Saturday, August 24, 2013

case laws

Provision of Article 335 of Constitution of India

Posted on 13 August 2013 by Diganta Paul

Court

SUPREME COURT OF INDIA


Brief

Although the matter is now before a Bench of five Judges, the terms of reference are not very clear. From what we have been able to gather from the pleadings and the judgment of the Division Bench of the High Court, the question to be considered is whether reservation was inapplicable to specialty and superspecialty faculty posts in the All India Institute of Medical Sciences, hereinafter referred to as “AIIMS”. Faced with the decisions of this Court in the case of Indra Sawhney Vs. Union of India & Ors. [(1992) Supp. (3) SCC 215]; Jagdish Saran & Ors. Vs. Union of India & Ors. [(1980) 2 SCR 831]; and Dr. Pradeep Jain etc. Vs. Union of India & Ors. etc. [(1984) 3 SCR 942], wherein reservation in admission to specialty and superspecialty courses was disallowed, the Division Bench of the High Court confined itself to the limited issue, namely, whether reservation policy was inapplicable for making appointments to the entry level faculty post of Assistant Professor and to super specialty posts and also whether the resolutions adopted by AIIMS on 11.1.1983 and 27.5.1994 were liable to be struck down.


Citation

FACULTY ASSOCIATION OF AIIMS … APPELLANT VS. UNION OF INDIA & ORS. …RESPONDENTS WITH CIVIL APPEAL NO. 5119 OF 2002


Judgement

REPORTABLE
 
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4500 of 2002
 
FACULTY ASSOCIATION OF AIIMS … APPELLANT
VS.
UNION OF INDIA & ORS. …RESPONDENTS
 
WITH
CIVIL APPEAL NO. 5119 OF 2002
 
J U D G M E N T
ALTAMAS KABIR, CJI.
 
1. When Special Leave Petition (Civil) No. 2106 of 2002, filed by the Faculty Association of AIIMS, was taken up for consideration, notice thereupon was issued by a Bench of Two-Judges and it was stipulated that any appointment to be made, after the order was passed in accordance with the reservation policy, would only be tentative in nature until further orders. When the Appeal was taken up for hearing on 20th February, 2003, along with Civil Appeal No. 5119 of 2002, considering the important nature of the issues involved for determination in the said cases, as also the recurring nature of the problem, it was thought appropriate that the matters be heard by a larger Bench. Thereafter, on 12th February, 2004, a Bench of Three-Judges headed by the Chief Justice was of the view that the matters involved substantial questions of law as to the interpretation of the Constitution and were required to be heard by a Bench of Five-Judges. It is pursuant to such direction that the matter appeared before the Bench of Five-Judges on several occasions and ultimately they were listed before a Bench of Five- Judges on 2nd July, 2013.
 
2. Although the matter is now before a Bench of five Judges, the terms of reference are not very clear. From what we have been able to gather from the pleadings and the judgment of the Division Bench of the High Court, the question to be considered is whether reservation was inapplicable to specialty and superspecialty faculty posts in the All India Institute of Medical Sciences, hereinafter referred to as “AIIMS”. Faced with the decisions of this Court in the case of Indra Sawhney Vs. Union of India & Ors. [(1992) Supp. (3) SCC 215]; Jagdish Saran & Ors. Vs. Union of India & Ors. [(1980) 2 SCR 831]; and Dr. Pradeep Jain etc. Vs. Union of India & Ors. etc. [(1984) 3 SCR 942], wherein reservation in admission to specialty and superspecialty courses was disallowed, the Division Bench of the High Court confined itself to the limited issue, namely, whether reservation policy was inapplicable for making appointments to the entry level faculty post of Assistant Professor and to super specialty posts and also whether the resolutions adopted by AIIMS on 11.1.1983 and 27.5.1994 were liable to be struck down.
 
3. Appearing for the Petitioner, Mr. P.P. Rao, learned Senior Advocate, firstly referred to the statement of objects and reasons of the All India Institute of Medical Sciences Act, 1956, which provides as follows:
 
“For improving professional competence among medical practitioners, it is necessary to place a high standard of medical education, both postgraduate and under-graduate, before all medical colleges and other allied institutions in the country. Similarly, for the promotion of medical research it is necessary that the country should attain self-sufficiency in post-graduate medical education. These objectives are hardly capable of realisation unless facilities of a very high order for both undergraduate and post-graduate medical education and research are provided by a central authority in one place. The Bill seeks to achieve these ends by the establishment in New Delhi of an institution under the name of the All-India Institute of Medical Sciences. The Institute will develop patterns of teaching in under-graduate and post-graduate medical education in all its branches so as to demonstrate a high standard of medical education to all medical colleges and other allied institutions, will provide facilities of a high order for training of personnel in all important branches of health activities and also for medical research in its various aspects. The Institute will have the power to grant medical degrees, diplomas and other academic distinctions which would be recognised medical degrees for the purpose of the Indian Medical Council Act, 1933.”
 
4. Mr. Rao also referred to Section 5 of the Act which declared the institute to be an institution of national importance. As pointed out by Mr. Rao, Section 13 of the Act is in line with the objects for which the institute was created and Section 14 deals with the functions of the institute relating to the academic aspects of the institutes's functions as a teaching institute.
 
5. Mr. Rao submitted that the question had earlier been gone into and considered in Indra Sawhney's case (supra), wherein while considering the question of reservation the Bench also took into consideration the provisions of Article 335 of the Constitution regarding the claims of Scheduled Castes and Scheduled Tribes to services and posts. Referring to the concurring Judgment of Jeevan Reddy, J., learned counsel referred to Paragraphs 838 and 839 in particular and the observations made therein. Since Paragraph 838 places in focus the view of the Nine-Judge Bench, the same is extracted herein below:
 
838. While on Article 335, we are of the opinion that there are certain services and positions where either on account of the nature of duties attached to them or the level (in the hierarchy) at which they obtain, merit as explained hereinabove, alone counts. In such situations, it may not be advisable to provide for reservations. For example, technical posts in research and development organisations/departments/ institutions, in specialities and superspecialities in medicine, engineering and other such courses in physical sciences and mathematics, in defence services and in the establishments connected therewith. Similarly, in the case of posts at the higher echelons e.g., Professors (in Education), Pilots in Indian Airlines and Air India, Scientists and Technicians in nuclear and space application, provision for reservation would not be advisable.”
 
6. In fact, both in Paragraphs 838 and 839, while specifying areas, where it may not be advisable to put reservation, the learned Judge has included posts in research and development organisations/ departments /institutions, in specialties and super-specialties in medicine. The same observation is repeated in Paragraph 839, wherein, categorically it was held that the Bench was of the opinion that in certain services and in respect of certain posts, application of the rule of reservation may not be advisable and once again included as the fourth item – posts in superspecialties in medicine, engineering and other scientific and technical subjects. Mr. Rao submitted that as far as medicine is concerned “super-specialty” means “post doctoral courses”.
 
7. Mr. Rao submitted that in the instant case, reservation was being provided for up to the doctoral stage, but at the stage of recruitment for a post doctoral courses and research at the initial stage of candidates were required to sit for a written examination and those who are  uccessful, were, thereafter, recruited in the different disciplines of teaching. Mr. Rao submitted that the problem begins at that stage when posts are thereafter, reserved in respect of different courses. Mr. Rao submitted that once a candidate qualified for recruitment in the
different posts of faculty beginning from the$ post of Assistant Professor onward, there was no further logicin thereafter reserving posts for candidates from the Scheduled Castes and Scheduled Tribes and OBC communities. Mr. Rao submitted that at that level of super-specialty, the question of reservation ought not to arise as was observed by the Nine-Judge Bench in Indra Sawhney's case (supra). 8. Mr. Rao submitted that while Article 16(4) empowers the State in making provisions for reservation of appointments or posts in favour of any backward class of citizens which, in the opinion of the State, was not adequately represented in the services under the State, the same would have to be read and understood in the manner indicated in Indra Sawhney's case (supra). The learned Senior counsel submitted that although definite directions have not been given in Paragraphs 838 and 839 of the judgment in Indra Sawhney's case (supra), the observations made therein were guidelines for the Government and institutions, such as AIIMS, to follow, in order to provide the best candidates available with the opportunity of going in for super-specialties which entail higher degree of skill and where no compromise in quality and expertise could be entertained.
 
9. In support of his aforesaid submissions, Mr. Rao also referred to the decision of a Three-Judge Bench in Dr. Jagadish Saran & Ors. Vs. Union of India [(1980) 2 SCC 768], wherein in Paragraphs 21, 22 and 23, Krishna Iyer, J., writing the judgment, spoke about reservation and what he referred as wholesale banishment of proven ability to open up, hopefully, some dalit talent, total sacrifice of excellence at the altar of equalisation – when the Constitution mandates for every one equality before and equal protection of the law – may be fatal folly, self-defeating educational technology and antinational if made a routine rule of State Policy. His Lordship further observed that a fair preference, a reasonable reservation, a just adjustment of the prior needs and real potential of the weak with the partial recognition of the presence of competitive merit – such is the dynamics of social justice with animates the three egalitarian articles of the Constitution. The learned Judge goes on to observe in Paragraph 23 that flowing from the same stream of equalism is another limitation. The basic medical needs of a region or the preferential push justified for a handicapped group cannot prevail in the same measure at the highest scales of specialty where the best skill or talent, must be handpicked by selecting according to capability. The learned Judge went on to restrict the Indian Medical Council's recommendations which indicated that students of post-graduate courses therein should be selected strictly on merit, judged on the basis of academic record in the undergraduate course.
 
10. The next decision referred to by Mr. Rao is a short judgment in the case of Dr. Fazal Ghafoor Vs. Union of India & Ors. [(1988) Supp. SCC 794], which was a decision by two Judges, wherein, reliance was placed on the decision of this Court in the case of Dr. Pradeep
Jain & Ors. Vs. Union of India & Ors. [(1984) 3 SCC 654], wherein, a Three-Judge Bench of this Court, while considering the question of reservation in the light of the aspirations of the citizens of India, as contained in the Preamble to the Constitution, observed that while reservation was acceptable with regard to the undergraduate course, different considerations will have to prevail when it came to the question of reservation based on residents’ requirement within the State or on institutional preference for admission to the post-graduate courses, such as MD, MS and the like. Following the decision in Dr. Jagadish Saran's case (supra), Their Lordship observed that “there we cannot allow excellence to be compromised by any other consideration because that would be detrimental to the interest of the nation. Their Lordships also observed that if equality of opportunity for every other person in the country is the constitutional guarantee, merit must be the test when choosing the best.
 
11. Mr. Rao lastly referred to the Constitution Bench decision of this Court in Dr. Preeti Srivastava Vs. State of M.P. [(1999) 7 SCC 120], which was a writ petition heard along with several other writ petitions on various aspects of reservation. Mr. Rao pointed out that the Constitution Bench also referred to the decision in Dr. Pradeep Jain’s case (supra) and also Dr. Jagadish Saran’s case (supra), referred to hereinbefore, in expressing its concurrence with the views expressed therein. In Paragraph 25 of the judgment, Sujata V. Manohar, J., speaking for the Constitution Bench, observed that the specialty and super-specialty courses in medicine also entailed onhand experience of treating or operating on patients in the attached teaching hospitals. Those undergoing these programmes are expected to occupy posts in the teaching hospitals or discharge duties attached to such posts. The elements of Article 335, therefore, colour the selection of candidates for these course and the rules framed for this purpose. Consequently, in Paragraph 26, it was further observed that in the premises the special provisions for SC/ST candidates – whether reservations or lower qualifying marks – at the specialty level have to be minimal. There cannot, however, be any such special provisions at the level of super-specialties. In keeping with its findings the Constitution Bench ultimately held that since no relaxation is permissible at the highest levels in the medical institutions, the Petitioners therein were right when they contended that the reservations made for the Scheduled Castes and Scheduled Tribes candidates for admission to DM and MCH courses, which are super-specialty courses, in not consistent with the constitutional mandate under Articles 15(4) and 16(4), and that Regulation 27 of the Post Graduate Institute of Medical Education and Research, Chandigarh Regulations, 1967, would not apply at the levels of admissions to DM and MCH courses.
 
12. Mr. Rao submitted that the Health Survey and Development Committee, popularly known as the Bhore Committee, in its report published in 1946 recommended the establishment of a national medical centre at Delhi, which would concentrate on training, well- qualified teachers and research workers in order that a steady stream of those could be maintained to meet the needs of the rapidly expanding health activities throughout the country. It seems that pursuant to the said report and after attainment of Independence, the Union Ministry of Health proceeded to implement the aforesaid idea resulting in the enactment of the All India Institute of Medical Sciences Act, 1956, with the All India Institute of Medical Sciences as an autonomous institution of national importance and defined its objectives and functions. Various other decisions, including the decisions in Saurabh Chaudri and Others Vs. Union of India and Others [(2003) 11 SCC 146] and T.M.A. Pai Foundation Vs. State of Karnataka [(2002) 8 SCC 481] were referred to by Mr. Rao to urge that the observations made in Indra Sawhney's case as well as in Preeti Srivastava’s case were binding, though in the nature of observations made in the judgments. Mr. Rao referred to the decision of this Court in Commissioner of Income Tax, Hyderabad-Deccan Vs. Vazir Sultan and Sons [1959 Supp (2) SCR 375], wherein a Bench of Three-Judges examined the doctrine of “obiter dicta” and arrived at a finding that even obiter at times has the force of law declared by the Supreme Court under Article 141 of the Constitution. Mr. Rao ended on the note that the introduction of the concept of reservation in specialty and super-specialty subjects or for the appointment of faculty in AIIMS, would defeat the very purpose for which the institute was established. Mr. Rao also submitted that if excellence was to be achieved at the level of superspecialty disciplines, no compromise could be made in either imparting such education or recruiting persons who would impart such education at such level.
 
13. Dr. Rajiv Dhawan, learned Senior Advocate, who appeared in Civil Appeal No. 5119 of 2002, submitted that the AIIMS Act did not empower the Governing Body to impose reservation at any stage, much less at the stage of super-specialty. Referring to the affidavit filed by the Director of AIIMS, Dr. Dhawan submitted that the decision of the High Court was contrary to the decision of this Court in Indra Sawhney's case and also in M. Nagaraj and Others Vs. Union of India and Others  [(2006) 8 SCC 212] where it was held that there should be no reservation at the super-specialty stage, and, in any event, the same would have to be based on quantifiable data. Mr. Rao submitted that proportional representation and not adequacy, as understood in Indra Sawhney’s case or even in M. Nagaraj’s case, has been resorted to in the instant case in the teeth of the said two cases. While making reference to the concept of creamy layer, Dr. Dhawan urged that “equality” does not mean that reservation had to be applied in each and every case to maintain such equality, for example, the creamy layer concept as was considered by this Court in E.V. Chinnaiah Vs. State of A.P. and Others [(2005) 1 SCC 394].
 
14. Appearing for the Institute, Mr. Mehmood Pracha, learned Advocate contended that people from Backward classes and the Scheduled Castes and the Scheduled Tribes were often discriminated against and even in spite of having excellent qualities, they were not provided with sufficient opportunities to come up to the standards, as contemplated by the various medical colleges and, in particular, the All India Institute of Medical Sciences, which is an institution of national importance. Mr. Pracha urged that although reservation at all different levels of the Institute had been introduced, for quite some time, there is no available data to indicate that there has been any deterioration in the quality of medical services being provided in AIIMS. On the other hand, AIIMS was one of the most sought after medical institute, not only for promotion and research work, but also for the purpose of medical education. Taking a leaf out of Hindu mythology, Mr. Pracha drew an analogy from the story of Eklavya and Arjun in the Mahabharta. While Arjun belonged to the princely class, Eklavya was a tribal boy, who without actual training or guidance from any teacher, by his own efforts, excelled in the art of archery. The famous Dronacharya was Arjun’s teacher in archery and Eklavya had acquired the skills that he had by merely watching Dronacharya guiding Arjun. However, when it came to an archery competition, Dronacharya, who was more or less certain that, if allowed an opportunity, Eklavya would possibly beat Arjun, requested Eklavya that if he really loved and respected him, he should give his right thumb as gurudakshina to his master.
 
Eklavya dutifully obeyed the person he had chosen as his master and was thus prevented from competing in the competition which Arjun won. Mr. Pracha submitted that simply because Eklavya was a tribal boy he was denied the opportunity of competing with Arjun, despite his brilliance and excellence. Mr. Pracha submitted that there are many more Eklavyas in today’s society, who, if not suppressed and given a chance, would possibly even outshine those belonging to the higher echelons of Society.
 
15. Mr. Pracha strongly supported the concept of reservation at all stages, including at the superspecialty stage. He urged that at the entry level for recruitment to the faculty posts, which were all treated as super-specialty disciplines after the Post Graduate course, a member of the Backward Classes had to sit for an examination with others without any separate weightage given for reservation. It is only after having passed the written examination along with other candidates, was a member of the Backward Classes appointed in a teaching post on the basis of reservation. Mr. Pracha submitted that this was done only with the intention of giving such a candidate an opportunity of reaching the level of his other fellow faculty members. Mr. Pracha submitted that a little support was intended to help people from the Backward communities to make their presence felt in academia, so as to encourage others similarly situated. Mr. Pracha also relied on the decision of this Court in Indra Sawhney’s case, in support of his contention that members of the Scheduled Castes and Scheduled Tribes and Other Backward Classes were not adequately represented and for the said purpose a certain amount of reservation was necessary so that they could compete with others and excel in academics. Strongly supporting the policy adopted by the Institute, Mr. Pracha submitted that the Civil Appeal filed by the Faculty of Association of AIIMS was liable to be
dismissed.
 
16. Appearing for the Union of India, the learned Solicitor General repeated the submissions made by Mr. Pracha and added that the State had a constitutional duty to empower certain sections of society who needed help to uplift themselves from their particular situations. The learned Solicitor General submitted that Article 46 of the Constitution, though a Directive Principle, was in the nature of a guideline for good governance to the Government of the day. The said Article was intended to help the depressed classes, who otherwise had little opportunity of raising their standards. Faced with the question as to when initially the Central Government had opposed the doctrine of reservation on the ground of excellence in education, why was it necessary in 1972 to take a different stand and come out in support of reservation, even in super-specialty courses, the learned Solicitor General urged that the policy was based not on the question of adequacy, but as a measure of empowerment for the Backward Classes. While referring to the decision in M. Nagaraj’s case, which has been referred to by the other learned counsel, the learned Solicitor General contended that with the introduction of Article 16(4A) in the Constitution, the decision arrived at in M. Nagaraj’s case, would have to be read differently.
 
He, however, also urged that there was no constitutional prohibition to impose reservation, if it was felt necessary to benefit the Backward Classes, who had little or no support to help them improve their lot. Referring to the decisions of this Court in Dr. Jagadish Saran's case and Dr. Pradeep Jain’s case, which have been referred to hereinabove, the learned Solicitor General urged that the direction given in Dr. Pradeep Jain’s case that reservation should not exceed 70%, did not take into consideration Article 16(4A) of the Constitution, while giving such directions.
 
17. Although, the matter has been argued at some length, the main issue raised regarding reservation at the super-specialty level has already been considered in Indra Sawhney’s case (supra) by a Nine-Judge Bench of this Court. Having regard to such decision, we are not inclined to take any view other than the view expressed by the Nine-Judge Bench on the issue. Apart from the decisions rendered by this Court in Dr. Jagadish Saran's case (supra) and Dr. Pradeep Jain’s case (supra), the issue also fell for considerate in Preeti Srivastava’s case (supra) which was also decided by a Bench of Five Judges. While in Dr. Jagadish Saran's case (supra) and in Dr. Pradeep Jain’s case (supra) it was categorically held that there could be no compromise with merit at the super specialty stage, the same sentiments were also expressed in Preeti Srivastava’s case (supra) as well. In Preeti Srivastava’s case (supra), the Constitution Bench had an occasion to consider Regulation 27 of the Post Graduate Institute of Medical Education and Research, Chandigarh Regulations, 1967, whereby 20% of seats in every course of study in the Institute was to be reserved for candidates belonging to the Scheduled Castes, Scheduled Tribes or other categories of persons, in accordance with the general rules of the Central Government promulgated from time to time. The Constitution Bench came to the conclusion that Regulation 27 could not have any application at the highest level of super specialty as this would defeat the very object of imparting the best possible training to selected meritorious candidates, who could contribute to the advancement of knowledge in the field of medical research and its applications. Their Lordships ultimately went on to hold that there could not be any type of relaxation at the super specialty level.
 
18. In paragraph 836 of the judgment in Indra Sawhney’s case (supra), it was observed that while the relevance and significance of merit at the stage of initial recruitment cannot be ignored, it cannot also be ignored that the same idea of reservation implies selection of a less meritorious person. It was also observed that at the same time such a price would have to be paid if the constitutional promise of social justice was to be redeemed. However, after making such suggestions, a note of caution was introduced in the very next paragraph in the light of Article 15 of the Constitution. A distinction was, however, made with regard to the provisions of Article 16 and it was held that Article 335 would be relevant and it would not be permissible not to prescribe any minimum standard at all. Of course, the said observation was made in the context of admission to medical colleges and reference was also made to the decision in State of M.P. Vs. Nivedita Jain [(1981) 4 SCC 296], where admission to medical courses was regulated by an entrance test. It was held that in the matter of appointment of medical officers, the Government or the Public Service Commission would not be entitled to say that there would not be minimum qualifying marks for Scheduled Castes/Scheduled Tribes candidates while prescribing a minimum for others. In the very next paragraph, the Nine-Judge Bench while discussing the provisions of Article 335 also observed that there were certain services and posts where either on account of the nature of duties attached to them or the level in the hierarchy at which they stood, merit alone counts. In  such situations, it cannot be advised to provide for reservations. In the paragraph following, the position was made even more clear when Their Lordships observed that they were of the opinion that in certain services in respect of certain posts, application of rule of reservation may not be advisable in regard to various technical posts including posts in super specialty in medicine, engineering and other scientific and technical posts.
 
19. We cannot take a different view, even though it has been suggested that such an observation was not binding, being obiter in nature. We cannot ascribe to such a view since the very concept of reservation implies mediocrity and we will have to take note of the caution indicated in Indra Sawhney's case. While reiterating the views expressed by the Nine-Judge Bench in Indra Sawhney’s case, we dispose of the two Civil Appeals in the light of the said views, which were also expressed in Dr. Jagadish Saran's case, Dr. Pradeep Jain's case, Dr. Preeti Srivastava's case. We impress upon the Central and State Governments to take appropriate steps in accordance with the views expressed in Indra Sawhney's case and in this case, as also the other decisions referred to above, keeping in mind the provisions of Article 335 of the Constitution.
 
20. There will be no order as to costs.
 
 
 
…………………………………………………CJI.
(ALTAMAS KABIR)
 
………………………………………………………J.
(SURINDER SINGH NIJJAR)
 
………………………………………………………J.
(RANJAN GOGOI)
 
………………………………………………………J.
(M.Y. EQBAL)
 
………………………………………………………J.
(VIKRAMAJIT SEN)
 
New Delhi
 
Dated: July 18, 2013.

Provision of section 9(1)(vi) of IT Act 1961 on royalty on sale of software

Posted on 13 August 2013 by Diganta Paul

Court

INCOME TAX APPELLATE TRIBUNAL


Brief

The assessee has impugned action of learned Dispute Resolution Panel (‘DRP’) confirming the additions proposed by the Assessing Officer in the draft assessment order as against the returned income by holding that the revenue earned by the assessee from sale of Microsoft software products to the Indian distributors is taxable in the hands of the assessee as royalty under the provisions of Section 9(1)(vi) of the Income-tax Act, 1961. This action of the learned DRP has been questioned on several grounds. Besides, the assessee has also questioned initiation of penalty proceedings under Section 271(1)(c) of the Act and levy of interest under Section 234B of the Act.


Citation

M/s Microsoft Regional Sales Corporation, USA C/o Mr.Ashwin Ravindranath, Partner, SRBC & Associates, Golf View Corporate Tower B, Sector-42, Sector Road, Gurgaon, Haryana. PAN: AADCA1638A.(Appellant) Vs. Additional Director of Income-tax, International Taxation, Range-3, New Delhi. (Respondent)


Judgement

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘H’: NEW DELHI
 
BEFORE SHRI I.C.SUDHIR, JUDICIAL MEMBER AND
SHRI TARVINDER SINGH KAPOOR, ACCOUNTANT MEMBER
 
ITA No.6092/Del/2012
Assessment Year: 2009-10
 
M/s Microsoft Regional Sales
Corporation, USA
C/o Mr.Ashwin Ravindranath,
Partner, SRBC & Associates,
Golf View Corporate Tower B,
Sector-42, Sector Road,
Gurgaon,
Haryana.
PAN: AADCA1638A.
(Appellant)
 
Vs.
 
Additional Director of Income-tax,
International Taxation,
Range-3,
New Delhi.
 (Respondent)
 
Appellant by: Shri Nageshwar Rao, Advocate and Shri Rahul Garg & Shri Shailesh
Kumar, CAs.
Respondent by: Shri D.K.Gupta, CIT-DR.
 
ORDER
PER I.C.SUDHIR, JM:
 
The assessee has impugned action of learned Dispute Resolution Panel (‘DRP’) confirming the additions proposed by the Assessing Officer in the draft assessment order as against the returned income by holding that the revenue earned by the assessee from sale of Microsoft software products to the Indian distributors is taxable in the hands of the assessee as royalty under the provisions of Section 9(1)(vi) of the Income-tax Act, 1961. This action of the learned DRP has been questioned on several grounds. Besides, the assessee has also questioned initiation of penalty proceedings under Section 271(1)(c) of the Act and levy of interest under Section 234B of the Act.
 
2. We have heard and considered the arguments advanced by the parties and have gone through orders of the authorities below, material available on record and the decisions relied upon. The submission of the learned AR, at the outset, remained that the issue raised in the grounds regarding chargeability of income as royalty is fully covered by the decision of Delhi Bench of the Tribunal in the case of the assessee itself for the assessment years 2002-03 to 2008-09.
3. The facts in brief are that Microsoft Regional Sales Corporation (‘MRSC’ in short), the assessee, is a company incorporated in USA and is a wholly owned subsidiary of M/s Microsoft Corporation, USA (MS Corp). The assessee is engaged in the business of distribution of Microsoft retail products in the Asia Pacific region, including India. The assessee is engaged in selling/licensing of software through independent distributors to the end users under the End User License Agreement (EULA). The consideration received by the assessee from the distributors in India has not been offered to tax in India on the basis that they are business receipts and are not taxable in the absence of a permanent establishment (PE) in India.
 
4. MS Corp is the sole owner of intellectual property rights vested in Microsoft software. It has granted exclusive license to manufacture and distribute Microsoft products to one of its wholly owned subsidiaries, M/s Gracemac (now merged with MOL Corporation), which, in turn, granted similar non-exclusive rights to its wholly owned subsidiaries, Microsoft Operations Pte.Ltd., Singapore (MO Singapore) to manufacture Microsoft products in Singapore and distribute such products in Asia (excluding non-English language products in China and Taiwan). The assessee has been appointed as a distributor of Microsoft products in India by MO Singapore.
 
5. The sale proceeds received by the assessee were treated as royalty income and assessed accordingly in earlier assessment years since AY 1999-2000. The same was confirmed by the learned CIT(A) in his consolidated order dated 14.01.2005 for AY 1999-2000 to 2001-02. The Tribunal in its decision dated 26.10.2010 has deleted the addition of the receipts as royalty in the case of MRSC and confirmed the same addition in the hands of M/s Gracemac. The department has preferred an appeal before the Hon'ble Delhi High Court. In this year also, the facts of the case are same as in earlier years, therefore, relying on the stand taken by the department in the earlier years, the Assessing Officer has treated the entire receipts from licensing of Microsoft products to Indian distributors as royalty income in the hands of the assessee and has taxed accordingly. The learned DRP has approved this action of the Assessing Officer. The assessee has questioned this action of the learned DRP.
 
6. The learned DR has not disputed the above submission of the learned AR that the issue regarding the treatment of receipts from licensing of Microsoft products to Indian distributors as royalty income is covered by the decision of Delhi Bench of the Tribunal in the case of assessee itself for the earlier assessment years including AY 2007-08 and 2008-09. A copy of this order dated 29.02.2012 of the Tribunal in AY 2007-08 and 2008-09 in ITA No.5477 & 5478/Del/2011 has been made available on the record. He has, however, placed reliance on the orders of authorities below.
 
7. Having gone through the above order dated 29.02.2012 of the Tribunal in the case of the assessee itself for the AY 2007-08 and 2008- 09 (supra), we find that an identical issue has been decided in favour of the assessee under similar set of facts and circumstances. The authorities below have held that the payment made by the Indian distributors 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. They have also held that the amount received by the assessee fulfilled the conditions of Section 9(1)(vi) of the Act and, hence, taxable as royalty in India. They have held that the consideration received by the assessee was on account of licensing of software and not on sales of software and that the amount received by the assessee is taxable as royalty in India even though the assessee does not have any permanent establishment (PE) in India. They have held further that the consideration received by the assessee is payment for a ‘process’ and is covered by Section 9(1)(vi) of the Act.
 
They have held that the consideration received for use of software is towards consideration for use of patented article and inventions. As per the authorities below, 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 the policy of Computer Software Export, Software Development and Training, 1986 of the Government of India. They have observed that the assessee possesses right in copyright, which it can enforce in India, if any violation is noticed by it. The contention of the assessee remained that the authorities below have failed to appreciate this material fact that the owner of copyright in Microsoft software products is Microsoft Corporation (MS Corp) and legal action against the violation of a copyright can be undertaken only by the owner of copyright. Without prejudice to this contention, it was submitted further that 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. The assessee contended further that the learned DRP has erred in observing that the provisions of Section 115A of the Act characterizes the income from sale of software as ‘royalty’ under the Act in case of non-resident without appreciating that Section 115 does not enlarge the scope of the term ‘royalty’ as defined in Section 9(1)(vi) of the Act. Against the observation of the learned DRP that the assessee possesses the intellectual property rights (IPR) in the software which it had further licensed to distributors disregarding the fact that the assessee was engaged in only distribution of Microsoft software products to distributors/resellers outside India and no rights have been passed by the assessee to the distributors in the entire transaction, it was further contended by the assessee that the learned DRP has erred in making observation that the definition of royalty is not ambiguous and the expression ‘copyrighted article’ does not find any mention in the Act or in the treaty. While doing so, the learned DRP has failed to appreciate that the said distinction between ‘copyrighted article’ and ‘copyright’ is recognized by OECD Commentaries, US IRS Regulations, International Tax Commentaries and by Courts in various cases like Hon'ble Jurisdictional High Court in the case of Ericsson A.B. and Nokia Networks OY. The assessee has also questioned the finding of the learned DRP upholding the draft assessment order that revenue earned by the assessee from sale of Microsoft retail products to distributors in India is royalty under Article 12 of the India US Tax Treaty and that the payments received by the assessee were deemed to arise in India under Article 12(7) of the India US Tax Treaty. While
doing so, the learned DRP has disregarded the fact that the revenue earned by the assessee is from the sale of Microsoft software products to the Indian distributors ex-warehouse Singapore. It was contended that the learned DRP has also erred in holding that the Revenue earned and received from sale of Microsoft software products by the assessee to Indian distributors is taxable in India under the provisions of Article 12(2) and Article 12(3)(a) of the India US Tax Treaty. The assessee contended that the authorities below have erred in not appreciating that the definition of royalty is different in the Act and the India US Tax treaty. The benefits available under the India US Tax Treaty would still be available to the assessee as the amendment in the Finance Act, 2012 would not impact the treaty interpretation of the term ‘royalty’ under Article 12. The authorities below have failed to appreciate that the sale of software is the 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 the India US Tax Treaty in the absence of the PE of the assessee in India.
 
They have also erred in observing that only two types of transactions in respect of computer software i.e. sale and license (letting) are recognized by the Indian laws and India US Tax Treaty and no further dissection of licensing (on the lines of OECD Commentaries) is permitted under the Indian Copyright Act, Income-tax Act and Indian Tax Treaties.
 
8. There is no dispute that the facts relating to the issue are similar with the facts of the case of the assessee in the AY 2002-03 to 2008-09. During the AY 2007-08 & 2008-09, the Tribunal in the case of the assessee has decided an identical issue in favour of the assessee following the earlier order of the Tribunal on the issue in the AY 2002-03 to 2006-07. After discussing the issue in detail as well as its finding for the AY 2002-03 to 2006-07, the Tribunal has decided the issue with this finding that such royalty cannot be assessed in the hands of the assessee as it will tantamount to assess the same income which has been assessed in the hands of M/s Gracemac. Though it has been held by the Tribunal that the amount was in the nature of royalty, but, it was held that the said amount cannot be assessed in the hands of the present assessee as it has been held to be taxable in the hands of M/s Gracemac Corporation. The decision of the Tribunal in the case of M/s Gracemac Corporation decided along with the assessee in the AY 1999- 2000 is reported in 132 TTJ 257 (Del). Quoting the finding of the Tribunal in the case of M/s Gracemac Corporation (supra), the Tribunal has decided an identical issue in ITA Nos.5477 & 5478/Del/2011 for AY 2007-08 and 2008-09 vide following paragraphs:
 
“6. The ITAT thereafter noticed the facts from the order of the Learned CIT(Appeals) in assessment year 1999-00 and other years which are common in these assessment years also. The facts noticed by the ITAT as well as the findings of the ITAT recorded in the case of M/s. Gracemac Corporation reported in 132 TTJ 257 read as under:
 
“4. The basic facts as found mentioned in the consolidated order passed by the CIT (A) in respect of assessment years 1999-2000, 2000-01 and 2001-02 are as under:-
 
“4. Facts of the case
 
The Appellant is a company incorporated in US and is a wholly owned subsidiary ("WOS") of Microsoft Corporation, USA ("MS Corp") with a branch in Singapore. The operating structure of the distribution model along with the flow of distribution rights from MS Corp to Appellant through Gracemac Corporation, USA ("Gracemac") and Microsoft Operations Pte Limited, Singapore (‘MO") was explained by appellant as follows:
 
Gracemac is a company incorporated under the laws of USA on September 23, 1994 having its registered office at 300 South Fourth Street, Suite 1100, Las Vegas, Nevada, USA-89109. Gracemac is a WOS of MS Corp. MS Corp entered into a Parent Subsidiary agreement ("PSA"') with Gracemac on January 1, 1999 wherein MS Corp had granted Gracemac the:
 
a) exclusive license to manufacture Microsoft products         
 
b) exclusive license to distribute the products so manufactured directly to retailers or to MS Corp or to subsidiaries of MS Corp; and
 
c) exclusive right to license any third party to directly grant customers the right to reproduce Microsoft software products for internal use.
 
In lieu of the abovementioned rights, Gracemac has issued its entire share capital to MS Corp.
 
In pursuance of the rights granted under the PSA, Gracemac has entered into a License Agreement with MO, (a company incorporated under the laws of Singapore and a WOS of MS Corp), on January 1, 1999 wherein Gracemac has granted MO the:
 
a) non-exclusive license to manufacture Microsoft products in Singapore;
 
b) non-exclusive license to distribute the products so manufactured to retailers or to MS Corp or to subsidiaries of MS Corp; and
 
c) non-exclusive right to license or sublicense the right to reproduce Microsoft software products to certain end users (large account customers) for their internal use.
 
In lieu of the abovementioned rights, Gracemac earns royalty from MO. The royalty was computed on the basis of the net selling price of Microsoft products manufactured by MO and distributed to retailers, MS Corp or subsidiaries of MS Corp.
 
4.1 In turn, MO has entered into a non-exclusive distribution and inter-company services agreement ("distribution agreement") with the Appellant, wherein Appellant was appointed as a distributor of Microsoft products manufactured by MO. Appellant was given the right to distribute Microsoft products in Asia (with restrictions in China, Korea and Taiwan), Japan, South East Asia and the South Pacific. The assessee did not have any right to copy, adapt etc. the software. The distribution agreement specifies that MO would ship the products to such addresses (of the assessee or its approved distributors) as specified by the appellant. Further, except for Australia and Japan, the title of the products has been agreed to be transferred to Appellant in Singapore which evidences the fact that delivery takes place outside India.
 
4.2 MO had agreed to sell the products to Appellant at a price equal to 95% of the price at which Appellant sells the product to approved distributors or other MS Corp affiliates. Pursuant to the distribution agreement, the assessee had entered into agreements with various distributors in "approved territories". The distributors had a right to distribute the products in India. The products supplied by the assessee are often stocked by distributors and then supplied against specific orders. The products were delivered by the assessee to distributors "ex warehouse" from the warehousing facility nominated by the assessee. Further, the distributor sold the products to a reseller in India who in turn sold it to a consumer/ distributor sells directly to consumers. The resellers/ consumers did not have the right to make copies of the software for "commercial exploitation". The distributor was not liable to pay the assessee only upon sale by the distributor to the reseller/ consumer. It was liable to pay the assessee even if it was not able to sell the products to the reseller/ consumer.
 
4.3 According to appellant the income earned from the sale of computer software to independent distributor in India was in the nature of business profit in the years under consideration and was not taxable in India as appellant did not have a PE in India under provisions of Double Taxation Avoidance Agreement between India and USA (in short DTAA). It was also contested that royalty income from sale of software could not be taxed in hand of appellant which was only distributor of the software of MS Corp and copyrights of these software were owned by MS Corp not by appellant. For these reasons it was claimed that business income of appellant was not taxable in India for the years under consideration accordingly, appellant did not file returns of income for the years under consideration. Later on, the AO issued notice to the appellant for the years under consideration u/s 148 of the Act. In response to notice appellant filed return of income declaring Nil income for the years under consideration stating above reasons for non taxability of its business profit in India. Later on, the cases of appellant for the years were selected for scrutiny by issue and service of notice U/S .143(2). During the course of scrutiny assessment the A.O assessed the income of the appellant for the years under consideration at US$ 1,01,75,235, US$ 5,87,64,099 and US$ 8,35,51,260 under the head 'Royalty' against the Nil income disclosed by the appellant in the returns of income filed for the years under consideration for following grounds:
 
a) The software falls under the category 'secret formula or process' and the software when installed on a computer respond to every instruction in a specific way. Accordingly, the total revenue received by the appellant from sale of software in India was royalty.
 
b) The appellant was taxable in India under provisions of Act and the DTAA as income from sale of software was in the nature of royalty u/s 9(1)(vi) and article 12 of DTAA.”
 
5. Accordingly, aforementioned income was assessed in the hands of the assessee as royalty upon which the penalty has been levied by the Assessing Officer as follows:-
 
Assessment Year 1999-2000 ` 6,45,31,340/-
Assessment Year 2000-2001 ` 38,30,83,161/-
Assessment Year 2001-2001 ` 58,18,92,771
 
6. The aforementioned additions were also upheld by learned CIT (A) against which a further appeal to the Tribunal was filed and the said appeals have been decided by the Tribunal along with the appeals in the case of M/s Gracemac Corpn. vs. Asstt. Director of Income-tax, International Tax Division, Circle 2 (1), New Delhi and appeals of M/s Microsoft Corporation vs. Asstt. Director of Income-tax vide order dated 26th October, 2010 which is since reported as 132 TTJ 257 (Del); 8 ITR (Trib.) 522 (Del); 42 SOT 550 (Del). Though it has been held by the Tribunal that the said amount was in the nature of royalty, but it was held that the said amount cannot be assessed in the hands of the present assessee and it has been held to be taxable in the hands of the Gracemac Corpn. The relevant observations of the Tribunal while holding so are contained in para 128 and 132 and it will be relevant to reproduce the said observations of the Tribunal with regard to taxability or otherwise of the aforementioned amount in the hands of the assessee:-
 
“128. From the above it is evident that MRSC was also authorized to reproduce certain products and distribute the same to end users through the distributors appointed by MRSC. MRSC vide agreement dated 3rd May, 1999 was authorized to copy the marketing programmes in object code form from the master copy provided by Microsoft Operations (MO) on to either diskettes or such approved media and prepare the product documentation and packaging based on the material provided and approved by MO. We would like to mention here that source code and object code have copyright.
 
Therefore, MRSC also got right to use copyright in computer products from sub-licencee (MO). Each product package would include a pre-approved diskettes label attached to the diskettes and MS Corp. standard End User Licence Agreement for the territory. From the above it is evident that MRSC is not simply a distributor appointed by Microsoft Operations, but was authorized to reproduce certain computer programmes.
The End User Licence Agreement was to be in the standard format of Microsoft Corporation. Article 3.2 also provides that the marketing programme released by the distributor will be approximately equivalent in quality of the software product manufactured by MS Corp. The Microsoft Operation also provided up-dated master copies of marketing programmes as and when the same were updated by MS Corp. Since the Microsoft Corporation has granted the right to reproduce and distribute Microsoft Products in lieu of Shares to Gracemac and no further royalty is payable by Gracemac and also the End User Licence Agreement is to be in the standard format of Microsoft Corporation, the Microsoft Corp. is under obligation to sign EULA on behalf of Gracemac. Thus it has to be logically concluded that Microsoft Corporation has signed the EULA on behalf of Gracemac to whom exclusive rights to manufacture and distribute Microsoft products have been granted otherwise the products would have been rendered useless and no revenue could have been earned by anyone in the supply chain. Microsoft Corporation has devised a scheme under which EULA has to be signed by Microsoft Corp. and not by Gracemac Corporation. Hence assessee cannot be permitted to take a plea that since EULA has been signed between end users and Microsoft Corp. No licence was granted by Gracemac and consequently the royalty payments will not be chargeable to tax in the hands of Gracemac. The agreements entered into between group companies have drafted in such a way which give an impression that Gracemac Corporation has no connection with the granting of licence. The real transaction of the granting of the licence in respect of copyrights in computer programmes have camouflaged by entering into various agreements between Microsoft and Gracemac; Gracemac and Microsoft operations; Microsoft operation and MRSC; and MRSC and Indian distributors but when real intention is gathered from the in-depth reading of the agreements, the matter becomes crystal clear. Since we have held that end users have made payments in respect of the granting of licence in respect of copyright in computer programmes the payments made by endusers as consideration for the same will be taxable in the hands of Gracemac.
 
132. As discussed above, MRSC reproduced certain software products and distributed the same through chain of distributors in India. Therefore, the very appointment of distributors by MRSC in India, had business connection in India and the portion of income earned by MRSC perhaps could have been chargeable to tax as business income under section 9(1)(i) of the Act.
 
But since the assessing officer as well as the ld. CIT (Appeals) has chosen to assess the entire receipts under the head 'royalty' in the hands of MRSC also, in our considered opinion, MRSC cannot be taxed again on the same income by way of royalty for exploitation of same
rights which had been assessed in the hands of Gracemac, otherwise it would result in double taxation. Therefore, we delete the addition in the hands of MRSC for all the three years.”
 
7. The question involved in the quantum appeals filed by the revenue is whether learned CIT (A) is right in deleting the addition made by the Assessing Officer on account of aforementioned royalty. The learned AR of the assessee has referred to the aforementioned decision of the Tribunal wherein on similar facts, it has been held by the Tribunal that such royalty cannot be assessed in the hands of the assessee as it will tantamount to assess the same income which has been assessed in the hands of Gracemac and it has been held by the Tribunal that the aforementioned amount of royalty cannot be assessed in the hands of the assessee as the same is taxable in the hands of the Gracemac. Therefore, it is the case of the learned AR that for all the aforementioned years in which learned CIT (A) has granted relief to the assessee in quantum, will be covered by the aforementioned decision and, hence, the order of the CIT (A) for deletion of the aforementioned amount should be upheld. As against that it is the case of the learned DR that royalty has rightly been assessed in the hands of the assessee and learned CIT (A) has wrongly deleted the same.
 
8. In the penalty proceedings, it is the case of the learned AR that it has been held by the Tribunal that income is not assessable in the hands of the assessee. Therefore, he pleaded that there is no question of levy of concealment penalty on the assessee. He submitted that learned CIT (A) though has deleted the penalty on merits and, therefore, it is the case of the learned AR that penalty has rightly been deleted by the CIT (A) and his order should be upheld.
 
9. In respect of appeal filed by the assessee, it is the case of the learned AR that the facts for Assessment Year 2006-07 are same and on the basis of similar facts, ld. DRP has held that the assessee is assessable in respect of royalty. He submitted that the order of DRP is not in conformity with the decision of the Tribunal in assessee’s own case and the aforementioned decision of the Tribunal will be equally applicable for that year also and, therefore, the addition made by the department for that year should be deleted.
 
10. On the other hand, it is the case of the learned DR that the addition has rightly been made by the Assessing Officer and his order should be confirmed.
 
11. We have carefully considered the rival submissions in the light of the material placed before us. It has been held by the Tribunal in aforementioned decision that though the amount constitute royalty, but the same is not assessable in the hands of the present assessee. One of us (AM ) is party to the aforementioned decision. No case has been made out by the department to differ from the earlier decision which has been found to be delivered on the basis of similar facts. The facts for all the years are similar and this fact is not disputed by the revenue. Therefore, respectfully following the aforementioned decision of the Tribunal, the relevant observations of which has already been reproduced, we hold in the quantum appeals that the additions have rightly been deleted by learned CIT (A) and we decline to interfere in his order. Similarly, for penalty appeals, as income has not been held to be assessable in the hands of the assessee, we find no justification in levy of penalty, therefore, the order of the CIT (A) deleting the penalty is upheld on the ground that as the income itself is not assessable in the hands of the assessee according to the aforementioned order of the Tribunal, there is no question of levy of penalty.
 
12. So far as it relates to assessee’s appeal, the facts being similar, adopting the similar view which has been adopted by the Tribunal in earlier decision in the case of the assessee, we find no justification in assessability of aforementioned royalty in the hands of the assessee, therefore, the appeal of the assessee is allowed.
 
13. To sum up, in the result, all the departmental appeals are dismissed and the appeal filed by the assessee is allowed in the manner aforesaid”.
 
7. Respectfully following the order of the ITAT, we are of the view that though the amount constitutes royalty but the same is not assessable in the hands of the present assessee. Accordingly, the appeal of the assessee for assessment year 2007-08 is allowed partly and the appeal for assessment year 2008-09 is allowed and the additions are deleted.”
 
9. Respectfully following the above decision on the issue, we hold that though the amount in question constitutes royalty but the same is not assessable in the hands of the present assessee as the same has been held taxable in the hands of M/s Gracemac Corporation. The appeal of the assessee is accordingly allowed partly.
 
10. So far as the ground relating to initiation of penal action under Section 271(1)(c) is concerned, it is premature. Hence, it does not need adjudication. The same is rejected as such.
 
11. The charging of interest under Section 234B questioned by the assessee is consequential in nature. Hence, it does not need separate adjudication.
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