Summary and Review of Case Laws Decided by Income Tax Appellate Tribunals
Friday, 26 February 2016 11:53

Royalty u/s 9 (1) - Consideration received by the assessee towards software claimed to have been supplied as part of ‘Diamonds & Gems Scanning Machine’ would not be liable to tax as “Royalty” in the hands of the assessee - Mumbai Tribunal Featured

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Royalty u/s 9(1)


1. Consideration received by the assessee towards software claimed to have been supplied as part of ‘Diamonds & Gems Scanning Machine’ would not be liable to tax as “Royalty” in the hands of the assessee

2. The break–up of invoice value of hardware and software may be as a result of some other legal requirement or as a matter of convenience or an agreement between buyer and seller


1. Assessee is a company incorporated under the laws of Israel and is tax resident of Israel for the purpose of Indo–Israel Double Taxation Avoidance Agreement

2. During the year, the assessee company was involved in the business of developing, manufacturing and servicing machinery, equipment, tools, supporting software, accessories, equipments, products, parts and materials for the diamond, gems and jewellery industry

3. It is 100% subsidiary of M/s Sarin Technologies Ltd., Israel

4. As a part of its business, during the year under consideration, the assessee company sold to its customers machines and operating software

5. In the invoice issued by the assessee company, the consideration was mentioned separately for the machine and operating software

6. Some of the customers deducted tax at source @ 10% from the payments made by them towards operating software and application software, treating the same as “Royalty” under article 12(3) of the Israel tax treaty

7. But since the assessee was of the view that the aforesaid payments made by the customers did not constitute “Royalty”, under the Israel tax treaty and the tax was wrongly withheld by the customers, it filed its return of income for the impugned assessment year at nil and claimed refund of the tax withheld / deducted by its customers

8. The Assessing Officer treated the same as taxable in the hands of the assessee in India

9. Being aggrieved, assessee filed its objection before the DRP wherein no relief was given and, therefore, still being aggrieved, the assessee approached the Tribunal

10. Assessee had no business connection in India and it had no P.E. in India. This fact has not been disputed by the Assessing Officer

11. Assessing Officer has proceeded on this admitted fact that the assessee has neither any P.E. nor business connection in India

12. Under these circumstances, the impugned amount of consideration is not liable to be taxed as business income of the assessee

13. The taxability of the same, however, has to be examined in view of the provisions contained in clause (vi) of sub–section (1) of section 9 of the Act read with relevant provisions of Indo-Israel DTAA

14. The solitary dispute which is required to be addressed by Tribunal is that consideration received by the assessee towards software claimed to have been supplied as part of ‘Diamonds & Gems Scanning Machine’ would be liable to tax as “Royalty” in the hands of the assessee or not

Arguments by the Assessee

1. The first part of the argument made by the Ld. Counsel for the assessee is that the impugned consideration was received on account of sale of machine along with requisite software which formed integral part of machines sold by it to the customers

2. The whole dispute arose merely because value of software was separately mentioned. But, there was no separate transaction of sale of software and, therefore, it was predominantly transaction of sale of machine and, therefore, it could not have been brought within the definition of “Royalty” as envisaged in section 9(1)(vi) of the Act and, therefore, in the absence of there being any P.E. of the assessee in India, the income arising from sale of machine could not have been taxed in its hands in India

3.  the second part of the argument is that in case there is some conflict between the provisions as contained in articles of tax-treaty and provisions of the Act then whatever course is beneficial to the assessee in terms of determination of its tax liability, the same should be allowed to be followed by the assessee as per well accepted position of law. It has been further submitted that if the amendment has been made in the provisions of the Act, the same shall not be automatically and by implication imported into the articles of the treaty unless of course a corresponding amendment is made in the tax treaty as well. It was thus submitted that amendment made in section 9(1)(vi) by way of insertion of an Explanation by Finance Act, 2012, for extending the scope of the term “Royalty”, shall not be read into the provisions of Article 12.3 of the Indo–Israel tax treaty incorporated in the treaty for explaining meaning of the term ‘Royalty’

Arguments by the Revenue

1. The only argument given by the Ld. Departmental Representative to counter the submissions of the Ld. Counsel for the assessee was that in this case, payment was made separately for the software at the time of sale of machine as well as subsequently and that software was provided by e–mail and, therefore, separate treatment should be given to the software


The dominant and fundamental character of the transaction shall not be altered because of these two features only. The break–up of invoice value of hardware and software may be as a result of some other legal requirement or as a matter of convenience or an agreement between buyer and seller. It has been submitted that separate values were given for the purpose of proper assessment of custom duty to be levied at the time of imports of the machines. Further, software has been supplied separately by e–mail for various security reasons and to enable the customer to have the benefits of updated technologies. Similarly, separate payments have been made at the time of sale and subsequently by customer as a matter of terms between both the parties keeping in view various factors such as financial and administrative convenience and commercial expediency. The dominant and essential character of the transaction was sale of machine by the assessee and purchase of the same by the customer, and it shall remain the same with or without these two features.....

Thus, from the aforesaid judgments, we can safely conclude that if the assessee cannot be fastened with the tax liability taking shelter of provisions of tax treaty, then the same cannot be imposed by applying the provisions of the Act by disregarding and overriding the provisions of the treaty....

Apart from that, we find that Hon'ble Supreme Court has observed time and again in some of its judgments that where two views are available, then the view favourable to the assessee should be followed, in the interest of justice and harmony....

Thus, in view of the discussion above, it is held that the amount received by the assessee was not liable to tax as “Royalty” and therefore addition made by the Assessing Officer is directed to be deleted.

Cases referred to

1. DIT v/s Ericsson A.B., 343 ITR 470 (Delhi)

2. DIT v/s Nokia Networks O.Y., 358 ITR 259 (Delhi)

3. CIT v/s Alcatel Lucent, Canada, 372 ITR 476 (Del.)

4. DIT v/s Infrasoft Ltd., 39 88 (Del.)

5. CIT v/s Siemens Aklcongesllschaft, 177 Taxmann 81 (Bom.)

7. B4U International Holdings Ltd. v/s DCIT, 148 TTJ 237 (Mum.)

8. CIT v/s Dynamic Vertical Software India Pvt. Ltd., 332 ITR 222 (Del.)

10. Dassault Systems v/s DICT, 322 ITR 125 (AAR)

11. Geoquest Systems B.V. v/s DIT, 327 ITR 001 (AAR)

12. Motorola Inc. v/s DCIT, 95 ITD 269 (Del.) (SB)

13. TII Team Telecom International, 140 TTJ 649 (Mum)

14. DDIT v/s Solid Works Corporation, 152 TTJ 570 (Mum.)

15. DDIT v/s Reliance Infocom Ltd., 37 CCH 69 (Mum.)

16. CIT v/s Samsung Electronics Co. Ltd., 345 ITR 494 (Kar.)

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