DDIT vs. Reliance Industries Ltd (ITAT Mumbai)

(i) A comparison of the definition of “royalty” as provided under the DTAA (USA), as reproduced above, with the definition of “royalty” as provided under Income Tax Act shows that the same are not in pari materia with each other. The definition provided under the DTAA is the very short and restrictive definition, whereas, the definition of the royalty as provided under the Income Tax Act is a very wide and inclusive definition but the same seems to be somewhat vague also. Computer software has been recognized as a separate item not only in 2nd proviso to clause (vi) but in “Explanation 4” also and has been included in the definition and within the scope of the words “right”, “property” or “information” as provided under clauses (b) and (c) to section 9(1)(vi) . The term “computer software” has not been included in the meaning and scope of the term “literary work” under clause (v) to Explanation 2. It is also pertinent to mention here that the consideration paid for „computer software‟ has not been specifically included under the definition of royalty under the DTAA.

(ii) The Hon‘ble Delhi High Court in the case of DIT vs. Nokia Networks OY [2012] Taxmann.com 225 (Delhi) has held that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect from 1.6.1976 to provide that all consideration for user of software shall be assessable as “royalty”, the definition in the DTAA has been left unchanged. That in Siemens AG 310 ITR 320 (Bom), it was held that amendments cannot be read into the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act.

(iii) Further, in a recent judgment in the case of DIT Vs New Skies Satellite BV, (ITA 473/2012 vide order dated 08.02.2016), the Hon‘ble Delhi High Court has observed that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend its operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument affected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Hon‘ble Delhi High Court concluded in the said decision (supra) that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word “royalty” prior to the amendment in the Income Tax Act will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties;

(iv) While finalizing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty vis-à-vis computer software in the light of India UK Treaty has been discussed. The Tribunal in para 12.1 of the said order(supra) has observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of “royalty” in the relevant India-UK Treaty, there was no specific mention of word “computer software” along with other terms such as “literary, artistic or scientific work, patent, trade mark” etc. The Tribunal observed that such a language of the India-UK DTAA was in sharp contrast to the specific use of the term “computer software” or “computer software programme” together with other terms such as literary, artistic or scientific work, patent, trade mark etc. in many other DTAAs such as India-Malaysia Treaty, wherein, the term “computer software programme” has been separately mentioned along with the words copy right of a literary, artistic or scientific work …. plan, knowhow, computer software programme, secret formula or process. It is thus clear that wherever the Government of India intended to include consideration 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 DTAA with UK does not contain any consideration for the use of or the right to use any ‘computer software’, the same cannot be imported into it.;

(v) In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of “good” by the owner. The consideration paid by the assessee thus as per the clauses of DTAA cannot be said to be royalty and the same will be outside the scope of the definition of “royalty” as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957;

(v) Even otherwise, the Revenue has not cited any direct case law of the jurisdictional High Court of Bombay before us. In the case laws cited by the Revenue of the Hon‘ble Karanatka High Court in the matter of CIT vs. Samsung Electronics Company Ltd (2012) 345 ITR 494 and CIT vs. Synopsis International Old Ltd. (2013) 212 taxman 454, though, a view in favour of the Revenue has been taken, but the Hon‘ble Delhi High Court in the case of DIT vs. Infrasoft Ltd. (supra), which is a latter decision, has discussed the Samsung case also and has taken the view in favour of the assessee. The Hon‘ble Delhi High court has taken the identical view favouring the assessee in the case of DIT vs Nokia Network (supra) and in the case of DIT vs. Ericson A.B. (supra) also. The Hon‘ble Bombay High Court in the case of The Addl. Commissioner of Sales Tax vs. M/s Ankit International, Sales Tax Appeal No.9 of 2011 vide order dated 15 September, 2011 while relying upon the decisions of the Hon‘ble Supreme Court in The Commissioner of Income Tax V. Vegetable Product Ltd. (1973) 88 ITR 192 and in Mauri Yeast India Pvt. Ltd. V. State of U.P. (2008) 14 VST 259(SC) : (2008) 5 S.C.C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. Reliance can also be placed in this regard on the decision of Hon‘ble Supreme Court in Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another: (1997) 5 SCC 289. We accordingly adopt the construction in favour of the assessee.

(vi) Also, as the purchase orders for the softwares were made much prior to the year 2012, Explanation 4 to section 9(1)(vi) inserted by Finance Act, 2012 with retrospective effect 01.06.1976, vide which the right for use or right to use a computer software including granting of license has been included in the definition of the term right, property or information, the consideration paid for which has been deemed to be income by royalty under section 9(1)(vi) of the Act, though preceded with the phrase “it is hereby clarified” and is followed by the words “includes” and “has always included” yet the said explanation cannot be applied retrospectively. Vide said Explanation, computer software has been specifically added into the definition of right, property or information. However, prior to the insertion of explanation 4 to section 9(1)(vi), no such interpretation as has ever been done by any court of law to include computer software in the definition of right, property or information under section 9(1)(vi) of the Act. Under sub-clause (v) to Explanation 2, consideration paid for the transfer of all or any rights in respect of any copyright in literary, artistic or scientific work was to be considered in the definition of royalty. The assessee was not supposed to deduct TDS on the remittance made for the purchase of software prior to the bringing of amendment/insertion of Explanation 4 to the section 9(1)(vi) of the Act, as per the interpretation of the relevant provision done by various courts, the assessee was under bonafide belief that no TDS was deductable as the consideration paid for purchase off the shelf/shrink wrapped software would not fall in the definition of royalty. (Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another (2005) 199 CTR (SC) 320 (SC), Rich Graviss Products (P.) Ltd. vs. ACIT (2014) 49 Taxman.com 531 (Mum-Trib.), JM Morgan Stanley Securities Pvt. Ltd. vs. ACIT in ITA No.6340/M/2004 decided vide order dated 05.03.2007 followed)

(vii) Even in cases where there is no treaty/DTAA of India with the country of which the recipient is a resident, in the light of the law laid down by the Hon‘ble Supreme Court in the case of Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another and in view of the observations made above, the assessee during the relevant period prior to the insertion of explanation 4 to section 9(1)(vi) of the I.T. Act, was not liable to deduct TDS even in above said two cases also even though there was no DTAA with the countries from the residents of whom the assessee had made the purchases.