{"id":696,"date":"2012-05-30T12:28:42","date_gmt":"2012-05-30T12:28:42","guid":{"rendered":"http:\/\/www.itatonline.org\/blog\/?p=696"},"modified":"2012-05-30T18:25:31","modified_gmt":"2012-05-30T18:25:31","slug":"why-software-income-is-not-taxable-despite-retro-law-in-finance-act-2012","status":"publish","type":"post","link":"https:\/\/itatonline.org\/blog\/why-software-income-is-not-taxable-despite-retro-law-in-finance-act-2012\/","title":{"rendered":"Why Software Income Is Not Taxable Despite Retro Law In Finance Act 2012"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.itatonline.org\/blog\/wp-content\/uploads\/2011\/04\/CA_Vellalapatti_Swaminathan.jpg\" alt=\"\" title=\"\" width=\"100\" height=\"100\" class=\"alignleft size-full wp-image-437\" \/><\/p>\n<p><strong>The verdict in <a href=\"https:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\">B4U International<\/a> has sent shock waves across the Country because it implies that the retrospective amendments in the Finance Act 2012 to the definition of the term &#8220;royalty&#8221; so as to rope in software income and equipment hire charges are infructuous in the absence of a corresponding amendment to the definition of that term in the DTAA. The author puts the issue in perspective and explores the way forward for the Government <\/strong>\n<\/p>\n<p>The verdict of the ITAT Mumbai in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\">B4U International<\/a><\/strong> must have come as a nasty shock to the mandarins of North Block because while these worthies thought that by amending s. 9(1)(vi) of the Income-tax Act with retrospective effect, they had accomplished the mission of taxing software receipts, they overlooked one minor detail \u2013 the Double Taxation Avoidance Agreement!\n<\/p>\n<p><!--more--><\/p>\n<div align=\"center\">\n<div class=\"\"><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-6440093791992877\";\n\/* judgements_adsense *\/\ngoogle_ad_slot = \"0133843924\";\ngoogle_ad_width = 728;\ngoogle_ad_height = 90;\n\/\/-->\n<\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"https:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/div>\n<\/div>\n<div class=\"articlequote\">\n<p>One can well imagine the scenario in the court room when the <a href=\"https:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\"><strong>B4U International<\/strong><\/a> appeal was being argued. The department\u2019s counsel must have sauntered into the court room with an exaggerated swagger and a smug grin on his face, put his elbows on the podium, rolled his eyes and drawled \u201c<em>MiLord, please see the retrospective amendments. All the judgements cited by my learned friend are now totally worthless<\/em>\u201d <\/p>\n<\/div>\n<p>Lets\u2019 get some background first. The question whether software receipts are assessable as \u201croyalty\u201d arose after the verdict of the Supreme Court in <strong><a href=\"https:\/\/www.itatonline.org\/f\/o.php?url=https:\/\/www.indiankanoon.org\/doc\/428977\/\">Tata Consultancy Services<\/a><\/strong> 271 ITR 401 (SC). There, the Supreme Court held, in the context of the Customs Act, that software embedded in a CD was \u201cgoods\u201d and liable to customs duty.\n<\/p>\n<p>The assesses were quick to pounce on this to argue that when software was licensed, there was a transfer of a \u201c<em>copyrighted article<\/em>\u201d and not the transfer of a \u201c<em>copyright<\/em>\u201d and so the consideration was not assessable as \u201croyalty\u201d u\/s 9(1)(vi) and its corresponding provision in the DTAA.\n<\/p>\n<p>The argument found favour with the Special Bench in <strong>Motorola<\/strong> 95 ITD 269 (SB) and the AAR in <strong>Dassault Systems<\/strong> 229 CTR 105 (AAR). However, just when everyone thought that the law was settled, the ITAT Delhi Bench sent out a shocker by deciding against the assesses in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/microsoft-corporation-vs-adit-itat-delhi-income-from-supply-of-shrink-wrapped-software-assessable-as-royalty-a-tax-treaty-can-be-unilaterally-overridden\">Microsoft Corporation<\/a><\/strong> 134 TTJ (Del) 257.\n<\/p>\n<p>That started a free-for-all with everyone being able to take any view that he pleased. The ITAT Mumbai Bench in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/adit-vs-tii-team-telecom-international-pvt-ltd-itat-mumbai\/\">TII Team Telecom<\/a><\/strong> 140 TTJ (Mum) 649 decided not to toe the <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/microsoft-corporation-vs-adit-itat-delhi-income-from-supply-of-shrink-wrapped-software-assessable-as-royalty-a-tax-treaty-can-be-unilaterally-overridden\">Microsoft<\/a><\/strong> line and held that software receipts were not \u201croyalty\u201d. This was endorsed by the Delhi High Court in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/dit-vs-ericsson-ab-delhi-high-court-s-9-profits-from-offshore-supply-of-equipment-software-not-taxable-in-india\/\">Ericsson<\/a><\/strong> AB 204 TM 192. On the other hand, the Bangalore Bench of the ITAT decided in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/ing-vysya-bank-ltd-vs-ddit-itat-bangalore-fee-for-user-of-software-taxable-as-royalty\/\">ING Vyasa Bank<\/a><\/strong> 143 TTJ (Bang) 249 that the contrary view was more appealing. This was endorsed by the AAR in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/in-re-millennium-it-software-ltd-aar-software-is-copyright-even-if-copyrighted-article-license-fee-taxable-as-royalty\/\">Millenium<\/a><\/strong> (AAR) and the Karnataka High Court in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/cit-vs-samsung-electronics-co-ltd-karnataka-high-court-s-91vi-income-from-licence-of-software-assessable-as-royalty\/\">Samsung<\/a><\/strong> 203 TM 477.\n<\/p>\n<p>The situation also become a bit chaotic and comic because, faced with two conflicting High Court verdicts, the Tribunal Benches were free to follow whichever view appealed to them. Fortunately for the assessees, in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/ddit-vs-ms-solid-works-corporation-itat-mumbai-software-royalty-view-in-favour-of-assessee-should-be-followed\/\">Solid Works Corporation<\/a><\/strong> and <strong>Allianz SE<\/strong> the Delhi High Court law was followed by the Mumbai and Pune Benches respectively as that was in favour of the assessee.\n<\/p>\n<p>A similar controversy arose on the question whether hire charges for use of equipment could be assessed as \u201croyalty\u201d. In <strong>Asia Satellite<\/strong> 85 ITD 478, the Delhi bench of the ITAT decided in favour of the revenue though a contrary view was taken in <strong>PanAmSat<\/strong> 103 TTJ 861. The issue was referred to the Special Bench which, in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/new-skies-satellites-vs-adit-itat-delhi-special-bench\">New Skies Satellite<\/a><\/strong> 121 ITD 1 (SB), ruled in favour of the revenue. However, the department\u2019s joy was short-lived because the High Court in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/asia-satellite-telecommunications-co-vs-dit-delhi-high-court-no-income-is-deemed-to-accrue-in-india-from-use-of-satellite-outside-india-to-beam-tv-signals-into-india-even-if-bulk-of-revenue-arises-due\/\">Asia Satellite<\/a><\/strong> 332 ITR 340 reversed the Special Bench and upheld the assessee\u2019s plea. It was held that to constitute \u201cuser\u201d, the payer of the fee had to have \u201ccontrol\u201d over the equipment. If the equipment was used to provide a standard service, then there was no \u201cuser\u201d by the payer, it was held.\n<\/p>\n<p>So, what was the way to resolve the controversy? Simple, if you ask the mandarins of North Block. Simply amend the law with retrospective effect and all your troubles are over.\n<\/p>\n<p>So it is that the law was amended by the <a href=\"https:\/\/www.itatonline.org\/info\/index.php\/download-finance-act-2012\/\">Finance Act 2012<\/a> with retrospective effect from 1.6.1976 to provide that software receipts and hire charges would be assessed as royalty. Lets\u2019 take a look at the law pre and post amendment:\n<\/p>\n<p>Definition of the term \u201croyalty\u201d in Explanation 2 to s. 9(1)(vi) pre-amendment:\n<\/p>\n<blockquote><p>Explanation 2.\u2014For the purposes of this clause, \u201croyalty\u201d means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head \u201cCapital gains\u201d) for\u2014<\/p>\n<p>(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;<\/p>\n<p>(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;<\/p>\n<p>(iii)\tthe use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;<\/p>\n<p>(iv)\tthe imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;<\/p>\n<p>(iva)\tthe use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;<\/p>\n<p>(v)\tthe transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or<\/p>\n<p>(vi)\tthe rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).<\/p>\n<p>Explanation 3.\u2014For the purposes of this clause, \u201ccomputer software\u201d means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data;<\/p><\/blockquote>\n<p>Explanation 4 to 6 inserted by the Finance Act 2012 in s. 9(1)(vi) with retrospective effect from 1.6.1976:\n<\/p>\n<blockquote><p>Explanation 4.\u2014For the removal of doubts, it is hereby clarified that the transfer of all or<br \/>\nany rights in respect of any right, property or information includes and has always<br \/>\nincluded transfer of all or any right for use or right to use a computer software (including<br \/>\ngranting of a licence) irrespective of the medium through which such right is transferred.\n<\/p>\n<p>Explanation 5.\u2014For the removal of doubts, it is hereby clarified that the royalty includes<br \/>\nand has always included consideration in respect of any right, property or information,<br \/>\nwhether or not\u2014<\/p>\n<p>(a) the possession or control of such right, property or information is with the payer;<\/p>\n<p>(b) such right, property or information is used directly by the payer;<\/p>\n<p>(c) the location of such right, property or information is in India.\n<\/p>\n<p>Explanation 6.\u2014For the removal of doubts, it is hereby clarified that the expression<br \/>\n&#8220;process&#8221; includes and shall be deemed to have always included transmission by satellite<br \/>\n(including up-linking, amplification, conversion for down-linking of any signal), cable,<br \/>\noptic fibre or by any other similar technology, whether or not such process is secret.<\/p><\/blockquote>\n<div class=\"articlequoteleft\">\n<p>what is the way out for the government? The solution \u2013 on which the mandarins are a past master \u2013 is to simply amend s. 90(2) to provide that the definition of the term \u201croyalty\u201d in s. 9(1)(vi) will override the definition of that term in all the DTAAs. While this measure will have the local and international community foaming and frothing at the mouth with fury, there is nothing that they can do about it<\/p>\n<\/div>\n<p>However, in their unholy excitement to collect the tax, the Mandarins forgot altogether about the DTAA which has a definition of the term\u201d royalty\u201d similar to that in the unamended s. 9(1)(vi).\n<\/p>\n<p>So, what was held by the Courts in the context of the unamended s. 9(1)(vi) would continue to apply to the DTAA!\n<\/p>\n<p>One can well imagine the scenario in the court room when the <a href=\"https:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\"><strong>B4U International<\/strong><\/a> appeal was being argued. The department\u2019s counsel must have sauntered into the court room with an exaggerated swagger and a smug grin on his face, put his elbows on the podium, rolled his eyes and drawled \u201c<em>MiLord, please see the retrospective amendments. All the judgements cited by my learned friend are now totally worthless<\/em>\u201d. The assessee\u2019s counsel would have softly interjected \u201c<em>But MiLord, the DTAA has not been amended. Your Lordships are aware that as per <strong>Azadi Bachao Andolan<\/strong> 263 ITR 706 (SC) the DTAA prevails over the Act<\/em>\u201d.\n<\/p>\n<p>That would have left the department\u2019s counsel dumbfounded and speechless and totally perplexed about how to deal with the situation. How could the mandarins have overlooked this elementary point, he must have cursed.\n<\/p>\n<p>So it is that in <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\">B4U International<\/a><\/strong>, the dreaded retrospective amendments were turned to naught.\n<\/p>\n<p>Now the question is what is the way out for the government? One way is to amend each of the DTAAs to bring it in line with the amendments made to s. 9(1)(vi). However, this is easier said than done because negotiating these agreements at an inter-governmental level can take years. The other solution \u2013 on which the mandarins are a past master \u2013 is to simply amend s. 90(2) to provide that the definition of the term \u201croyalty\u201d in s. 9(1)(vi) will override the definition of that term in all the DTAAs. While this measure will have the local and international community foaming and frothing at the mouth with fury, there is nothing that they can do about it.\n<\/p>\n<p>Old timers will recall that a similar controversy had arisen over the question whether the non-discrimination clause in the DTAA would apply to the higher rate of tax payable by foreign companies. This issue was resolved \u2013 in favour of the department \u2013 by the retrospective insertion of Explanation 1 to s. 90 by the Finance Act 2001 w.r.e.f. 1.4.1962 to \u201c<em>declare for the removal of doubts<\/em>\u201d that the higher rate of tax would not be discriminatory. That did the job and kept the mandarins happy.\n<\/p>\n<p>So, the bottom-line of this entire treatise: Brace yourself for yet another retrospective amendment to nullify the <strong><a href=\"https:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\">B4U International<\/a><\/strong> verdict!\n<\/p>\n<p><a href=\"https:\/\/www.itatonline.org\/search.php?cx=partner-pub-6440093791992877%3Adkadzr-s6yc&#038;cof=FORID%3A11&#038;ie=ISO-8859-1&#038;q=Vellalapatti+Swaminathan+Iyer&#038;x=0&#038;y=0&#038;siteurl=www.itatonline.org%2Fblog%2Findex.php%2Fan-end-to-the-loot-in-the-name-of-haj-subsidy%2F&#038;ref=www.itatonline.org%2Fblog%2F\" target=\"_blank\">Vellalapatti Swaminathan Iyer<\/a><br \/>\nHyderabad<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The verdict in <a href=\"http:\/\/itatonline.org\/archives\/index.php\/b4u-international-holdings-ltd-vs-dcit-itat-mumbai-despite-retro-law-in-finance-act-2012-royalty-not-taxable-as-dtaa-prevail\/\">B4U International<\/a> has sent shock waves across the Country because it implies that the retrospective amendments in the Finance Act 2012 to the definition of the term &#8220;royalty&#8221; so as to rope in software income and equipment hire charges are infructuous in the absence of a corresponding amendment to the definition of that term in the DTAA. The author puts the issue in perspective and explores the way forward for the Government<\/p>\n<div class=\"read-more\"><a href=\"https:\/\/itatonline.org\/blog\/why-software-income-is-not-taxable-despite-retro-law-in-finance-act-2012\/\">Read more &#8250;<\/a><\/div>\n<p><!-- end of .read-more --><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[5],"tags":[],"class_list":["post-696","post","type-post","status-publish","format-standard","hentry","category-legislation"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/posts\/696","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/comments?post=696"}],"version-history":[{"count":0,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/posts\/696\/revisions"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/media?parent=696"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/categories?post=696"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/tags?post=696"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}