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DATE: January 3, 2018 (Date of pronouncement)
DATE: January 4, 2018 (Date of publication)
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CITATION:
Taxability of software payments as royalty: The fact that there is a conflict of judicial opinion on whether payments for software are assessable as royalty or not does not entitle the Dept to seek a reference to the Special Bench. The Tribunal has to follow judicial discipline. Also, if a reference is made to the Special Bench it will violate the principle in Vegetable Products 188 ITR 192 (SC) that if there are two possible views, the view favourable to the assessee must be adopted

So far as Constitution of special Bench is concerned, a reference to constitute a Special Bench flows from the members and not from the parties to the case. Furthermore, such a reference can be made by the members when they do not agree with the view taken by the earlier order of the Tribunal. However, in the instant cases before us, it is not a situation, only after hearing, the matter afresh by the division bench in terms of direction of Hon’ble High Court dated 08.08.2017, the bench may decide the issue to agree or disagree with the view already taken by the earlier bench. Furthermore merely on the conflict view .of the decision of the High Court, a reference cannot be made to constitute Special Bench. If the present application of the Revenue is accepted, the process of reference to a Special Bench / larger Bench would never reach an end. Reference to Special Bench would continue to be moved by the parties upon every subsequent non-jurisdictional High Court decision, thus, leading to a number of cases being referred to constitute Special Bench. However, correct decision is to follow the judicial hierarchy and maintain judicial discipline. Furthermore, if the applications of the Revenue were to be allowed, it would lead to the violation of the principle laid down by the Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products (1973) (188 ITR 192) (SC)

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DATE: October 23, 2017 (Date of pronouncement)
DATE: October 28, 2017 (Date of publication)
AY: 2007-08 to 2012-13
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Royalty u/s 9(1)(vi) & Article 12: The Google Adwords advertisement module is not merely an agreement to provide advertisement space but is an agreement for facilitating the display and publishing of an advertisement to the targeted customer using Google's patented algorithm, tools and software. Google Adwords uses data regarding the age, gender, region, language, taste habits, food habits, etc of the customer so as to maximize the impression and conversion to the ads of the advertisers. Consequently, the payments to Google Ireland are taxable as "royalty" and the assessee ought to have deducted TDS thereon u/s 195

If we look into the advertisement module of Adword program stated herein above, then we will come to an irresistible conclusion that it is not merely an agreement to provide the advertisement space but is an agreement for facilitating the display and publishing of an advertisement to the targeted customer. If we look into the submission made by the learned AR, it is clear that the advertiser, selects some key words and on the basis of key words, the advertisement is displayed on the website or along with the search result as and when the customer selects the key words relatable to the advertisement. The module as suggested does not merely work by providing the space in the Google search engine, but it works only with the help of various patented tools and software. As we have analyzed detailed functioning of Adword program, it is clear that with the help of the search tool/software / data base, the Google is able to identify the targeted consumer/person as per the requirement of the advertiser

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DATE: February 8, 2017 (Date of pronouncement)
DATE: February 20, 2017 (Date of publication)
AY: 2010-11
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CITATION:
Entire law on Permanent Establishment, Force of Attraction principle, taxability of software embedded in hardware as royalty, make available of technical services etc explained (all important judgements referred)

Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not, which is referred to as “Full Force of Attraction” principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. Article 7(1) of the DTAA between India and Netherlands provides for taxing profits of the enterprise in the other state only to the extent they are attributable to the PE in the other state, adopting “No Force of Attraction” principle

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DATE: January 17, 2017 (Date of pronouncement)
DATE: January 30, 2017 (Date of publication)
AY: 2002-03, 2003-04
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CITATION:
S. 9(1)(i)/ 9(1)(vi)/ 9(1)(vii)/ 40(a)(i): Law on whether payment by the assessee to non-resident parties for “call transmission services through dedicated bandwidth” is assessable as income accruing in India, royalty or fees for technical services and whether a disallowance can be made for failure to deduct TDS explained

In the instant case also, the undersea cable for providing dedicated bandwidth to the assessee was installed beyond the territory of India and no operations were carried out by the non-resident party M/s Kick Communication in India. It was responsible for restoring connectivity and Managing faults in connectivity etc in respect of data transmitted through undersea cable only. Similarly, the operations carried out by M/s. IGTL Solutions are also in USA and not in India. Since operations by both the non-resident parties are carried out beyond the territory of India, we thus hold that section 9(1)(i) is of the Act is not attracted in case of above two non-resident parties

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DATE: January 4, 2017 (Date of pronouncement)
DATE: January 27, 2017 (Date of publication)
AY: -
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CITATION:
S. 9(1)(vi) 'Royalty' on transfer of software rights: There is a difference between sale of a 'copyrighted article' and the 'copyright' itself. S. 9(1)(vi) applies only to the latter and not the former. Explanation 4 inserted by FA 2012 w.r.e.f. 01.06.1976 has to be read and understood only in that context and cannot be expanded to bring within its fold transactions beyond the realm of the provision

The provisions of section 9(1)(vi) as a whole, would stand attracted in the case of the latter and not the former. Explanations 4 and 7 relied by the authorities would thus have to be read and understood only in that context and cannot be expanded to bring within its fold transaction beyond the realm of the provision. The Tribunal has relied on the decision of the Division Bench of the Delhi High Court in the case of The Principal Commissioner of Income Tax V. M.Tech India Pvt Ltd, which supports our view as above. It is brought to our notice that the decision of the Delhi High Court has not been accepted by the Department and an SLP is pending. Be that as it may, in view of the facts and circumstances as observed above, we have no hesitation in dismissing the Departmental Appeal answering the questions of law in favour of the assessee and against the Revenue

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DATE: January 3, 2017 (Date of pronouncement)
DATE: January 16, 2017 (Date of publication)
AY: 2013-14
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CITATION:
S. 9(1)(vi)/ 9(1)(vii): Important law explained on whether payment for use of equipment can be assessed as "royalty" and whether payment for rendering of services can be assessed as "fees for technical services" in the context of s. 9(1)(vi) and 9(1)(vii) and Article 12 of the India-Canada DTAA

Article 12(4) provides that, “The term “fees for technical included services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein”. In order to invoke article 12(4)(a) it is necessary that such services should “make available” technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression ‘make available’

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DATE: January 21, 2017 (Date of pronouncement)
DATE: January 4, 2017 (Date of publication)
AY: 1998-99, 1999-00
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CITATION:
S. 9(1)(vi)/ Article 12: Law on whether consideration received for licensing of software programmes can be assessed as "royalty" u/s 9(1)(vi) and Article 12 of the DTAA explained

If we analyse and compare various provisions of the Copyright Act with the relevant clauses of the master agreement, it is noted that the said agreement does not permit HLL to carry out any alteration or conversion of any nature, so as to fall within the definition of ‘adaptation’ as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of HLL in India and no right was given to HLL for commercial exploitation of the same. It is also noted that the terms of the agreement do not allow or authorise HLL to do any of the acts covered by the definition of ‘copyright’. Under these circumstances, the payment made by HLL cannot be construed as payment made towards ‘use’ of copyright particularly when the provisions of Indian Income-tax Act and DTAA are read together with the provisions of the Copyright Act, 1957

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DATE: November 18, 2016 (Date of pronouncement)
DATE: November 26, 2016 (Date of publication)
AY: -
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CITATION:
Taxability of software license fees as royalty: Non-consideration of the verdict of the Tribunal in Solid Works Corporation (51 SOT 34) and misreading of the Delhi High Court's verdict in Ericsson AB constitutes a mistake apparent from the record u/s 254(2) and the orders have to be recalled

In the instant appeals, the Tribunal admittedly did not consider the decision rendered by co-ordinate bench in the case of Solid Works Corporation (supra), even though it was relied upon by the assessees herein. The assessees have contended that the non-consideration of the decision of co-ordinate bench, when it was specifically relied upon by the assessee would result in a mistake apparent from record and would warrant recall of the order. In support of this contention, the assessees have placed their reliance on the decision rendered by Hon’ble Supreme Court in the case of Honda Siel Power Products Ltd (supra), wherein the Hon’ble Apex Court has held that the Tribunal was justified in exercising its power u/s 254(2) when it was pointed out to the Tribunal that the judgement of co-ordinate bench was placed before the Tribunal when the original order came to be passed but it had committed a mistake in not considering the material which was already on record

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DATE: June 13, 2016 (Date of pronouncement)
DATE: August 4, 2016 (Date of publication)
AY: 2006-07
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CITATION:
S. 9(1)(vi)/ Article 12: Consideration received for sale of computer software programme in CD Rom is not assessable as “royalty”. The retrospective amendment in Explanation 4 to section 9(1)(vi) to tax such receipts as royalty has no application to DTAA if the definition of the term “royalty” in the DTAA has remained unchanged

The retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of ‘royalty’. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of “royalty” in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the ‘royalty’ has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision

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DATE: July 11, 2016 (Date of pronouncement)
DATE: July 14, 2016 (Date of publication)
AY: 2009-10, 2010-11
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S. 9(1)(vi): Though in Infrasoft 220 Taxman 273 (Del) the impact of the amendment to s. 9(1)(vi) on the question whether consideration received for sale of pre-packaged software was “royalty” or “fee for technical services” or "business income" was not examined, it is not required to be examined because u/s 90 (3) provides that the Act prevails only if it is more beneficial compared to the DTAA

The short question considered by the Court in Director of Income Tax v. Infrasoft Limited (2014) 220 Taxman 273 (Del) was whether the term “royalty” covered by Article 12 (3) of the DTAA would apply in the context of sale of pre-packaged copyrighted software. The Court stated that it has not examined the effect of the subsequent amendment to Section 9 (1) (vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial

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