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Income Tax Appellate Tribunal, DELHI BENCH “B”, NEW DELHI
Before: SHRI J. S. REDDY & SMT. BEENA A. PILLAI
ORDER
PER BEENA A. PILLAI, JM:
The present appeal has been filed by revenue against order dated 25.11.2012 passed by Ld. CIT (A) 11 for assessment year 2006-07 on the following grounds of appeal:
1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO on account of treating the receipt of the assessee from Nortel as Royalty.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in not considering the retrospective amendment made vide Finance Act, 2012 in section 9(l)(vi)
of the Act (i.e. Explanation 4) relating to software taxation as Royalty. 3. The appellant craves to add, amend, modify, or alter any grounds of appeal at the time or before the hearing of the appeal.
2. At the outset, Ld. Counsel for assessee submitted that the issue relate’s to whether offshore supply of telecom equipment and software and provision of related services to the customers of Nortel by assessee is in the nature of royalty, and is taxable in India. Ld. Counsel for assessee submitted that issue stands squarely covered by decision of Hon’ble Delhi High Court in the case of DDIT versus Ericsson AB reported in 343 ITR 370. He submitted that Ld. CIT (A) has deleted the addition made by Assessing Officer by relying upon the judgments passed by Hon’ble Delhi High Court in the case of Ericsson AB (supra) along with the following decisions:
• Geoffrey Manners vs. CIT reported in 2 to 1 ITR 695 • graphite versus CIT reported in 188 ITR 146 • Jyotikana vs. CIT reported in 26 ITR 424 • Benoykumar vs. CIT reported in 24 ITR 70 which has been affirmed by Hon’ble Supreme Court reported in 32 ITR 466
Ld. CIT(A) has observed that the assessee has supplied software which has been subsequently configured into the hardware by the assessee itself. Ld. Counsel for assessee placed his reliance upon the decision of Ericsson AB passed by Hon’ble jurisdictional High Court.
On the contrary, Ld. DR placed his reliance upon the order passed by Assessing Officer.
We have perused the submissions advanced by both the sides in the light of the records placed before us.
It is observed from the records placed before us that the assessee has entered into a contract with Nortel to whom offshore supply of CVRS software was made alongwith related maintenance services. It has also been submitted before the authorities below that assessee does not play any role in the price negotiation and that the supply of software has been undertaken from outside India and hence the profits from such supplies would not be taxable as Royalty under the provisions of the Act as well as the Treaty between India and France. It has also been brought out on record by the Ld. CIT (A) that the software supplied by the assessee is standard off-the-shelf software, and no copyrights are attached to it. On the basis of the submissions advanced by assessee Ld. CIT (A) has dealt with the issue as under:
Determination
I have considered the submissions of the Appellant, the observations of the AO and the facts of the case submitted before me. Jurisdictional Delhi High Court in the case of director of Income Tax vs Ericsson Radio Systems AB and Nokia Networks OY rendered on similar facts as the facts before me held that a distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article" and the payment for the mere supply of copyrighted article cannot be held to be 'Royalty' in nature. Similar view was being held by Mumbai ITAT as referred above. Though I agree that this view is highly contentious and has not gained affirmation of the Apex Court, but reliance can be placed on the position taken by the Delhi HC, being the jurisdictional court. The decision of a jurisdictional High Court has binding force in the state in which the court has jurisdiction. This has been held in the following decisions: o Geoffrey Manners vs CIT [221 ITR 695]; o Graphite vs CIT [188 ITR 146] o Jyotikana vs CIT [26 ITR 424]; o Benoykumar vs CIT [24 ITR 70] affirmed CIT vs Benoykumar [32 ITR 466 (SC)]
In this regard, looking at the facts of the Appellant's case and the guidance provided by the Delhi HC and Mumbai ITAT in the aforesaid cases as well as Special Bench in the case of Motorola Inc, I agree with the contentions of the Appellant that the payments received by it from Nortel are not in respect use of a copyright or secret process and accordingly do not qualify as Royalty. The software supplied, being a standard off-the shelf software is a copyrighted article and the payments made for the same cannot be offered to tax as 'Royalty'. Accordingly, it is submitted that the subject payments will not qualify as Royalty in terms of clause (vi) of the aforesaid definition. From the above, it can be seen that the case of the Appellant is squarely covered by the jurisdictional decision of the Delhi High Court (supra). Though in the facts of the case, the Appellant has not provided the hardware and has only supplied the software but it is pertinent to note that the Appellant in other similar transactions entered into with other customers supplied both hardware after obtaining from other overseas vendor and software developed in house. Also, it was submitted by the Appellant that the payments made by Nortel under the subject transaction includes payments towards the configuration of the software with the hardware which substantiates the contention that the software does not have any independent usage and is an integral part of the hardware. It was the contention of the Appellant that the said software could not have been used by Norte! or any of its customers unless the same would have been configured by the Appellant into the hardware. In view of the same, it was submitted by the Appellant that its case is covered by the decision of the Delhi High Court and the payments received by it cannot be classified as 'Royalty'. The jurisdictional High Court decision in the case of Ericsson AB held that the software supplies would not be taxable as Royalty even after the amended law. Hence, Rs 42,564,247 received by the Appellant from Nortel would not be 'Royalty' but would be taxable as business income. Accordingly, the aforesaid addition made by the AO treating Rs. 4,25,64,247/- as Royalty stands deleted.
We do not find any infirmity in the above findings of Ld. CIT (A). As Ld. DR has not brought on record any distinguishing facts we are inclined to uphold the order passed by Ld. CIT (A) on this issue. In the result appeal filed by revenue stands dismissed.
Order pronounced in the open court on 19th January, 2017.