MOL CORPORATION,GURGAON vs ADDL. DIT, NEW DELHI

Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI

Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI

Hearing: 27/06/2016

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 6089 to 6091/Del/2012 (Assessment Year: 2007-08 to 2009-10)

MOL Corporation, Addl. DIT, C/o. Mr. Ashwin International Taxation, Vs. Randranath (Partner), SRBC Range-3, New Delhi & Assciates, Golf View Corporate Tower B, Sector- 42, Sector Road, Gurgaon PAN:AAFCM9676A (Appellant) (Respondent)

ITA No. 1969/Del/2014 (Assessment Year: 2010-11)

ITA No. 1615/Del/2015 (Assessment Year: 2011-12)

Microsoft Regional Sales DCIT, Corporation, International Vs. C/o. Mr. Ashwin Taxation,Gurgaon Ravindranath (Partner) SRBC & Associates LLP, Gold View Corporate Tower

Page 2 of 52 B, Sector-42, Sector Road, Gurgaon PAN:AADCM1638A (Appellant) (Respondent)

ITA No. 1970/Del/2014 (Assessment Year: 2010-11)

Microsoft Regional Sales DCIT, Corporation, International Vs. C/o. Mr. Ashwin Taxation,Gurgaon Ravindranath (Partner) SRBC & Associates LLP, Gold View Corporate Tower B, Sector-42, Sector Road, Gurgaon PAN:AADCM1638A (Appellant) (Respondent)

Assessee by : Sh. Nageswar Rao, Adv Revenue by: Sh. Dheeraj Batnagar, CIT DR Date of Hearing 27/06/2016 26/09/2016 Date of pronouncement O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the six appeals filed by the assessee on identical issue and therefore are disposed off by this common order. Parties have agreed to argue and submit on appeal for assessment year 2007 – 08 as a lead case and therefore the facts noted for that year are later on applied in other appeals which are for subsequent years in case of the same assessee and reasons and decision is applied accordingly.

Page 3 of 52 2. This appeal for assessment year 2007-08 is preferred by assessee against the order dated 30/10/2012 of Additional Director of Income Tax (International Taxation), range – 3 , New Delhi [hereinafter referred to as ‗Ld. assessing officer‘ or ‗Ld. AO‘] passed under section 143 (3) read with section 147 of the Income Tax Act [hereinafter referred to as‘ The Act‘] pursuant to direction dated 24/09/2012 under section 144C (13) of the Ld. Dispute Resolution Panel [hereinafter referred to as ―DRP‘] raising following grounds of appeal in ITA No. 6089/Del/2012 which are as under:- “1. That on facts and in law, while passing the assessment order, the Additional Director of Income Tax, Range - 3, International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 7,999,960,616 as against 'Nil' income returned by the Appellant and therefore, the order of the Learned AO is bad in law and needs to be annulled; 2. Without prejudice to the below mentioned grounds of appeal, the Hon'ble Dispute Resolution Panel {'DRP') and Learned AO erred on the facts of the case and in law, in determining the income of the Appellant for the subject Assessment Year at INR 7,999,960,616, thereby completely ignoring the fact that the payments received by the Appellant from licensing of manufacturing and distribution rights to Microsoft Operations Pte Ltd. ('MO') pertaining to India was INR 4,799,976,369. 3. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act') and the recent jurisprudence. 3.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order as against the returned Income by holding that payments received by the Appellant from MO is taxable as 'Royalty' under the provisions of section 9(1)(vi) of the Act. 3.2 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by the Learned AO in the Draft assessment order that revenue earned and received from sale of software by a group company of the Appellant -Microsoft Regional Sales Corporation ('MRSC'), a distributor of Microsoft Software Products, to Indian distributors is taxable in India in the hands of the Appellant under the provisions of the section 9(1)(vi) of the Act. 3.3 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion of the Learned AO in the Draft assessment order that the reassessment proceedings initiated against the Appellant were valid without appreciating that: 3.3.1 the reasons to believe recorded by the Learned AO were palpably perverse as the same were based on the existing material available with the office of the Learned AO and no new material had come to his notice for initiation of such proceedings;

Page 4 of 52 3.3.2 All the material facts and legal position in relation to the transactions undertaken by the Appellant were on record with the office of Director of Income-tax, International Taxation, New Delhi which is evident from the letter dated 4 November 2008 received from the Authority of Advance Rulings (AAR). 3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the amount received by the Appellant fulfilled the conditions of section 9(1)(vi) of the Act and hence is taxable as Royalty in India. 3.6 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by placing reliance on the order passed by the Hon'ble Income-tax Appellate Tribunal (ITAT) in case of Gracemac Corporation (now MOLC) for Assessment Years 1999-00 to 2004-05. 3.7 That on the facts and in law the Learned AO has erred in observing that: 3.7.1 the copyright has been commercially exploited in India, as the licences were sent to India in hard discs in large volumes; 3.7.2 the agreement between MO and MRSC clearly establishes that the Appellant is getting royalty out of licensing of software carried out in India; 3.7.3 the Appellant has given the license to end users in India to use the software which is sort of a lease of a software and the payments received against the same would constitute lease rentals and hence taxable as Royalty: 3.7.4 the consideration received by the Appellant is payment for a 'process' and is thus covered under section 9(1)(vi) of the Act; 3.7.5 the consideration received for use of software is towards consideration for use of patented article and inventions; 3.7.6 as per the provisions of section 9 of the Act, the payments made for import of software are royalty payments and the only exception provided is for computer software supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under policy of Computer Software Export, Software Development and Training, 1986 of the Government of India; 3.7.7 the Appellant possesses right in copyright, which it can enforce in India, if any violation of such right is noticed by it without appreciating the fact that: 3.7.7.1 the owner of copyright in Microsoft Software Products is Microsoft Corporation {'MS Corp') and legal action against the violation of copyright can be undertaken only by owner of copyright; 3.7.7.2 without prejudice to the above, the right of the owner of the copyright to take legal action, would not alter the nature of the transaction from the sale of a copyrighted article to transfer of a copyright; 3.7.8 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term "Royalty as defined in section 9(1)(vi) of the Ac.

Page 5 of 52 Accordingly, the order passed by the Learned AO on the basis of DRP's directions is erroneous both in taw and on facts. Therefore, the additions made by the Learned AO are liable to be deleted. 4 Tax on revenue alleged as 'Royalty' under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions of Article 12(2) and Article 12(3}(a) of the India US tax treaty. 4.2 That on facts and in law, the Hon'ble DRP and Learned AO has erred in not appreciating that: 4.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 4.2.2 the benefits available under the India US tax treaty would still be available to the Appellant as the amendments in the Finance Act 2012 would not impact the treaty interpretation of the term royalty. 4.3 That on facts and in law, the DRP and the Learned AO erred in placing reliance on the decision in case Gramophone Company of India (AIR 1984 SC 667) to hold that domestic tax legislation of later date can over-ride treaty provisions if there is an irreconcilable conflict. 4.4 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 4.5 That on facts and in law, the Hon'ble DRP and Learned AO erred in disregarding OECD commentaries, US IPS regulations, International tax commentaries, UN model convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 4.6 That on facts and in law, the Learned AO has erred in interpreting the ratio laid down in the decision of P.V.A.L. Kulandagan Chettiar in an incorrect manner on relevance of OECD commentaries / US IRS regulations / International tax commentaries for interpretation of treaties. 4.7 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by relying on the decisions pronounced in cases of Samsung Electronics (203 taxman 477) (Kar HC), Millenium IT Software {338 ITR 391) (AAR), ING Vysya Bank Ltd. (61 DTR 401)(ITAT), Citrix Systems (343 ITR 1 (AAR No. 822 of 2009). 4.8 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by distinguishing from the decisions in cases of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A. B. and Metapath (ITA 504/2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant.

Page 6 of 52 4.9 That on facts and in law, the Learned AO has erred in observing that even grant of one right in respect of a copyright or work would amount to transfer of the use of copyright. 4.10 That on facts and in law, the Learned AO has erred in observing that the Appellant has not received royalty in respect of any manufacturing rights. 4.11 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on facts the Hon'ble DRP and the Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following: 4.13.1 that the payment received by the Appellant is related to number of software that is ultimately licensed and distributed in India; 4.13.2 that the payment of royalty is directly related to the source in India and, therefore it is taxable in India; 4.13.3 that the source of revenue derived by the Appellant is from licensing of software and utilisation/ exploitation of the license granted to the users in India; 4.13.4 that the Appellant received amount on account of lease of software / software renting. 4.14 The Learned AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant. 4.15 Without prejudice to the above grounds, the Learned AO has erred in levying interest under section 234B of the Act while completely disregarding the provisions of the Act and the various judicial precedents decided in favour of taxpayers on this issue.” 3. Brief facts of the case are that appellant is a company incorporated in the United States of America having its registered office at USA. Microsoft Corporation, USA is the ultimate parent entity of appellant. Appellant is a tax resident of USA and therefore it is entitled to claim applicability of provisions of the Double Taxation Avoidance Agreement[ hereinafter referred to as the DTAA] entered into between India and USA, if more beneficial than provision of the Indian Income Tax Act 1961.

Page 7 of 52 4. On amalgamation of GraceMac corporations, a company incorporated in the United States of America and wholly owned subsidiary of Microsoft Corporation USA, with the appellant w.e.f. 02/10/2006, all rights and obligation of the GraceMac got merged into the affairs of appellant. The GraceMac Corporation entered into a ‗Parent subsidiary agreement‘ with Microsoft Corporation on 01/01/1999 and was granted certain rights, which was assigned in favour of appellant on amalgamation. On the basis of the above rights vested in appellant, it entered into a license agreement with Microsoft operations PTE Ltd, a company incorporated under the laws of Singapore[ hereinafter referred to as ―Singapore Company‘] , w.e.f. 01/07/2006. Under the said licence agreement, appellant has granted Singapore company the non-exclusive rights to manufacture Microsoft retail products in Singapore, market sell and distribute manufactured Microsoft retail products, and to create derivative works based on Microsoft products as appropriate to customize the respective Microsoft products for the particular needs of the customers. As a consideration of the above mentioned rights granted by appellant to Singapore company, the appellant earns revenue from Singapore company. The receipts of appellant are computed on the basis of the net selling price of Microsoft products manufactured by Singapore company and distributed to retailers of Microsoft Corporation and subsidiary of Microsoft Corporation. Microsoft operations PTE Ltd, Singapore company has entered into a distribution agreement with Microsoft regional sales Corporation allowing it to distribute Microsoft software products in India amongst other countries. Microsoft regional sales Corporation makes payment to Microsoft operations PTE Ltd, a

Page 8 of 52 Singapore company, on the basis of the number of license it distributes and sells to end-users in India. In nutshell, the appellant receives royalty from Microsoft operations PTE Ltd, a Singapore company, on the basis of licensing of the software products of Microsoft in the territory of India by Microsoft regional sales Corporation and Microsoft regional sales Corporation to Microsoft operations PTE Ltd on the basis of the volume of licensing of such products distributors in India and Microsoft operations PTE Ltd in turn pays to the assessee. Thus the ultimate beneficiary of the licensing of Microsoft software products to end-users in India is the appellant. 5. On the basis of the above facts Learned assessing officer issued notice under section 148 of the Income Tax Act dated 25th of November 2010 requiring assesses to file a return of income under section 148 of the act. In response to the said notice, the assessee filed return of income declaring nil income on 21/12/2010 and submitting a copy of return vide letter dated 23/12/2010 requesting him to provide the copy of reasons recorded for initiating reassessment proceedings. Consequently, reasons recorded for reopening were provided to the assessee. The main reason for reopening of the case is that:-

―1. Microsoft Corporation is a company incorporated in 1981 as a tax resident of USA. It is world‘s leading software developer. Microsoft Corporation has granted Gracemac an exclusive right to manufacture and distribute Microsoft software in Asia. GraceMac had granted Microsoft operations (Singapore) PTE Ltd (MO) a company incorporated in Singapore the non-

Page 9 of 52 exclusive right to manufacture and distribute software in Asia including India. Now Gracemac has amalgamated with MO and the new company formed is MOL Corporation, which came in place as a result of amalgamation on 14/04/2005. 2. The Hon‘ble ITAT vide an order dated 26/10/2010 in case of Microsoft regional sales Corporation, GraceMac and Microsoft Corporation for assessment year 1999 – 2000 to 2004 – 05 has confirmed the order of CIT (A) holding that remuneration received by Microsoft regional sales Corporation (MRSC ) from Indian distributors for sale of software is taxable as ―royalty‖ in the hands of GraceMac. In the meantime, the assessee has applied in MAP through competent authority of United States and issue was discussed in MAP by the competent authority of India and USA. During this proceeding, order passed by the ITAT is accepted by both the parties, therefore findings of the ITAT have become final. Since Grace Mac has merged with MO and formed into a new entity MOLC after amalgamation, royalty will be taxable in the hands of MOLC. 3. The assessee has not filed any return of income for the assessment year 2007 – 08. The Hon‘ble DRP (while issuing direction in the case of Grace Mac for assessment year 2007- 2008 ) has also observed that the receipt of Rs. 7961316009/- will be taxed in the hands of a MOLC for assessment year 2007 – 08. As the assessee had not offered any income on this

Page 10 of 52 account, I have reason to believe that income amounting to Rs. 7961316009/-chargeable to tax has escaped assessment in assessment year 2007 – 08. This is a fit case for initiating proceedings under section 148. Accordingly, notice under section 148 is issued to the assessee.‖

Against the above reasons recorded for reopening, assessee vide letter dated 24/01/2011, filed its detailed objection against the reassessment proceedings initiated by Ld. assessing officer wherein it is contended that reassessment proceedings are not valid and the amount received by the assessee is not taxable as royalty in India. The objections of the assessee were disposed of by an order dated 28/01/2011 by the Ld. assessing officer. 7. Subsequently Ld. assessing officer issued a show cause notice to the appellant stating that why the amount received by Microsoft regional sales Corporation of Rs. 7999960616/-from various distributors received for the period 02/10/2006 to 31- March - 2007 should not be taxed in the hands of the assessee as ‗royalty‘. In response to that assessee contended that such amount is not chargeable to tax in the hands of the assessee in India. The Ld. assessing officer after considering the submissions of the appellant passed draft assessment order under section 143 (3) on 28/12/2011 wherein he proposed to tax the above amount received by Microsoft regional sales Corporation from various distributors outside India of Rs. 7999960616/- in India as ‗royalty‘ in the hands of the assessee. Against the draft order appellant preferred objections before the Dispute Resolution Panel. In the objection appellant challenged the reassessment

Page 11 of 52 proceedings stating that they are bad in law and also on merits of the case contesting that above income shall not be chargeable to tax in India as royalty. LD DRP vide its direction dated 24/09/2012 disposed of the objection of the appellant. Regarding the reopening of the assessment, relying upon the decision of the Hon‘ble Supreme Court in ACIT versus Rajesh Jhaveri stockbrokers private limited ( 291 ITR 500) (SC), objection was dismissed as assessee has not filed any return of income. Objection against the order of the Ld. assessing officer in holding that the payments received by the assessee are from a source in India and hence taxable under section 9 (1) (vi) read with article 12 of the Double Taxation Avoidance Agreement, held that in view of the amendment to the provisions of section 9 with retrospective effect from 1st June 1976 by The Finance Act 2012 the above receipts earned by the applicant are in the nature of royalty and fees for technical services. Therefore it was held that such amount shall be chargeable to tax as ‗royalty‘. However it accepted the contention of the applicant that there is a difference between the actual amount received and amount proposed to be taxed in the draft assessment order. Thereafter applying the rate of taxation with respect to the agreement entered prior to 01/06/2005 and post 01/06/2005 held that the entire sum of Rs. 7999960616/- is chargeable to tax as ‗royalty‘ in the hands of the assessee. Pursuant to the above direction the impugned assessment order under challenge was framed by the ld. assessing officer incorporating the findings of Ld. Dispute Resolution Panel computing the total income of the appellant at Rs. 799990616/-. Aggrieved by the above order of the Ld. Assessing Officer the assessee is in appeal before us.

Page 12 of 52 8. The only grounds argued before us are with respect to taxability of receipt of appellant as ― Royalty‖. 9. Ground No. 3 and 4 are with respect to taxability of the impugned sum as ‗royalty‘ under the Income Tax Act and according to the Double Taxation Avoidance Agreement between India and USA. Ground No. 3.3 is also against validity of the reopening of the proceedings under section 148 of the act where in it is contended that that the reason to believe recorded by the Ld. assessing officer were based on the existing material available with the office of the Ld. AO and no new material has come to his notice for initiation of such proceedings. 10. On the merits of the case the Ld. authorized representative submitted that that the issue is now squarely covered in favour of the appellant in view of the decision of the Hon‘ble Delhi high court in case of DIT versus Infrasoft Ltd in ITA No. 1034 – 2009 dated 22nd of November 2013. He further referred to the various paragraphs of that decision of Hon‘ble Delhi high court and submitted that now the issue is squarely covered in favour of the appellant. He further referred to para No. 95 of that order to state that Hon‘ble high court has not examined the effect of the subsequent amendment to section 9 of The Income Tax Act as assessee is covered by the Double Taxation Avoidance Agreement, the provisions of which are more beneficial. Therefore he submitted that according to the provisions of the DTAA the licensed software is not subject to taxation as ‗royalty‘. He further referred to the decision of the coordinate bench in ITA No. 5651/del/2010 for assessment year 2007-08 in case of Datamine International Ltd versus ADIT dated 14/03/2016 referred to para No. 3 of that decision and para No. 8.1 of that decision wherein

Page 13 of 52 the retrospective amendment to the provisions of the act was considered by the coordinate bench. His argument was that that any amendment carried out to the provisions of the act with retrospective effect shall no doubt have the effect of altering the provisions of the Income tax Act but cannot per se have the effect of automatically altering the analogous provisions of the DTAA. Therefore he submitted that the subsequent provisions which have been amended by retrospective effect by the Finance Act 2012 will not have any impact on the issue of taxability of the income of appellant as ‗royalty. He further referred to the decision of the Hon‘ble Delhi high court dated 08/02/2016 in DIT V New Skies Satellite BV to support his argument. He further submitted that the decision of the Hon‘ble Delhi high court in case of DIT versus Infrasoft Limited (supra) and submitted that each and every characteristics of the software of the appellant is identical to the software in question before Hon‘ble Delhi high court and therefore now the issue is squarely covered in favour of the appellant. He further relied on the decision of the Mumbai bench of tribunal in case of ADIT (international taxation) versus TII team Telecom International private limited dated 26/08/2011 wherein identical issue has been decided that whether amount received by the assessee for the supply of software is in the nature of ‗royalty‘ which is liable for taxation in India or not. He further referred to para No. 19 wherein the decision of the Gracemac is also considered. He therefore submitted that now the issue be decided in favour of the appellant because of binding decision of Hon Delhi High court. 11. Ld. departmental representative submitted that coordinate bench of the tribunal has already decided this issue in favour of

Page 14 of 52 revenue by decision dated 26/10/2010 and the income of the assessee is arising out of that agreement, hence that should be followed as it is a binding precedent. He further submitted that there is no change in the facts and circumstances of the case therefore the decision of the coordinate bench in assessee‘s own case should be followed. He further submitted that the decision of Hon‘ble Delhi high court now relied upon by the appellant in case of CIT versus Infrasoft Ltd does not apply to the facts of the case of the appellant. 12. In rejoinder, the Ld. authorized representative submitted that if there is a subsequent decision of the Hon‘ble high court then that decision should be followed and not the decision of the Hon‘ble tribunal. For this proposition he relied upon the decision of coordinate bench in Asit C Mehta versus DCIT (2006) 10 SOT 36 (Mum). He further relied up on para No. 21 of that decision and impressed upon us that decision of the coordinate bench should not be followed. He further referred to the decision of coordinate bench in case of ADIT versus TII Team Telecom International private limited (supra) wherein it is held that even the coordinate bench decision which is admittedly contrary to the earlier precedents on that issue from the other coordinate benches does not bind the subsequent coordinate benches. 13. We have carefully considered the rival contentions. In the present appeal as noted by the coordinate bench is whether the sale of off-the-shelf software product by a US based non-resident companies to independent Indian distributors is taxable in the hands of such non-resident companies as royalty within the meaning of explanation 2 to section 9 (1) (vi) of the act as well as under article 12 of DTAA between India and USA. We also

Page 15 of 52 perused the decision of the Hon‘ble Delhi high court wherein the facts are that assessee is an international software marketing and development company of an international group and the holding company is based in the United States being Infrasoft Corporation. That company was primarily engaged in the business of developing and manufacturing civil engineering software and one such software which was subject matter of the controversy before Hon‘ble Delhi high court was called MX. Therefore the issue before the Hon‘ble Delhi High Court was whether the income tax appellate tribunal was right in holding that the consideration received by the respondent assessee on grant of license for use of software is not royalty within the meaning of article 12 (3) to the DTAA between India and the United States of America. Therefore, in the decision of Hon‘ble Delhi high court the same article of that DTAA was in question. The coordinate bench in the case of the appellant for previous years has held vide para No. 122 of that decision that the definition of the term ‗royalty‘ as appearing in explanation 2 to section 9 (1) (vi) and paragraph (3) of article 12 of Indo US DTAA are identical. The coordinate bench in case of appellant has held it so as under:- “122. The definitions of term "royalty" as appearing in Explanation 2 to section 9(1)(vi) and paragraph 3 of Article 12 of Indo-US DTAA are identical. Paragraph 1 of Article 12 says that royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However as paragraph 2, such royalties also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall

Page 16 of 52 not exceed the amount specified therein. Rate at which tax is payable is specified in the paragraph 2 of Article 12 of Indo-US DTAA. In the case of assessee we have held that payments made by end users is chargeable to tax as royalty u/s 9(1)(vi) of the Act. As per paragraph 7(a) royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. If the person paying royalty has a permanent establishment or a fixed base there in connection with which the liability to pay the royalties is incurred and the liability is borne by such establishment or base the royalty is deemed to arise in state in which the permanent establishment or fixed base is situated. As per Paragraph 7(b) the royalties relate to the use of, or the right to use, the right of property, in one of the Contracting States, the royalties shall be deemed to arise in that Contracting State. We have already held in paragraphs 75 to 82 of our order that a "copyrighted article" is one in which copyright subsists. We have also held that the considerations received by the non-resident assessee are for the use of, or the right to use copyright, patent, invention or process in India and consequently liable to tax in India u/s 9(1)(vi) of the Income tax Act, 1961. Further, we have also held that per Explanation inserted by the Finance Act, 2010 w.r.e.f. 1.4.1976 the income by way of royalty of a non-resident shall be deemed to accrue or arise in India under clause (vi) irrespective of the fact whether the non-resident has a residence or a place of business or business connection in India. Hon‘ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra) has held that the provisions of agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over

Page 17 of 52 the provisions of the Act, as is clear from the provisions of section 90(2). Section 90(2) makes it clear that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein. No such case conflict between income tax Act and the treaty has been made out by the ld. counsel for the assessee. Therefore, in our considered opinion there is no merit in the arguments of ld counsel for the assessee that copyright was not used in India and therefore, stands rejected.‖

Whereas Hon‘ble Delhi high court in paragraph No. 62 has held that in terms of the law laid down by the Hon‘ble Supreme Court and since the assessee is governed by the DTAA between India and USA the income of the assessee would be chargeable to tax as per the provisions of the Double Taxation Avoidance Agreement if the same is more advantageous or beneficial to the assessee. It was further held that revenue applied the definition of the word ‗royalty‘ as defined in explanation 2 to section 9 (1) (vi) of the act. Therefore according to the Hon‘ble high court the more rigorous provisions of the act could not have been applied if the provisions of the DTAA were more beneficial than the provisions of the ACT by the ld. assessing officer. Meaning thereby that when the appellant is a resident of the United States of America then the provisions of the Income Tax Act or the provisions of the DTAA between the countries, whichever is more beneficial shall be applied. Therefore it is apparent that Hon‘ble High Court is of the view that there is a difference between the definition of the term ‗royalty‘ between the Indian Income Tax Act and the Double Taxation Avoidance Agreement.

Page 18 of 52 14. Comparing the software which was in issue before honourable high court in case of DIT V Infrasoft Limited , we note that in that decision the issue was with respect to a customized software where as in the present case it is shrink wrapped software. Honourable High court classified the characteristic of software as a customized software to be used for designing highways, railways, airports, ports, mines, etc. The software so customized was licensed to an Indian customer and the branch office of the assessee in India performed services involving interface to peripheral installation and training etc. In the present case it is ‗off the shelf‘/‗shrink wrapped‘ software. According to us when the revenue from customized software is not considered as ―Royalty‖ , the issue in case of shrink wrapped or off the shelf software stands on much better footings. We also draw support from the recent decision of Coordinate bench Mumbai in ADIT V Baan Global BV 2016 71 Taxmann.com 213 ( Mum wherein after considering all the decisions on the issue it is held as under that revenue from shrink wrapped software is not a Royalty:-

“10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of "royalty" or business income. In case, if it is a 'business' income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India and if it is a "royalty", then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within the terms of "royalty" under Article 12(4) of India-Netherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo-Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has

Page 19 of 52 to be examined under the treaty provisions. Briefly recapitulating the relevant facts for the purpose of our adjudication emanating from the impugned order is that, Assessee Company is engaged in the business of development and sale of computer software and also provides "other general services" in relation to the software. For both the activities, it has entered into a "distribution agreement" with its Indian subsidiary INFOR India which mainly functions as a distributor of computer software. So far as payments received from "other general services" of Rs.4,79,36,944/-, same has been offered to tax in India as 'fee for technical services' on which there is no dispute. The dispute is with regard to the payment of Rs.3,75,25,291/- received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold "off shelf" which is mainly used by the Indian customer in their business for financial accounting, inventory management, HR management etc. INFOR India carries out marketing and sale of the software in India and places order with the assessee. The software supplied is then distributed to the Indian customers through INFOR. The consideration charged by INFOR India is based on terms agreed between the assessee and INFOR India as per the 'distribution agreement'. Under the terms of the agreement, as noted by the CIT (A), there is no transfer of any copyright in the software product. The payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT (A) in his order is reckoned as admitted facts.

11.

Now, on these facts, we have to decide, whether the payment received by the assessee can be reckoned as "royalty" within the terms of article 12(4) of DTAA. Before that, the relevant paragraph of Article 12 dealing with the definition of "royalty" reads as under:—

'4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience'.

From the plain reading of the article it can be inferred that, it refers to payments of any kind received as a consideration for the use of, or the

Page 20 of 52 right to use any 'copyright' of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as "royalty", it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting 'royalty' in Para 4 are for a consideration for the 'use of' or the 'right to use' any copyright. . . . . . . .The key phrases "for the use" or "the right to use any copyright of"; "any patent. . . . . .; "or process", "or for information. . . . . . . . .,"; "or scientific experience", etc., are important parameter for treating a transaction in the nature of "royalty". If the payment doesn't fit within these parameters then it doesn't fall within terms of "royalty" under Article 12(4). The computer software does not fall under most of the term used in the Article barring "use of process" or "use of or right to use of copyrights" Here first of all, the sale of software cannot be held to be covered under the word "use of process", because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the various Courts have consistently opined that the definition of "copyright" as given in the 'Copyright Act, 1957' has to be taken into account for understanding the concept. Section 14 of the said Act defines the 'copyrights' to mean as under:—

'14. Meaning of copyright - For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely:- (a) in the case of a literary, dramatic or musical work, not being a computer programme, - (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound

Page 21 of 52

recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,— (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme : Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) In the case of cinematograph film, — (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) In the case of sound recording, -

Page 22 of 52

(i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation'.

Thus, the definition of 'copyright' in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. As noted by the CIT (A), under the terms of the agreement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling the software. The agreement also provides that the end user shall use the software only for the operation and shall not sublicense or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT (A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of "shrink wrapped software" off the shelf and hence, cannot be considered as a "royalty" within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright.

12.

One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of 'royalty' as given therein should be read into the DTAA. We are unable to appreciate this contention of the Ld. DR because 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

Page 23 of 52 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. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty.

13.

Now, we come to the various decisions relied upon by the parties. Before us, the Ld DR has heavily relied upon the two decisions of Karnataka High Court, one in the case of Synopsis International Old Ltd. (supra) and other in the case of Samsung Electronics Co Ltd. (supra). Both these decisions, admittedly, are against the assessee. However, we find that Hon'ble Delhi High Court in series of decisions have specifically disagreed with the ratio and the conclusion of Hon'ble Karnataka High Court. In the case of Infrosoft Ltd. (supra), the Hon'ble Delhi High Court precisely on similar nature of agreement and the issue before it has dealt and decided the mater in the following manner:—

"87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty.

88.

The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user,

Page 24 of 52 should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.

89.

There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non- transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto.

90.

The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do.

91.

There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA.

Page 25 of 52 92. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub- licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. ** ** **

94.

The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty.

95.

We have 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.

Page 26 of 52 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.

97.

What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income.

98.

We are not in agreement with the decision of the Andhra Pradesh High Court in the case of Samsung Electronics Co. Ltd. (supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software".

The ratio of the above decision clearly clinches the issue which is applicable in the case of the assessee also. This ratio and principle has been followed and reiterated again in the case of M. Tech India Pvt Ltd. (supra) and again in the decisions of Alacatel Lucent (supra), wherein Hon'ble Delhi High Court relying upon its earlier two decisions in the case of DIT v. Erisson [2012] 343 ITR 470/204 Taxman 192/[2011] 16 taxmann.com 371 (Delhi) and DIT v. Nokia Networks OY [2013] 358 ITR 259/212 Taxman 68/25 taxmann.com 225 (Delhi) concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. The relevant observation of the High Court in Alcatel Lucent (supra) in this regard reads as under:

Page 27 of 52 'We have noticed, at the outset, that the ITAT had relied upon the ruling of this Court in Director of Income Tax V. Ericsson A.B. (2012) 343 ITR 470 wherein identical argument with respect to whether consideration paid towards supply of software along with hardware rather software embedded in the hardware amounted to royalty. After noticing several contentions of the revenue, this Court held in Ericsson A.B. (supra) as follows:

"54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any of the copyrights referred to in Section 14 (b) of the Copyright Act, 1957.

55.

Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC), wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:-"In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of

Page 28 of 52 painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. TAXPUNDIT.ORG Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes. . . . .

In Advent Systems Ltd. v. Unisys Corpn, (925 F. 2d 670 (3rd Cir. 1991)), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held:

"Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good," but when transferred to a laser- readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty."

This Court also noticed that the ITAT had in addition relied upon other judgment of this Court i.e. Director of Income Tax v. M/s. Nokia Networks, (2013) 358 ITR 259 (Delhi)'.

Page 29 of 52 Similar view has been reiterated in other decisions also as relied upon by the Ld. Counsel. Now that there are catena of decisions and case laws in favour of the assessee including that of the Delhi High Court on several occasions, we are inclined to follow the decision and proposition laid down by the Hon'ble Delhi High Court. Thus, in view of the finding given above, we uphold the order of the CIT (A) that the payment received by the assessee for sums amounting to Rs. 3,75,25,291/- does not amount to "royalty" within the meaning of Article 12(4) of Indo-Netherland DTAA and accordingly, the same is not taxable in India. Since, admittedly, the assessee has no PE in India; therefore, same cannot be taxed as business income under Article 7. Accordingly, ground raised by the revenue stands dismissed.‖ [extracted from taxmann.com] 15. Furthermore the coordinate bench has also rejected the contention of the appellant that the computer programs embedded in compact disc are not ―copyrighted articles‖ as according to the bench there is no ambiguity in the definition of the term royalty and there is no need for importing the expression ―copyrighted article‖ from OECD commentary or US guidelines for the purpose of interpretation of the term royalty. However honorable High court has held that sale of software is a sale of ‗copyrighted article‘ and ultimately held that the payment for the same is not in the nature of ―royalty‖. The Hon‘ble high court has held as under :- ―89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non- transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct

Page 30 of 52 to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA. 92. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-

Page 31 of 52 licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de- assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyrighter mains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty.‖ 16. With respect to the retrospective amendment by the Finance Act 2012, it has been held by Hon‘ble Delhi high court in case of DIT versus New Skies Satellite BV 382 ITR 114 wherein it has been held that unless Double Taxation Avoidance Agreement is jointly amended by both the countries to incorporate particular income partaking the nature of ‗royalty‖ or amend definition in a manner so that such income automatically becomes royalty, The Finance Act, 2012 which inserted several explanations to section 9 (1) (vi) by itself would not affect the meaning of the term ‗royalty‘ as mentioned in article 12 of the Double Taxation Avoidance Agreement. Though Hon‘ble high court was concerned with the Double Taxation Avoidance Agreement between India

Page 32 of 52 and Thailand, however the principle laid down makes clear vide para No. 60 as under :- ―60. Consequently, since we have held 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" in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), 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 to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement.‖ Therefore, the retrospective amendment made to the Income tax Act will not apply in deciding the issue of taxability of income of the assessee in present case. 17. Furthermore Hon‘ble Delhi high court has examined this issue in CIT versus Halliburton export incorporation (ITA No. 363 and 365 of 2016 dated 11/07/2016 wherein, after considering the decision of the DIT versus Infrasoft Ltd, has held that at the consideration received by appellant on sale of prepackaged software in terms of article 12 (3) would not be chargeable to tax as ―royalty‖ or ―fees or technical services‖ or ―business income‖. The Hon‘ble high court made it clear that according to section 90 (3) of the act it is clear that in context of Double Taxation Avoidance Agreement that it is only when the provisions of the Income Tax Act are more beneficial to the assessee , The ACT will prevail over the Double Taxation Avoidance Agreement.

Page 33 of 52 Conversely, where the provisions of the Double Taxation Avoidance Agreement are more beneficial to the assessee, the treaty would prevail over the act. Accordingly the retrospective amendment made to the Income Tax Act, if are not beneficial to an assessee, who is also entitled to the benefit of the Double Taxation Avoidance Agreement, then whatever is less rigorous to the assessee should be followed for the purpose of the taxation in case of that assessee. In the present case therefore Double Taxation Avoidance Agreement between India and USA is required to be seen and applied, if by retrospective amendment to the Income Tax Act the taxation regime with respect to the ‗royalty‘ and ‗fees for technical service‘ have become more stringent. Likewise, on many issues about taxation of sale of software, after the decision of Honorable Delhi high court in DIT V Infrasoft limited (supra) view of the coordinate bench in case of Gracemac corporation no longer remains a good law.

18.

In view of the above facts it is apparent that after rendering of the decision of the tribunal based on which the reopening has been initiated by revenue and addition has been made in the hands of the appellant, the decision of the Hon‘ble Delhi high court in case of DIT V versus Infrasoft limited covers the issue in favour of the assessee. As the lower authorities did not have any benefit of the decision of the Hon‘ble Delhi high court while deciding the issue about the taxation of copyrighted article i.e. the software being sold by the appellant but have solely relied upon the decision of the coordinate bench in case of M/s Gracemac Corporation, it would be in the interest of the Justice to set the whole issue back to the file of the Ld. assessing officer to decide it afresh after

Page 34 of 52 considering the decision of Hon‘ble Delhi high court DIT versus Infrasoft Ltd (supra), applying it to nature of the software of the appellant, which covers the issue with respect to the sale of software holding that according to article 12 (3) of the Indo US DTAA, is a sale of ‗copyrighted article‘, and is not chargeable to tax as ‗royalty‘. In view of above, ground No. 3 to ground number 4.13.4 of the appeal of the assessee are allowed with above direction. 19. The ground number 4.14 of the appeal is against the initiation of penalty under section 271 (1) (C) of the income tax act. In ground, No. 4.15 of the appeal is against the charging of the interest under section 234B of the income tax act. As both these grounds will depend on the ultimate assessment of the assessee therefore at present there are premature, hence they are dismissed. 20. In the result, appeal of the assessee is partly allowed. ITA No 6090/Del/2012 A Y 2008-09 21. The grounds of appeal raised by the assessee in ITA No.6090/Del/2012 as under:- “1. That on facts and in law, while passing the assessment order, the Additional Director of Income Tax, Range - 3, International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 18,496,742,612 as against 'Nil' income returned by the Appellant and therefore, the order of the Learned AO is bad in law and needs to be annulled; 2. Without prejudice to the below mentioned grounds of appeal, the Hon'ble Dispute Resolution Panel ('DRP') and Learned AO erred on the facts of the case and in law, in determining the income of the Appellant for the subject Assessment Year at INR 18,496,742,612 thereby completely ignoring the fact that the payments received by the Appellant from licensing of manufacturing and distribution rights to Microsoft Operations Pte Ltd. ('MO') pertaining to India was INR 11,098,045,567. 3. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act') and the recent jurisprudence 3.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order as against the returned

Page 35 of 52 Income by holding that payments received by the Appellant from MO is taxable as 'Royalty under the provisions of section 9(1 )(vi) of the Act. 3.2 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by the Learned AO in the Draft assessment order that revenue earned and received from sale of software by a group company of the Appellant -Microsoft Regional Sales Corporation (MRSC'), a distributor of Microsoft Software Products, to Indian distributors is taxable in India in the hands of the Appellant under the provisions of the section 9(1)(vi) of the Act. 3.3 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion of the Learned AO in the Draft assessment order that the reassessment proceedings initiated against the Appellant were valid without appreciating that: 3.3.1 the reasons to believe recorded by the Learned AO were palpably perverse as the same were based on the existing material available with the office of the Learned AO and no new material had come to his notice for initiation of such proceedings; 3.3.2 All the material facts and legal position in relation to the transactions undertaken by the Appellant were on record with the office of Director of Income-tax, International Taxation, New Delhi which is evident from the letter dated 4 November 2008 received from the Authority of Advance Rulings (AAR). 3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the amount received by the Appellant fulfilled the conditions of section 9(1)(vi) of the Act and hence is taxable as Royalty in India. 3.6 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by placing reliance on the order passed by the Hon'ble Income-tax Appellate Tribunal (ITAT) in case of Gracemac Corporation (now MOLC) for Assessment Years 1999-00 to 2004-05. 3.7 That on the facts and in law the Learned AO has erred in observing that: 3.7.1 the copyright has been commercially exploited in India, as the licences were sent to India in hard discs in large volumes; 3.7.2 the agreement between MO and MRSC clearly establishes that the Appellant is getting royalty out of licensing of software carried out in India; 3.7.3 the Appellant has given the license to end users in India to use the software which is sort of a lease of a software and the payments received against the same would constitute lease rentals and hence taxable as Royalty: 3.7.4 the consideration received by the Appellant is payment for a 'process' and is thus covered under section 9(1)(vi) of the Act; 3.7.5 the consideration received for use of software is towards consideration for use of patented article and inventions; 3.7.6 as per the provisions of section 9 of the Act, the payments made for import of software are royalty payments and the only exception provided is for computer software supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under

Page 36 of 52 policy of Computer Software Export, Software Development and Training, 1986 of the Government of India; 3.7.7 the Appellant possesses right in copyright, which it can enforce in India, if any violation of such right is noticed by it without appreciating the fact that: 3.7.7.1 the owner of copyright in Microsoft Software Products is Microsoft Corporation {'MS Corp') and legal action against the violation of copyright can be undertaken only by owner of copyright; 3.7.7.2 without prejudice to the above, the right of the owner of the copyright to take legal action, would not alter the nature of the transaction from the sale of a copyrighted article to transfer of a copyright; 3.7.8 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term "Royalty as defined in section 9(1)(vi) of the Ac. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is erroneous both in taw and on facts. Therefore, the additions made by the Learned AO are liable to be deleted. 4 Tax on revenue alleged as 'Royalty' under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions of Article 12(2) and Article 12(3}(a) of the India US tax treaty. 4.2 That on facts and in law, the Hon'ble DRP and Learned AO has erred in not appreciating that: 4.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 4.2.2 the benefits available under the India US tax treaty would still be available to the Appellant as the amendments in the Finance Act 2012 would not impact the treaty interpretation of the term royalty. 4.3 That on facts and in law, the DRP and the Learned AO erred in placing reliance on the decision in case Gramophone Company of India (AIR 1984 SC 667) to hold that domestic tax legislation of later date can over-ride treaty provisions if there is an irreconcilable conflict. 4.4 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 4.5 That on facts and in law, the Hon'ble DRP and Learned AO erred in disregarding OECD commentaries, US IPS regulations, International tax commentaries, UN model

Page 37 of 52 convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 4.6 That on facts and in law, the Learned AO has erred in interpreting the ratio laid down in the decision of P.V.A.L. Kulandagan Chettiar in an incorrect manner on relevance of OECD commentaries / US IRS regulations / International tax commentaries for interpretation of treaties. 4.7 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by relying on the decisions pronounced in cases of Samsung Electronics (203 taxman 477) (Kar HC), Millenium IT Software {338 ITR 391) (AAR), ING Vysya Bank Ltd. (61 DTR 401)(ITAT), Citrix Systems (343 ITR 1 (AAR No. 822 of 2009). 4.8 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by distinguishing from the decisions in cases of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A. B. and Metapath (ITA 504/2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant. 4.9 That on facts and in law, the Learned AO has erred in observing that even grant of one right in respect of a copyright or work would amount to transfer of the use of copyright. 4.10 That on facts and in law, the Learned AO has erred in observing that the Appellant has not received royalty in respect of any manufacturing rights. 4.11 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on facts the Hon'ble DRP and the Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following: 4.13.1 that the payment received by the Appellant is related to number of software that is ultimately licensed and distributed in India; 4.13.2 that the payment of royalty is directly related to the source in India and, therefore it is taxable in India; 4.13.3 that the source of revenue derived by the Appellant is from licensing of software and utilisation/ exploitation of the license granted to the users in India; 4.13.4 that the Appellant received amount on account of lease of software / software renting. 4.14 The Learned AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant.

Page 38 of 52 4.15 Without prejudice to the above grounds, the Learned AO has erred in levying interest under section 234B of the Act while completely disregarding the provisions of the Act and the various judicial precedents decided in favour of taxpayers on this issue.” 22. It was submitted before us that the issue involved in the present appeal are identical to the appeal of the assessee for assessment year 2007 – 08. The mainly ground No. 3 and ground No. 4 of the above appeal are against the action of the Ld. Assessing officer in charging the income of the appellant as ‖Royalty‖. It was further submitted that argument of the parties remains the same as arguments advanced by them for assessment year 2007-08. 23. We‘ve carefully considered the rival contentions. The only issue involved in the appeal of the assessee is that that whether the income received by it is chargeable to tax as royalty. We have decided this issue in the appeal of the assessee for assessment year 2007 – 08 wherein we set aside the whole issue to the file of the assessing officer to decide it afresh in accordance with the decision of the Hon‘ble Delhi High Court in case of DIT V Infrasoft Limited ( supra). Similarly in this year also we set aside the whole issue to the file of the assessing officer with similar direction as contained in ITA number 6089/Del/2012. 24. In the result appeal of the assessee for the assessment year 2008- 2009 in ITA No. 6090/del/ 2012 is allowed with above direction.

ITA No.6091/Del/2012 A Y 2009-10 25. The grounds of appeal raised by the assessee in ITA No.6091/Del/2012 as under:- “1. That on facts and in law, while passing the assessment order, the Additional Director of Income Tax, Range - 3, International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 23,305,639,377 as against 'Nil' income returned by the Appellant and therefore, the order of the Learned AO is bad in law and needs to be annulled;

Page 39 of 52 2. Without prejudice to the below mentioned grounds of appeal, the Hon'ble Dispute Resolution Panel ('DRP') and Learned AO erred on the facts of the case and in law, in determining the income of the Appellant for the subject Assessment Year at INR 23,305,639,377 thereby completely ignoring the fact that the payments received by the Appellant from licensing of manufacturing and distribution rights to Microsoft Operations Pte Ltd. ('MO') pertaining to India was INR 13,983,383,626. 3. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act') and the recent jurisprudence 3.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order as against the returned Income by holding that payments received by the Appellant from MO is taxable as 'Royalty under the provisions of section 9(1 )(vi) of the Act. 3.2 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by the Learned AO in the Draft assessment order that revenue earned and received from sale of software by a group company of the Appellant -Microsoft Regional Sales Corporation (MRSC'), a distributor of Microsoft Software Products, to Indian distributors is taxable in India in the hands of the Appellant under the provisions of the section 9(1)(vi) of the Act. 3.3 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion of the Learned AO in the Draft assessment order that the reassessment proceedings initiated against the Appellant were valid without appreciating that: 3.3.1 the reasons to believe recorded by the Learned AO were palpably perverse as the same were based on the existing material available with the office of the Learned AO and no new material had come to his notice for initiation of such proceedings; 3.3.2 All the material facts and legal position in relation to the transactions undertaken by the Appellant were on record with the office of Director of Income-tax, International Taxation, New Delhi which is evident from the letter dated 4 November 2008 received from the Authority of Advance Rulings (AAR). 3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the amount received by the Appellant fulfilled the conditions of section 9(1)(vi) of the Act and hence is taxable as Royalty in India. 3.6 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by placing reliance on the order passed by the Hon'ble Income-tax Appellate Tribunal (ITAT) in case of Gracemac Corporation (now MOLC) for Assessment Years 1999-00 to 2004-05. 3.7 That on the facts and in law the Learned AO has erred in observing that: 3.7.1 the copyright has been commercially exploited in India, as the licences were sent to India in hard discs in large volumes; 3.7.2 the agreement between MO and MRSC clearly establishes that the Appellant is getting royalty out of licensing of software carried out in India;

Page 40 of 52 3.7.3 the Appellant has given the license to end users in India to use the software which is sort of a lease of a software and the payments received against the same would constitute lease rentals and hence taxable as Royalty: 3.7.4 the consideration received by the Appellant is payment for a 'process' and is thus covered under section 9(1)(vi) of the Act; 3.7.5 the consideration received for use of software is towards consideration for use of patented article and inventions; 3.7.6 as per the provisions of section 9 of the Act, the payments made for import of software are royalty payments and the only exception provided is for computer software supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under policy of Computer Software Export, Software Development and Training, 1986 of the Government of India; 3.7.7 the Appellant possesses right in copyright, which it can enforce in India, if any violation of such right is noticed by it without appreciating the fact that: 3.7.7.1 the owner of copyright in Microsoft Software Products is Microsoft Corporation {'MS Corp') and legal action against the violation of copyright can be undertaken only by owner of copyright; 3.7.7.2 without prejudice to the above, the right of the owner of the copyright to take legal action, would not alter the nature of the transaction from the sale of a copyrighted article to transfer of a copyright; 3.7.8 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term "Royalty as defined in section 9(1)(vi) of the Ac. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is erroneous both in taw and on facts. Therefore, the additions made by the Learned AO are liable to be deleted. 4 Tax on revenue alleged as 'Royalty' under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions of Article 12(2) and Article 12(3}(a) of the India US tax treaty. 4.2 That on facts and in law, the Hon'ble DRP and Learned AO has erred in not appreciating that: 4.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 4.2.2 the benefits available under the India US tax treaty would still be available to the Appellant as the amendments in the Finance Act 2012 would not impact the treaty interpretation of the term royalty.

Page 41 of 52 4.3 That on facts and in law, the DRP and the Learned AO erred in placing reliance on the decision in case Gramophone Company of India (AIR 1984 SC 667) to hold that domestic tax legislation of later date can over-ride treaty provisions if there is an irreconcilable conflict. 4.4 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 4.5 That on facts and in law, the Hon'ble DRP and Learned AO erred in disregarding OECD commentaries, US IPS regulations, International tax commentaries, UN model convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 4.6 That on facts and in law, the Learned AO has erred in interpreting the ratio laid down in the decision of P.V.A.L. Kulandagan Chettiar in an incorrect manner on relevance of OECD commentaries / US IRS regulations / International tax commentaries for interpretation of treaties. 4.7 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by relying on the decisions pronounced in cases of Samsung Electronics (203 taxman 477) (Kar HC), Millenium IT Software {338 ITR 391) (AAR), ING Vysya Bank Ltd. (61 DTR 401)(ITAT), Citrix Systems (343 ITR 1 (AAR No. 822 of 2009). 4.8 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by distinguishing from the decisions in cases of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A. B. and Metapath (ITA 504/2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant. 4.9 That on facts and in law, the Learned AO has erred in observing that even grant of one right in respect of a copyright or work would amount to transfer of the use of copyright. 4.10 That on facts and in law, the Learned AO has erred in observing that the Appellant has not received royalty in respect of any manufacturing rights. 4.11 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on facts the Hon'ble DRP and the Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following: 4.13.1 that the payment received by the Appellant is related to number of software that is ultimately licensed and distributed in India;

Page 42 of 52 4.13.2 that the payment of royalty is directly related to the source in India and, therefore it is taxable in India; 4.13.3 that the source of revenue derived by the Appellant is from licensing of software and utilisation/ exploitation of the license granted to the users in India; 4.13.4 that the Appellant received amount on account of lease of software / software renting. 4.14 The Learned AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant. 4.15 Without prejudice to the above grounds, the Learned AO has erred in levying interest under section 234B of the Act while completely disregarding the provisions of the Act and the various judicial precedents decided in favour of taxpayers on this issue.” 26. It was submitted before us that the issue involved in the present appeal are identical to the appeal of the assessee for assessment year 2007 – 08. The mainly ground No. 3 and ground No. 4 of the above appeal are against the action of the Ld. Assessing officer in charging the income of the appellant as ―Royalty‖. It was further submitted that argument of the parties remains the same as arguments advanced by them for assessment year 2007-08. 27. We‘ve carefully considered the rival contentions. The only issue involved in the appeal of the assessee is that that whether the income received by it is chargeable to tax as royalty. We have decided this issue in the appeal of the assessee for assessment year 2007 – 08 wherein we set aside the whole issue to the file of the assessing officer to decide it afresh in accordance with the decision of the Hon‘ble Delhi High Court in case of DIT V Infrasoft Limited ( supra). Similarly in this year also we set aside the whole issue to the file of the assessing officer with similar direction as contained in ITA number 6089/Del/2012. 28. In the result appeal of the assessee for the assessment year 2009-10 in ITA No. 6091/del/ 2012 is allowed with above direction. ITA 1969/Del/2014 A Y 2010-11

Page 43 of 52 29. The grounds of appeal raised by the assessee in ITA No.1696/Del/2014 as under:- 1. That on facts and in law, the Dy. Director of Income Tax, Circle - 3(2), International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 23,452,242,102 as against'Nil' income returned by the Appellant. 2. Without prejudice to the below mentioned grounds of appeal, the Hon'ble Dispute Resolution Panel ('DRP') and Learned AO erred on the facts of the case and in law, in determining the income of the Appellant for the subject Assessment Year at INR 23,452,242,102 thereby completely ignoring the fact that the payments received by the Appellant from licensing of manufacturing and distribution rights to Microsoft Operations Pte Ltd. ('MO') pertaining to India was INR 14,071,345,261. 3. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act'): 3.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that payments received by the Appellant from MO is taxable as 'Royalty' under the provisions of section 9(1)(vi) of the Act. 3.2 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by the Learned AO in the Draft assessment order that revenue received from sale of software by a group company of the Appellant - Microsoft Regional Sales Corporation ('MRSC'), from Indian distributors is taxable in India in the hands of the Appellant under the provisions of the section 9(1)(vi) of the Act. 3.3 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion of the Learned AO in the Draft assessment order that the reassessment proceedings initiated against the Appellant were valid without appreciating that: 3.3.1 the reasons to believe recorded by the Learned AO were palpably perverse as the same were based on the existing material available with the office of the Learned AO; 3.3.2 the reassessment proceedings were initiated by the office of the Learned AO since no action had been taken by your office within the time limit provided under section 143(2) of the Act.3.4 That on facts and in law, the Learned AO in the Draft assessment order has erred in observing that amount paid by MO to Appellant was for earning income from a source in India and from licensing of software carried out in India. 3.5 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the amount received by the Appellant fulfilled the conditions of section 9(1)(vi) of the Act and hence is taxable as Royalty in India. 3.6 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO by placing reliance on the order passed by the Hon'ble Income-tax Appellate Tribunal (ITAT) in case of Gracemac Corporation (now MOLC) for Assessment Years 1999-00 to 2004-05. 3.7 That on the facts and in law the Learned AO has erred in observing that: 3.7.1 the copyright has been commercially exploited in India, as the licences were sent to India in hard discs in large volumes;

Page 44 of 52 3.7.2 the agreement between MO and MRSC clearly establishes that the Appellant is getting royalty out of licensing of software carried out in India; 3.7.3 the Appellant has given the license to end users in India to use the software which is sort of a lease of a software and the payments received against the same would constitute lease rentals and hence taxable as Royalty: 3.7.4 the consideration received by the Appellant is payment for a 'process' and is thus covered under section 9(1)(vi) of the Act; 3.7.5 the consideration received for use of software is towards consideration for use of patented article and inventions; 3.7.6 as per the provisions of section 9 of the Act, the payments made for import of software are royalty payments and the only exception provided is for computer software supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under policy of Computer Software Export, Software Development and Training, 1986 of the Government of India; 3.7.7 the Appellant possesses right in copyright, which it can enforce in India, if any violation of such right is noticed by it without appreciating the fact that: 3.7.7.1 the owner of copyright in Microsoft Software Products is Microsoft Corporation {'MS Corp') and legal action against the violation of copyright can be undertaken only by owner of copyright; 3.7.7.2 without prejudice to the above, the right of the owner of the copyright to take legal action, would not alter the nature of the transaction from the sale of a copyrighted article to transfer of a copyright; 3.7.8 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term "Royalty as defined in section 9(1)(vi) of the Ac. Accordingly, the order passed by the Learned AO on the basis of DRP's directions is erroneous both in taw and on facts. Therefore, the additions made by the Learned AO are liable to be deleted. 4 Tax on revenue alleged as 'Royalty' under the Double Taxation Avoidance Agreement between India and US ('India US tax treaty') and the recent jurisprudence 4.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that: 4.1.1 payments received by the Appellant are deemed to arise in India under Article 12(7) of the India US tax treaty, disregarding the fact that 'royalty' paid by MO is not for earning income from a source in India: 4.1.2 revenue earned and received from sale of software by MRSC is taxable in India in the hands of the Appellant under the provisions of Article 12(2) and Article 12(3}(a) of the India US tax treaty. 4.2 That on facts and in law, the Hon'ble DRP and Learned AO has erred in not appreciating that: 4.2.1 the definition of Royalty is different in the Act and the India US tax treaty;

Page 45 of 52 4.2.2 the benefits available under the India US tax treaty would still be available to the Appellant as the amendments in the Finance Act 2012 would not impact the treaty interpretation of the term royalty. 4.3 That on facts and in law, the DRP and the Learned AO erred in placing reliance on the decision in case Gramophone Company of India (AIR 1984 SC 667) to hold that domestic tax legislation of later date can over-ride treaty provisions if there is an irreconcilable conflict. 4.4 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 4.5 That on facts and in law, the Hon'ble DRP and Learned AO erred in disregarding OECD commentaries, US IPS regulations, International tax commentaries, UN model convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 4.6 That on facts and in law, the Learned AO has erred in interpreting the ratio laid down in the decision of P.V.A.L. Kulandagan Chettiar in an incorrect manner on relevance of OECD commentaries / US IRS regulations / International tax commentaries for interpretation of treaties. 4.7 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by relying on the decisions pronounced in cases of Samsung Electronics (203 taxman 477) (Kar HC), Millenium IT Software {338 ITR 391) (AAR), ING Vysya Bank Ltd. (61 DTR 401)(ITAT), Citrix Systems (343 ITR 1 (AAR No. 822 of 2009). 4.8 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order by distinguishing from the decisions in cases of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A. B. and Metapath (ITA 504/2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant. 4.9 That on facts and in law, the Learned AO has erred in observing that even grant of one right in respect of a copyright or work would amount to transfer of the use of copyright. 4.10 That on facts and in law, the Learned AO has erred in observing that the Appellant has not received royalty in respect of any manufacturing rights. 4.11 That on facts and in law, the Hon'ble DRP has erred in confirming the conclusion drawn by Learned AO in the Draft assessment order and observing that only two types of transactions in respect of computer software i.e. sale and licence (letting) are recognized by the Indian laws and India - US tax treaty and no further dissection of licensing (on the lines of OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian tax treaties. 4.12 That on facts and in law, the Learned AO has erred in observing that the consideration received by the Appellant has arisen in India, as MO has been granted retail distribution rights in India. Factual inaccuracies: 4.13 That on facts the Hon'ble DRP and the Learned AO have failed in comprehending the facts of the Appellant's case and erroneously observed the following:

Page 46 of 52 4.13.1 that the payment received by the Appellant is related to number of software that is ultimately licensed and distributed in India; 4.13.2 that the payment of royalty is directly related to the source in India and, therefore it is taxable in India; 4.13.3 that the source of revenue derived by the Appellant is from licensing of software and utilisation/ exploitation of the license granted to the users in India; 4.13.4 that the Appellant received amount on account of lease of software / software renting. 4.14 The Learned AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant. 4.15 Without prejudice to the above grounds, the Learned AO has erred in levying interest under section 234B of the Act while completely disregarding the provisions of the Act and the various judicial precedents decided in favour of taxpayers on this issue.” 30. It was submitted before us that the issue involved in the present appeal are identical to the appeal of the assessee for assessment year 2007 – 08. The mainly ground No. 3 and ground No. 4 of the above appeal are against the action of the Ld. Assessing officer in charging the income of the appellant as ―Royalty‖. It was further submitted that argument of the parties remains the same as arguments advanced by them for assessment year 2007-08. 31. We‘ve carefully considered the rival contentions. The only issue involved in the appeal of the assessee is that that whether the income received by it is chargeable to tax as royalty. We have decided this issue in the appeal of the assessee for assessment year 2007 – 08 wherein we set aside the whole issue to the file of the assessing officer to decide it afresh in accordance with the decision of the Hon‘ble Delhi High Court in case of DIT V Infrasoft Limited ( supra). Similarly in this year also we set aside the whole issue to the file of the assessing officer with similar direction as contained in ITA number 6089/Del/2012. 32. In the result appeal of the assessee for the assessment year 2010-11 in ITA No. 1969/Del/2014 is allowed with above direction. ITA No.1615/Del/2015 AY 2011-12

Page 47 of 52 33. The grounds of appeal raised by the assessee in ITA No.1615/Del/2015 as under:- “1. That on facts and in law, the Dy. Commissioner of Income Tax, Circle - 'Gurgaon', International Taxation, New Delhi {Learned AO) has erred in computing the total income of the Appellant at INR 2801,21,58,358 as against the returned income of INR 21,76,50,620. 2. Tax on revenue alleged as 'Royalty' under the India US tax treaty 2.1 That on facts and in law, the Hon'ble DRP erred in confirming the variations proposed by the Learned AO in the draft assessment order by holding that the revenue earned by the Appellant from sale of Microsoft Retail Products to distributors in India is royalty under Article 12 of the India US tax treaty; 2.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not appreciating that: 2.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 2.2.2 the benefits available under the India US tax treaty have not been impacted by the amendments in the Finance Act, 2012 in any manner. 2.3 That on facts and in law, the Hon'ble DRP and the Learned AO grossly erred in not following the judgment of the Hon'ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd (ITA 1034/2009) which is binding on the lower tax administrative bodies and the other judicial precedents as they are squarely applicable to the facts of the Appellant. 2.4 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not following the decisions of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A.B. and Metapath (ITA 504 / 2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant. 2.5 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 2.6 That on facts and in law, the Hon'ble DRP and Learned AO erred in disregarding OECD commentaries, US IRS regulations, International tax commentaries, UN model convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 2.7 That on facts and in law, the Hon'ble DRP and Learned AO erred in placing reliance of Samsung Electronics Co. Ltd (245 CTR 481) (Kar HC). 3. Tax on revenue alleged 'as royalty' under the Income-tax Act. 1961 ('the Act'): 3.1 That on facts and in law, the Hon'ble Dispute Resolution Panel (Hon'ble DRP) erred in confirming the variations proposed by the Learned AO in the draft assessment order as against the returned income by holding that the revenue earned by the Appellant from the Indian distributors is taxable in the hands of the Appellant as royalty under the provisions of section 9(1)(vi) of the Act. 3.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the payment made by the Indian distributors to the Appellant is towards the use of

Page 48 of 52 copyright and not for the purchase of copyrighted article and therefore, the same is royalty under section 9(1)(vi) of the Act. 3.3 That on facts and in law, the Learned AO erred in observing that: 3.3.1 the consideration received by the Appellant was on account of licensing of software and not on sales of software; 3.3.2 that the use of computer programme is a use of process; 3.3.3 that computer programme being patented are inventions; 3.3.4 all payments made for import of software are royalty and the only exception is second proviso to section 9(1)(vi); 3.3.5 no distinction exists between copyright and copyrighted article; 3.3.6 the Appellant possesses the Intellectual Property Right (IPR) in the software which it had further licensed to distributors, completely disregarding the fact that the Appellant was engaged in only distribution of Microsoft software products to distributors / resellers outside India and no right has been passed by the Appellant to distributors in the entire transaction; 3.3.7 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term "Royalty" as defined in section 9(1)(vi) of the Act. 3.4 That on the facts and in law, the Learned AO erred in placing reliance on the Explanations 4, 5 and 6 inserted by Finance Act 2012 completely disregarding the detailed submission filed by the Appellant that the said explanations did not have any bearing on the position of non-taxability of revenue earned by Appellant in the Act as well as the Double Taxation Avoidance Agreement between India and US ('India US tax treaty'}. 3.5 That on the facts and in law, the Learned AO erred in placing reliance on the judgment of Hon'ble Supreme Court in the case of Swadeshi R Anjan Sinha vs. Hardev Banerjee (AIR 1992 SC 1590). 4 That on facts and in law, the Learned AO grossly erred in not transferring the TDS credit claimed by MRSC to MOL Corporation in view of the mandatory directions of Hon'ble DRP and the law laid down by the Supreme Court in the decision of ITO vs. Bachu Lal Kapoor (60 ITR 74) (1966) (SC). 5 That the Ld. AO and DRP has grossly erred on facts and in law in allowing the credit for TDS of Rs. 214,83,30,661 instead of Rs. 270,17,14,077 as claimed by the appellant in the return of income. 6 That the Ld. AO and DRP has grossly erred on facts and in law in levying surcharge and education cess on the income which is assessed to tax under the provisions of the India - US Tax Treaty. 7 That on facts and in law, the Learned AO erred in initiating penalty proceedings under section 271 (1 )(c) of the Act against the Appellant. 8 Without prejudice to the above grounds, the Learned AO erred in levying interest under section 234B of the Act which is not maintainable in law in view of the decisions of jurisdictional High Court and various other judicial precedents decided in favor of taxpayers on this issue.

Page 49 of 52 34. It was submitted before us that the issue involved in the present appeal are identical to the appeal of the assessee for assessment year 2007 – 08. The mainly ground No. 3 and ground No. 4 of the above appeal are against the action of the Ld. Assessing officer in charging the income of the appellant as ―Royalty‖. It was further submitted that argument of the parties remains the same as arguments advanced by them for assessment year 2007-08. 35. We‘ve carefully considered the rival contentions. The only issue involved in the appeal of the assessee is that that whether the income received by it is chargeable to tax as royalty. We have decided this issue in the appeal of the assessee for assessment year 2007 – 08 wherein we set aside the whole issue to the file of the assessing officer to decide it afresh in accordance with the decision of the Hon‘ble Delhi High Court in case of DIT V Infrasoft Limited ( supra). Similarly in this year also we set aside the whole issue to the file of the assessing officer with similar direction as contained in ITA number 6089/Del/2012. 36. In the result appeal of the assessee for the assessment year 2011-12 in ITA No. 1615/Del/2015 is allowed with above direction.

ITA No.1970/Del/2015 AY2010-11

37.

The grounds of appeal raised by the assessee in ITA No.1970/Del/2015 as under:-

Page 50 of 52 1. That on facts and in law, the Dy. Director of Income Tax, Circle - 3(2), International Taxation, New Delhi ('Learned AO') has erred in computing the total income of the Appellant at INR 23,730,653,027 as against the returned income of INR 278,410,925. 2. Tax on revenue alleged 'as royalty' under the Income-tax Act, 1961 ('the Act'): 2.1 That on facts and in law, the Hon'ble Dispute Resolution Panel (DRP) has erred in confirming the variations proposed by the Learned AO in the draft assessment order as against the Returned Income by holding that the revenue earned by the Appellant from the Indian Distributors is taxable in the hands of the Appellant as royalty under the provisions of section 9(1)(vi) of the Act. 2.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in observing that the payment made by the Indian distributors to the Appellant is towards the use of copyright and not for the purchase of copyrighted article and therefore, the same is royalty under section 9(1)(vi)of the Act. 2.3 That on facts and in law, the Learned AO has erred in observing that: 2.3.1 the consideration received by the Appellant was on account of licensing of software and not on sales of software; 2.3.2 that even grant of one right in respect of a copyright would amount to transfer of the use of copyright; 2.3.3 that the use of computer programme is a use of process; 2.3.4 that computer programme being patented are inventions; 2.3.5 all payments made for import of software are royalty and the only exception is second proviso to section 9(1)(vi); 2.3.6 no distinction exists between copyright and copyrighted article; 2.3.7 the Appellant possesses the Intellectual Property Right (IPR) in the software which it had further licensed to distributors, completely disregarding the fact that the Appellant was engaged in only distribution of Microsoft software products to distributors / resellers outside India and no right has been passed by the Appellant to distributors in the entire transaction; 2.3.8 the provisions of section 115A of the Act characterizes the income from sale of software as 'Royalty' under the Act in case of Non-residents, without appreciating that section 115A does not enlarge the scope of the term "Royalty" as defined in section 9(1)(vi) of the Act. 2.4 That on the facts and in law, the Learned AO has erred in placing reliance on the Explanations 4, 5 and 6 inserted by Finance Act 2012 completely disregarding the detailed submission filed by the Appellant that the said explanations did not have any bearing on the position of non-taxability of revenue earned by Appellant in the Act as well as the Double Taxation Avoidance Agreement between India and US ('India US tax treaty1). 2.5 That on the facts and in law, the Learned AO has erred in placing reliance on the judgment of Hon'bie Supreme Court in the case of Swadeshi R Anjan Sinha vs. Hardev Banerjee (AIR 1992SC 1590). 2.6 That on facts and in law, the Learned AO has grossly erred in not transferring the TDS credit claimed by MRSC to MOL Corporation in view of the mandatory directions of Hon'ble DRP and the law laid down by the Supreme Court in the decision of ITO vs. Bachu Lal Kapoor (60 ITR 74) (1966) (SC).

Page 51 of 52 3 Tax on revenue alleged as 'Royalty' under the India US tax treaty 3.1 That on facts and in law, the Hon'ble DRP has erred in confirming the variations proposed by the Learned AO in the Draft assessment order by holding that the revenue earned by the Appellant from sale of Microsoft Retail Products to distributors in India is royalty under Article 12 of the India US tax treaty; 3.2 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not appreciating that: 3.2.1 the definition of Royalty is different in the Act and the India US tax treaty; 3.2.2 the benefits available under the India US tax treaty have not been impacted by the amendments in the Finance Act, 2012 in any manner. 3.3 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not following the judgments of the Hon'ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd (ITA 1034/2009) and the judgment of the jurisdictional ITAT in the case of Convergys Customer Management Group Inc. vs. ADIT (ITA No. 1443 I 2012)(Del ITAT) which are squarely applicable to the facts of the Appellant. 3.4 That on facts and in law, the Hon'ble DRP and the Learned AO erred in not following the decisions of Tata Consultancy Services (271 ITR 401) (SC), Ericsson A.B. and Metapath (ITA 504 / 2007) (Del HC), Nokia Networks OY (ITA 512 / 2007) (Del HC) and various other Tribunal / AAR rulings relied on by the Appellant. 3.5 That on facts and in law, the Hon'ble DRP and Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. 3.6 That on facts and in law, the Hon'ble DRP and Learned AO have erred in disregarding OECD commentaries, US IRS regulations, International tax commentaries, UN model convention, International court rulings on classification of transactions involving computer software while interpreting tax treaties. 3.7 That on facts and in law, the Hon'ble DRP and Learned AO erred in placing reliance on the decision in case of Samsung Electronics (203 taxman 477)(Kar HC). 3.8 That on facts and in law, the Learned AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant. 3.9 Without prejudice to the above grounds, the Learned AO has erred in levying interest under section 234B of the Act which is not maintainable in law in view of the decision of jurisdictional High Court in the case of DIT vs. Jacabs Civil (330 ITR 578) and various other judicial precedents decided in favor of taxpayers on this issue. 38. It was submitted before us that the issue involved in the present appeal are identical to the appeal of the assessee for assessment year 2007 – 08. The mainly ground No. 3 and ground No. 4 of the above appeal are against the action of the Ld. Assessing officer in charging the income of the appellant as ―Royalty‖. It was further

Page 52 of 52 submitted that argument of the parties remains the same as arguments advanced by them for assessment year 2007-08. 39. We‘ve carefully considered the rival contentions. The only issue involved in the appeal of the assessee is that that whether the income received by it is chargeable to tax as royalty. We have decided this issue in the appeal of the assessee for assessment year 2007 – 08 wherein we set aside the whole issue to the file of the assessing officer to decide it afresh in accordance with the decision of the Hon‘ble Delhi High Court in case of DIT V Infrasoft Limited ( supra). Similarly in this year also we set aside the whole issue to the file of the assessing officer with similar direction as contained in ITA number 6089/Del/2012. 40. In the result appeal of the assessee for the assessment year 2010-11 in ITA No. 1970/Del/2014 is allowed with above direction. 41. In the result all the six appeals of the assessee are allowed for statistical purposes. Order pronounced in the open court on 26/09/2016. -Sd/- -Sd/- (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:26/07/2016 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

MOL CORPORATION,GURGAON vs. ADDL. DIT, NEW DELHI