME FROM ROYALTY AS DEFINED UNDER PROVISIONS OF SECTION 9(1)(VI) OF THE ACT AND ARTICLE 12 OF THE DTAA. IN THIS REGARD, IT WAS HELD BY THE AO AS UNDER:- THE ASSESSEE COMPANY IS COMPANY BASED OUT OF IRELA ND. AS PER SECTION 90 OF THE INCOME TAX ACT, 1961 TAXABILI TY OF A NON-RESIDENT IS TO BE GOVERNED BY THE PROVISIONS OF THE ACT OR THE DTAA WHICHEVER IS MORE BENEFICIAL TO THE ASSESS EE. PAYMENTS FOR SOFTWARE ARE ANYWAYS TAXABLE UNDER SEC TION 9(1)(VI) OF THE ACT. THE INTENTION OF THE LEGISLATU RE TO TAX SOFTWARE PAYMENTS WAS MADE CLEAR BY WAY OF AMENDMEN TS BROUGHT IN THE BY FINANCE ACT 2012 BY WAY OF INSERT ION OF EXPLANATION 12 TO SECTION 9(1)(VI) BY WHICH IT WAS CLARIFIED ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 5 THAT TRANSFER OF ALL OR ANY RIGHTS FOR USE OR RIGHT TO USE A COMPUTER SOFTWARE. THE ASSESSEE BEING A RESIDENT OF IRELAND IS ELIGIBL E TO CLAIM TAXATION UNDER THE DTAA IF PROVISIONS OF DTAA ARE N OT BENEFICIAL TO ASSESSEE. THE RELEVANT DTAA IN THIS C ASE IS INDIA-IRELAND DTAA. AS PER ARTICLE 12 OF THE DTAA, ROYALTIES MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERAT ION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF L ITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS OR FILMS OR TAPES FOR RADIO OR TELEVISION BROADCASTING , ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA O R PROCESS OR FOR THE USE OF OR THE RIGHT TO USE INDUSTRIAL, C OMMERCIAL OR SCIENTIFIC EQUIPMENT, OTHER THAN AN AIRCRAFT OR FOR INFORMATION CONCERNING INDUSTRIAL COMMERCIAL OR SCIENTIFIC EXPE RIENCE. ACCORDING TO THE SUBMISSIONS MADE BY THE ASSESSEE T HE PAYMENTS RECEIVED FOR SALE OF SOFTWARE, WITHOUT ALL OWING ANY RIGHT TO USE THE COPYRIGHT IN THE SOFTWARE, WOULD N OT BE COVERED WITHIN THE SCOPE OF ROYALTY UNDER THE DTA A. THE ASSESSEE ALSO SUBMITTED THAT THE PARTING OF INTELLE CTUAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOF TWARE PRODUCT IN FAVOR OF THE DISTRIBUTORS IS WHAT IS CON TEMPLATED BY THE DEFINITION OF ROYALTY PROVIDED IN THE DTAA. M ERELY AUTHORIZING THE DISTRIBUTOR TO DISTRIBUTOR THE SOFT WARE PRODUCTS IN INDIA AND ENABLING THE END-CUSTOMER TO HAVE THE BENEFIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN W ITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT, AMOUNT TO USE OF OR RIGHT TO USE ANY COPYRIGHT. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 6 THE ABOVE SUBMISSIONS OF THE ASSESSEE ARE NOT TENAB LE SINCE THE DEFINITION OF ROYALTY UNDER THE DTAA COVERS NOT ONLY THE PAYMENT MADE FOR THE RIGHT TO USE ANY COPYRIGHT BUT ALSO THE PAYMENT MADE FOR THE RIGHT TO USE ANY COPYRIGHT. TH EREFORE, CONSIDERATION RECEIVED FROM DISTRIBUTORS IS TO BE T REATED AS ROYALTY EVEN UNDER THE DTAA AS THE DEFINITION COVER S THE CONSIDERATION RECEIVED FOR THE USE OF COPYRIGHT. KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRO NICS CO. LTD. (345 ITR 494) WHEREIN THE HONBLE KARNATAKA HI GH COURT HAS HELD THAT PAYMENTS MADE FOR SOFTWARE WOULD BE T AXABLE AS ROYALTY EVEN UNDER THE DTAA. THE HONBLE HIGH CO URT HELD AS UNDER:- IF IS ALSO CLEAR FROM THE ABOVE SAID ANALYSIS OF T HE DTAA, INCOME-TAX ACT, COPYRIGHT ACT THAT THE PAYMEN T WOULD CONSTITUTE ROYALTY WITHIN THE MEANING OF AR TICLE 12(3) OF THE DTAA AND EVEN AS PER THE PROVISIONS OF SECTION 9(1)(VI) AS THE DEFINITION OF ROYALTY UND ER SECTION 9(1)(VI) IS BROADER THAN THE DEFINITION OF ROYALTY UNDER THE DTAA AS THE RIGHT THAT IS TRANSFERRED IN THE IN STANT CASE IS THE TRANSFER OF COPYRIGHT INCLUDING THE RIG HT TO MAKE COPY OF SOFTWARE FOR INTERNAL BUSINESS, AND PAYMENT MADE IN THAT REGARD WOULD CONSTITUTE ROYAL TY FOR IMPARTING OF ANY INFORMATION CONCERNING TECHNIC AL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL AS PER CLAUSE (IV) OF EXPLANATI ON 2 TO SECTION 9(1)(VI). IN ANY VIEW OF THE MATTER, IN VIE W OF THE PROVISIONS OF SECTION 90, AGREEMENTS WITH FOREIGN COUNTRIES (DTAA) WOULD OVERRIDE THE PROVISIONS OF T HE ACT. ONCE IT IS HELD THAT PAYMENT MADE BY THE ASSES SEE TO THE NON-RESIDENT COMPANIES WOULD AMOUNT TO ROYA LTY WITHIN THE MEANING OF ARTICLE 12 OF THE DTAA WITH T HE RESPECTIVE COUNTRY, IT IS CLEAR THAT THE PAYMENT MA DE BY ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 7 THE ASSESSEE TO THE NON-RESIDENT SUPPLIER WOULD AMO UNT TO ROYALTY. SIMILAR VIEW WAS UPHELD BY KARNATAKA HIGH COURT IN THE CASE OF SYNOPSIS INTERNATIONAL OLD LTD. (212 TAXMAN 454) WHEREIN THE COURT WHILE DEALING WITH TAXABILITY OF SOFTWARE PAYMENTS HELD AS UNDER:- IT IS NO DOUBT TRUE THE PROVISIONS OF THE DTAA OVE RRIDES THE PROVISIONS OF THE INCOME-TAX ACT. IN THE DTAA T HE TERM ROYALTY MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OR THE RIGHT TO USE ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK WHEREAS IN THE INCOME-TAX ACT, ROYALTY MEANS CONSIDERATION FOR THE TRANSFER OF ALL OR ANY RIGHTS INCLUDING THE GRA NTING OF A LICENSE. THEREFORE, UNDER THE DTAA TO CONSTITUTE ROYALTY THERE NEED NOT BE ANY TRANSFER OF OR ANY RI GHTS IN RESPECT OF ANY COPYRIGHT. IT IS SUFFICIENT IF CONSI DERATION IS RECEIVED FOR USE OF OR THE RIGHT TO USE ANY COPY RIGHT. THEREFORE, IF THE DEFINITION OF ROYALTY IN THE DTAA IS TAKEN INTO CONSIDERATION IT IS NOT NECESSARY THERE SHOULD BE A TRANSFER OF ANY EXCLUSIVE RIGHT. A MERE RIGHT TO USE OR THE USE OF A COPYRIGHT FALLS WITHIN THE MISCHIEF OF EXPLANATION (2) TO CLAUSE (VI) OF SUB-SECTION (1) O F SECTION 9 AND IS LIABLE TO TAX. THEREFORE, THERE IS NO SUBS TANCE IN THE SAID CONTENTION. SIMILAR VIEW WAS ALSO UPHELD BY JURISDICTIONAL DELH I TRIBUNAL IN THE CASE OF MICROSOFT CORPORATION VS. ADIT (8 IT R 522) WHEREIN THE PAYMENTS FOR SOFTWARE WERE HELD TO BE T AXABLE AS ROYALTY BOTH UNDER THE ACT AND THE DTAA AND THE AUTHORITY FOR ADVANCE RULINGS IN THE RULINGS PRONOU NCED IN THE CASES OF MILLENNIUM IT SOFTWARE LTD. (338 ITR 3 91) AND CITRIX SYSTEMS ASIA PACIFIC PTY LTD. HAVE HELD THE PAYMENTS FOR SOFTWARE TAXABLE AS ROYALTY IN INDIA. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 8 THE RELIANCE PLACED BY THE ASSESSEE ON THE JUDGEMEN TS OF DELHI HIGH COURT IN THE CASE OF INFRASOFT LTD., DYN AMIC VERTICAL SOFTWARE INDIA (P) LTD. AND M. TECH INDIA P. LTD. CANNOT BE RELIED UPON SINCE THE ISSUE HAS NOT ATTAI NED FINALITY AND THE DEPARTMENT HAS FILED SLP IN FEW CASES AND T HE DECISION OF THE HONBLE SUPREME COURT IS STILL PEND ING. 2.2 BEING AGGRIEVED, THE ASSESSEE FILED OBJECTIONS BEFORE THE LD. DRP. THE JUDICIAL PRECEDENTS CITED BEFORE T HE AO WERE REITERATED. THE LD. DRP RECORDED THAT THE TAX DEPAR TMENT HAS PREFERRED AN APPEAL BEFORE HONBLE APEX COURT AGAIN ST THE JURISDICTIONAL HIGH COURT DECISIONS RELIED UPON BY THE ASSESSEE AND SINCE IT IS AN AUTHORITY WHICH IS PART OF THE A SSESSMENT PROCESS THE ISSUE IN DISPUTE HAS TO BE DECIDED AGAI NST THE ASSESSEE IN ORDER TO KEEP THE MATTER ALIVE. IN THIS REGARD, IT HAS BEEN HELD BY THE LD. DRP AS UNDER:- THE DISTRIBUTORS OF THE ASSESSEE (M/S MENTOR GRAPHI CS) RECEIVE THE SOFTWARE AND THEN TRANSMIT THE SAME ONW ARDS TO THE CUSTOMERS. IT IS NOT DEMONSTRATED THAT SUCH SOF TWARE IS SPECIFIC FOR THE ASSESSEE AS IT IS TRANSFERRED ONLI NE TO THE DISTRIBUTOR WHO THE PASSES IT ON TO THE CLIENTS FRO M ITS COMPUTERS. SIMILAR TRANSACTIONS HAVE BEEN HELD TO B E IN THE NATURE OF ROYALTY BY HONBLE KARNATAKA HIGH COURT I N 345 ITR 494 IN CASE OF SAMSUNG ELECTRONICS CO. LTD. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 9 FURTHER, SECTION 9(1)(VI), WHERE TERM ROYALTY HAS B EEN DEFINED, DEALS WITH TRANSACTIONS OF SIMILAR NATURE. THE SOFTWARE REVENUE, RECEIVED BY THE ASSESSEE, CLEARLY FALLS WITHIN THE DEFINITION AS LAID DOWN IN 9(1)(VI). IN VIEW OF THE DISCUSSIONS SUPRA, IN ADDITION TO TH E RATIONALE GIVEN BY THE AO IN THE DRAFT ASSESSMENT ORDER, THE PANEL IS IN AGREEMENT WITH THE POSITION OF THE AO. ACCORDINGLY, THE ACTION OF THE AO IN THIS RESPECT IS UPHELD. THE ASSESSEE HAS TAKEN A PLEA ABOUT NOT BEING HEARD BY THE AO. THAT IS NOW REDUNDANT AS THE MATTER HAS BEEN HE ARD BY THE DRP AT LENGTH AND THE ASSESSEE HAS BEEN AFFORDE D SUFFICIENT OPPORTUNITY TO MAKE OUT ITS CASE. DRP, B EING AN EXTENSION OF THE ASSESSMENT PROCESS, HAS HEARD THE ASSESSEE BEFORE REACHING ITS CONCLUSIONS. THE ASSESSEE CANNO T NOW CLAIM TO NON-AVAILABILITY OF OPPORTUNITY OF BEING H EARD. THIS OBJECTION IS HENCE DISMISSED. THE AO HAS ALSO RECORDED THAT THE RELIANCE PLACED BY THE ASSESSEE ON THE JUDGEMENTS OF DELHI HIGH COURT IN T HE CASE OF INFRASOFT LTD., DYNAMIC VERTICAL SOFTWARE INDIA (P) LTD. AND M. TECH INDIA P. LTD. CANNOT BE RELIED UPON SINCE THE ISSUE HAS NOT ATTAINED FINALITY AND THE DEPARTMENT HAS FILED SLP IN FEW CASES AND THE DECISION OF THE HONBLE SUPREME COURT IS STILL PENDING. THE DEPARTMENTAL POSITION IS CLEAR IN THI S REGARD AND THE PANEL IS PART OF ASSESSMENT PROCESS. THEREF ORE THE ISSUES IN CHALLENGE BEFORE HONBLE APEX COURT NEED TO BE KEPT ALIVE. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 10 THE OBJECTION OF THE ASSESSEE ARE DISMISSED IN VIEW OF THE FOREGOING. IN VIEW OF ABOVE DISCUSSION ON EACH OF THE GROUNDS OF OBJECTION, THE ASSESSING OFFICER IS DIRECTED TO COM PLETE THE ASSESSMENT AS PER THE DIRECTIONS OF THE DRP AS ABOV E. 2.3 THE ASSESSEE IS NOW IN APPEAL BEFORE US. FOLLO WING GROUNDS OF APPEAL HAVE BEEN RAISED:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED DRP/AO HAVE ERRED IN HOLDING THAT THE CONSIDERATION RECEIVED BY THE APPELLANT FOR SUPPLY/DISTRIBUTION OF ITS COPYRIGHTED SOFTWARE TO THE INDIAN DISTRIBUTORS QUALIFIES AS ROYALTY UNDER SECTION 9 (1)(VI) OF THE ACT AS WELL AS ARTICLE 12 OF THE INDIA-IRELAND DOUB LE TAXATION AVOIDANCE AGREEMENT (DTAA). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED DRP/AO HAS ERRED IN CONCLUDING THA T CONSIDERATION RECEIVED BY THE APPELLANT FOR SUPPLY / DISTRIBUTION OF ITS COPYRIGHTED SOFTWARE IS FOR GRA NT OF RIGHT TO USE COPYRIGHT IN SUCH SOFTWARE AND HENCE, QUALIFIE S AS ROYALTY. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED DRP/AO ERRED IN NOT FOLLOWING THE PRINCIPLES LAID DOWN IN JUDICIAL PRECEDENTS CITED BY THE APPEL LANT, INCLUDING THE BINDING JUDGMENTS RENDERED BY THE JURISDICTIONAL HONBLE DELHI HIGH COURT. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 11 4. WITHOUT PREJUDICE TO THE GROUNDS 1 TO 3 ABOVE, O N THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND LAW, THE LEARNED AO HAS ERRED IN CHARGING EDUCATION CESS ON THE TAX RATE AS PRESCRIBED UNDER INDIA IRELAND DTAA. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED AO HAS ERRED IN LEVYING INTEREST U NDER SECTION 234B OF THE ACT. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT AGAI NST THE APPELLANT. 3.0 DURING THE COURSE OF HEARING, SHRI TARANDEEP S INGH, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISS UE IN DISPUTE IS DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY TH E DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE FOLLOWING CASES :- (A) DIT VS. INFRASOFT LTD. (SUPRA) (B) DIT VS. ERICSSON A.B. (SUPRA) (C) DIT VS. NOKIA NETWORKS OY REPORTED IN 358 ITR 2 59 (DEL) 3.1 THE LD. AR FURTHER SUBMITTED THAT THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS REPORTED IN 203 TAXMANN 477 (KAR) IS NO T TO BE FOLLOWED AS THE SAME IS CONTRARY TO THE DECISION OF HONBLE ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 12 JURISDICTIONAL HIGH COURT CITED BY HIM. IN THIS REG ARD, THE LD. AR SPECIFICALLY REFERRED TO PARA 98 & 99 OF THE DECISI ON OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF INFRASOFT LTD. (SUPRA) WHEREIN THE HONBLE HIGH COURT HAS HELD THAT THEY A RE NOT IN AGREEMENT WITH THE DECISION OF THE HONBLE KARNATAK A HIGH COURT. THE LD. AR FURTHER SUBMITTED THAT THE RELIAN CE PLACED BY THE AO ON THE DECISION OF DELHI TRIBUNAL IN THE CAS E OF MICROSOFT CORPORATION (SUPRA) IS ALSO NOT RELEVANT AS THE SAI D DECISION HAS BEEN HELD TO BE BAD IN LAW BY THE HONBLE JURISDICT IONAL HIGH COURT IN THE CASE OF NOKIA NETWORK OY (SUPRA) . IN THIS REGARD, THE LD. AR INVITED OUR ATTENTION TO PARA 23 OF THE DECI SION IN THE CASE OF NOKIA NETWORK (SUPRA) . 4.0 THE LD. CIT (DR), ON THE OTHER HAND, DID NOT DISPUTE THE CONTENTIONS RAISED BY THE LD. AR. BY PLACING RE LIANCE ON THE ORDER PASSED BY THE LOWER AUTHORITIES IT WAS SUBMIT TED BY HIM THAT THE VIEW EXPRESSED BY THEM DOES NOT REQUIRE AN Y INTERFERENCE BY THIS COURT. 5.0 WE HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPU TE AS REGARDS THE FACTS OF THE CASE. AFTER CONSIDERING THE FACTS OF THE CASE AND THE ARGUMENTS OF BOTH THE SIDES, WE ARE OF THE OPIN ION THAT THE ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 13 ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT. IN THE CASE O F ERICSSON A.B., (SUPRA), THE HON'BLE JURISDICTIONAL HIGH COURT HAS HELD AS UNDER: 'ONCE ONE PROCEEDS ON THE BASIS OF AFORESAID FACTUA L FINDINGS, IT IS DIFFICULT TO HOLD THAT PAYMENT MADE TO THE AS SESSEE WAS IN THE NATURE OF ROYALTY EITHER UNDER THE ACT OR UNDER THE DTAA. IT IS APPARENT THAT WHAT WAS SOLD BY THE ASSESSEE TO T HE INDIAN CUSTOMERS WAS A GSM WHICH CONSISTED BOTH OF THE HAR DWARE AS WELL AS THE SOFTWARE, THEREFORE, THE TRIBUNAL IS RIGHT IN HOLDING THAT IT WAS NOT PERMISSIBLE FOR THE REVENUE TO ASSESS THE SAME UNDER TWO DIFFERENT ARTICLES. THE SOFTWARE THAT WAS LOADED ON THE HARDWARE DID NOT HAVE ANY INDEPENDENT EXISTENCE. THE SOFTWARE SUPPLY IS AN INTEGRAL PART OF THE GSM MOBILE TELEPHONE SYSTEM AND IS USED BY THE CELLULAR OPERATOR FOR PROVIDING THE CELLULAR SERVICES TO ITS CUSTOMER S. THERE COULD NOT BE ANY INDEPENDENT USE OF SUCH SOFTWARE. THE SO FTWARE IS EMBODIED IN THE SYSTEM AND THE REVENUE ACCEPTS THAT IT COULD NOT BE USED INDEPENDENTLY. THIS SOFTWARE MERELY FAC ILITATES THE FUNCTIONING OF THE EQUIPMENT AND IS AN INTEGRAL PAR T THEREOF. A FORTIORARI WHEN THE ASSESSEE SUPPLIES THE SOFTWAR E WHICH IS INCORPORATED ON A CD, IT HAS SUPPLIED TANGIBLE PROP ERTY AND THE PAYMENT MADE BY THE CELLULAR OPERATOR FOR ACQUI RING SUCH PROPERTY CANNOT BE REGARDED AS A PAYMENT BY WAY OF ROYALTY. IT IS ALSO TO BE BORNE IN MIND THAT THE SUPPLY CONT RACT CANNOT BE SEPARATED INTO TWO VIZ., HARDWARE AND SOFTWARE. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 14 NO DOUBT, IN AN ANNEXURE TO THE SUPPLY CONTRACT THE LUMP SUM PRICE IS BIFURCATED IN TWO COMPONENTS, VIZ., THE CO NSIDERATION FOR THE SUPPLY OF THE EQUIPMENT AND FOR THE SUPPLY OF THE SOFTWARE. HOWEVER, IT WAS ARGUED BY THE ASSESSEE TH AT THIS SEPARATE SPECIFICATION OF THE HARDWARE/SOFTWARE SUP PLY WAS NECESSARY BECAUSE OF THE DIFFERENTIAL CUSTOMS DUTY PAYABLE. BE AS IT MAY, IN ORDER TO QUALIFY AS ROYALTY PAYMEN T, WITHIN THE MEANING OF SECTION 9(1)(VI) AND PARTICULARLY CLAUSE (V) OF EXPLANATION - II THERETO, IT IS NECESSARY TO ESTABL ISH THAT THERE IS TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRA NTING OF ANY LICENSE) IN RESPECT OF COPY RIGHT OF A LITERARY, AR TISTIC OR SCIENTIFIC WORK. SECTION 2(O) OF THE COPYRIGHT ACT MAKES IT CL EAR THAT A COMPUTER PROGRAMME IS TO BE REGARDED AS A LITERARY WORK. THUS, IN ORDER TO TREAT THE CONSIDERATION PAID BY T HE CELLULAR OPERATOR AS ROYALTY, IT IS TO BE ESTABLISHED THAT T HE CELLULAR OPERATOR, BY MAKING SUCH PAYMENT, OBTAINS ALL OR AN Y OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. IN THE PRES ENCE CASE, THIS HAS NOT BEEN ESTABLISHED. IT IS NOT EVEN THE C ASE OF THE REVENUE THAT ANY RIGHT CONTEMPLATED UNDER SECTION 1 4 OF THE COPYRIGHT ACT, 1957 STOOD VESTED IN THIS CELLULAR O PERATOR AS A CONSEQUENCE OF THE SUPPLY CONTRACT. DISTINCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE'.' 5.1 SIMILAR VIEW IS EXPRESSED BY THE HON'BLE JURIS DICTIONAL HIGH COURT IN THE CASE OF INFRASOFT LTD. (SUPRA), W HEREIN THEIR LORDSHIPS HELD AS UNDER: ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 15 '86. THE LICENSING AGREEMENT SHOWS THAT THE LICENSE IS NON- EXCLUSIVE, NON-TRANSFERABLE AND THE SOFTWARE HAS TO BE USES IN ACCORDANCE WITH THE AGREEMENT. ONLY ONE COPY OF THE SOFTWARE IS BEING SUPPLIED FOR EACH SITE. THE LICENSEE IS PE RMITTED TO MAKE ONLY ONE COPY OF THE SOFTWARE AND ASSOCIATED S UPPORT INFORMATION AND THAT ALSO FOR BACKUP PURPOSES. IT I S ALSO STIPULATED THAT THE COPY SO MADE SHALL INCLUDE INFR ASOFT'S COPYRIGHT AND OTHER PROPRIETARY NOTICES. ALL COPIES OF THE SOFTWARE ARE THE EXCLUSIVE PROPERTY OF INFRASOFT. T HE SOFTWARE INCLUDES A LICENCE AUTHORISATION DEVICE, WHICH REST RICTS THE USE OF THE SOFTWARE. THE SOFTWARE IS TO BE USED ONLY FO R LICENSEE'S OWN BUSINESS AS DEFINED WITHIN THE INFRASOFT LICENC E SCHEDULE. WITHOUT THE CONSENT OF THE ASSESSEE THE S OFTWARE CANNOT BE LOANED, RENTED, SOLD, SUBLICENSED OR TRAN SFERRED TO ANY THIRD PARTY OR USED BY ANY PARENT, SUBSIDIARY O R AFFILIATED ENTITY OF LICENSEE OR USED FOR THE OPERATION OF A S ERVICE BUREAU OR FOR DATA PROCESSING. THE LICENSEE IS FURTHER RES TRICTED FROM MAKING COPIES, DECOMPILE, DISASSEMBLE OR REVERSE-EN GINEER THE SOFTWARE WITHOUT INFRASOFT'S WRITTEN CONSENT. THE S OFTWARE CONTAINS A MECHANISM WHICH INFRASOFT MAY ACTIVATE T O DENY THE LICENSEE USE OF THE SOFTWARE IN THE EVENT THAT THE LICENSEE IS IN BREACH OF PAYMENT TERMS OR ANY OTHER PROVISIO NS OF THIS AGREEMENT. ALL COPYRIGHTS AND INTELLECTUAL PROPERTY RIGHTS IN AND TO THE SOFTWARE, AND COPIES MADE BY LICENSEE, A RE OWNED BY OR DULY LICENSED TO INFRASOFT. 87. IN ORDER TO QUALIFY AS ROYALTY PAYMENT, IT IS N ECESSARY TO ESTABLISH THAT THERE IS TRANSFER OF ALL OR ANY RIGH TS (INCLUDING THE GRANTING OF ANY LICENCE) IN RESPECT OF COPYRIGH T OF A LITERARY, ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 16 ARTISTIC OR SCIENTIFIC WORK. IN ORDER TO TREAT THE CONSIDERATION PAID BY THE LICENSEE AS ROYALTY, IT IS TO BE ESTABL ISHED THAT THE LICENSEE, BY MAKING SUCH PAYMENT, OBTAINS ALL OR AN Y OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. DISTINCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A COPYRIGHTED ARTICLE'. COPYRIGHT IS DISTINCT FROM TH E MATERIAL OBJECT, COPYRIGHTED. COPYRIGHT IS AN INTANGIBLE INC ORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MANUSCRIPT. JUST BECAUSE ONE H AS THE COPYRIGHTED ARTICLE, IT DOES NOT FOLLOW THAT ONE HA S ALSO THE COPYRIGHT IN IT. IT DOES NOT AMOUNT TO TRANSFER OF ALL OR ANY RIGHT INCLUDING LICENCE IN RESPECT OF COPYRIGHT. COPYRIGH T OR EVEN RIGHT TO USE COPYRIGHT IS DISTINGUISHABLE FROM SALE CONSIDERATION PAID FOR 'COPYRIGHTED' ARTICLE. THIS SALE CONSIDERATION IS FOR PURCHASE OF GOODS AND IS NOT R OYALTY. 88. THE LICENSE GRANTED BY THE ASSESSEE IS LIMITED TO THOSE NECESSARY TO ENABLE THE LICENSEE TO OPERATE THE PRO GRAM. THE RIGHTS TRANSFERRED ARE SPECIFIC TO THE NATURE OF CO MPUTER PROGRAMS. COPYING THE PROGRAM ONTO THE COMPUTER'S H ARD DRIVE OR RANDOM ACCESS MEMORY OR MAKING AN ARCHIVAL COPY IS AN ESSENTIAL STEP IN UTILIZING THE PROGRAM. THEREFORE, RIGHTS IN RELATION TO THESE ACTS OF COPYING, WHERE THEY DO NO MORE THAN ENABLE THE EFFECTIVE OPERATION OF THE PROGRAM BY TH E USER, SHOULD BE DISREGARDED IN ANALYZING THE CHARACTER OF THE TRANSACTION FOR TAX PURPOSES. PAYMENTS IN THESE TYP ES OF TRANSACTIONS WOULD BE DEALT WITH AS BUSINESS INCOME IN ACCORDANCE WITH ARTICLE 7. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 17 89. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY PA ID ON TRANSFER OF COPYRIGHT RIGHTS AND CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTICLES. RIGHT TO USE A COPYRIGHTED AR TICLE OR PRODUCT WITH THE OWNER RETAINING HIS COPYRIGHT, IS NOT THE SAME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATI ON TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYRIGHT OWNER HAS, IS NECESSARY TO INVOKE THE ROY ALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON- TRANSFERABLE LICENCE ENABLING THE USE OF A COPYRIGH TED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN ARTICLE 12 OF DTAA. WHERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY T O RESTRICT USE OF THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PU RPOSE, IT WOULD NOT BE LEGALLY CORRECT TO STATE THAT THE COPY RIGHT ITSELF OR RIGHT TO USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. THE PARTING OF INTELLECTUAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/C USTOMER IS WHAT IS CONTEMPLATED BY THE TREATY. MERELY AUTHORIZ ING OR ENABLING A CUSTOMER TO HAVE THE BENEFIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN WITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT, AMOUNT TO TRANSFER OF RIGHT S IN RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING TH E COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONFERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIALLY CO-EXTENSIVE WITH THE OWNER/ TRANSFEROR W HO DIVESTS HIMSELF OF THE RIGHTS HE POSSESSES PRO TANTO.' ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 18 5.2 WE FIND THAT TREATY PROVISIONS BETWEEN INDIA A ND IRELAND UNAMBIGUOUSLY REQUIRE THAT THE USE OF COPYR IGHT IS TO BE TAXED IN THE SOURCE COUNTRY. IN THE PRESENT CASE, T HE PAYMENT HAS BEEN MADE BY ASSESSEE FOR USE OF 'COPYRIGHTED M ATERIAL' RATHER THAN FOR THE USE OF COPYRIGHT. THE FACTS OF THE PRESENT CASE ARE IDENTICAL WITH THE FACTS BEFORE THE HON'BLE JUR ISDICTIONAL HIGH COURT. NONE OF THE LOWER AUTHORITIES HAVE FACTUALLY DOUBTED THE CONTENTION OF THE ASSESSEE THAT IT HAS RECEIVED CON SIDERATION FOR THE TRANSFER OF A COPYRIGHTED PRODUCT AND NOT FOR T HE TRANSFER OF COPYRIGHTS IN THE COMPUTER SOFTWARE PROGRAMME. THE DISTINCTION BETWEEN THE TRANSFER OF A COPYRIGHT AND THE TRANSFE R OF A COPYRIGHTED PRODUCT IS PROMINENT. THE SOLE CONTENTI ON OF THE AO AND THE LD DRP IS THAT THE DEPARTMENT IS IN APPEAL AGAINST THE DECISIONS OF THE JURISDICTIONAL HIGH COURT BEFORE T HE HONBLE APEX COURT. THE AO HAS RELIED UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN CASE OF SAMSUNG ELECTRONICS (SUPRA) AND GRACEMACCORPN (SUPR A). THESE DECISIONS ARE NOT BEING CONSIDERED AS THE ISSUE IS EXTENSIVELY DEALT WITH B Y THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASES OF ERICSSON A.B. AND INFRASOFT LTD (SUPRA) WHICH ARE BINDING ON THIS TRI BUNAL. ONCE IT IS NOT IN DISPUTE THAT THERE IS NO TRANSFER OF ANY COPYRIGHT IN THE ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 19 COMPUTER SOFTWARE BY THE ASSESSEE TO ITS CUSTOMERS, WE OBSERVE THAT ALL THE ARGUMENTS PUT FORTH BY THE AO AND THE ASSESSEE ARE CONSIDERED AND ANSWERED BY THE JURISDICTIONAL HIGH COURT IN THESE DECISIONS. FURTHER, THE DELHI HIGH COURT IN I NFRASOFT (SUPRA) HAS SPECIFICALLY EXPRESSED ITS DISAGREEMENT WITH TH E VIEW TAKEN BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO LTD. (SUPRA) . HENCE, THE DECISIONS RELIED BY THE AO IN THE CASE OF SAMSUNG ELECTRONICS AND GRACEMACCORP N. (SUPRA) DOES NOT HELP THE CASE OF THE REVENUE, AS WE ARE UN DER THE JURISDICTION OF THE HON'BLE DELHI HIGH COURT. 5.3 ACCORDINGLY, RESPECTFULLY FOLLOWING DECISION O F THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF IN FRASOFT LTD. (SUPRA) AND ON THE BASIS OF DISCUSSIONS ABOVE WE HOLD THAT RECEIPTS DERIVED BY THE ASSESSEE FROM SALE OF SOFT WARE IS NOT IN NATURE OF ROYALTY AS DEFINED UNDER ARTICLE 12 OF INDIA-IRELAND DTAA. SINCE TREATY PROVISIONS ARE MORE BENEFICIAL, AN ADJUDICATION ON NATURE OF RECEIPTS VIS A VIS PROVISIONS OF SECTION 9(1)(VI) IS NOT REQUIRED. GROUNDS NOS. 1 TO 4 ARE A CCORDINGLY ALLOWED. ITA NO. 6693/DEL/2016 ASSESSMENT YEAR 2013-14 20 5.4 IN GROUND NO. 5, THE ASSESSEE HAS CHALLENGED T HE LEVY OF INTEREST U/S 234 OF THE ACT. SINCE THE RECEIPT I TSELF IS NOT LIABLE TO TAX IN INDIA INTEREST U/S 234B WILL BE CONSEQUEN TIAL. 5.5 IN GROUND NO. 6, THE ASSESSEE HAS CHALLENGED T HE ACTION OF INITIATING LEVY OF PENALTY. THIS GROUND I S PREMATURE AND IS DISMISSED AS BEING PREMATURE. 6.0 IN THE FINAL RESULT, THE APPEAL OF THE ASSESSE E IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD NOVEMBER, 2018. SD/- SD/- (ANADEE NATH MISSHRA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23 RD NOVEMBER, 2018 GS COPY FORWARDED TO: - 1) APPELLANT 2) RESPONDENT 3) CIT(A) 4) CIT 5) DR TRUE COPY BY ORDER ASST. REGISTRAR