TII Circular/Notification

Circular/Notification No : 20

Exchange facility to foreign citizens

Circular/Notification No : F.No.1/3/EM/2016

Corrigendum to FEMA Notification No 362/2016-RB dated February 15, 2016

CASE LAW

2016-TII-228-ITAT-MUM-INTL

RELIANCE COMMUNICATIONS LTD Vs DDIT: MUMBAI ITAT (Dated: November 18, 2016)

Income Tax - Sections 9, 195(2), 254(2) & 248.

Keywords - purchase of software - royalty - rectification of mistake - TDS - Wireless Telecom Network.

Whether an order suffering from mistake apparent from record on account of non-consideration of the decision rendered by the co-ordinate bench on identical issue and also on account of misreading of decision rendered by High Courts is liable to be recalled - YES: ITAT

The assessee are companies, desirous of setting–up Wireless Telecom Network in India. The assessee companies wanted to purchase both hardware and software from several non–resident companies for which payments were to be made to them. For enabling the assessee to make payments to these non–resident companies towards purchase of software without deduction of tax at source, the assessee filed applications u/s 195(2) of the Act. The AO rejected the applications of the assessee and passed an order under section 195 of the Act holding that the payment made towards purchase of software was in the nature of royalty, therefore, liable to be taxed in India. Accordingly, the AO directed the assessee companies to deduct tax at source at the prescribed rate before making payments to the non–resident payees towards purchase of software. Being aggrieved of the orders passed under section 195 of the Act, assessee companies preferred appeal before the CIT(A), which allowed the appeals holding that the payments made by the assessee being not in the nature of royalty, there was no requirement of deduction of tax at source. Aggrieved Revenue filed appeal before the Tribunal. The Tribunal, disposed of all the appeals preferred by the Revenue upholding the orders passed u/s 195 by the AO, thereby holding that assessee companies were liable to deduct tax at source on payments made to the non–resident companies towards purchase of software. In the said common order, the Tribunal also disposed of appeals preferred by Lucent Technologies GRL LLC, USA, (Lucent), a non–resident company, which also received payment from the assessee towards supply of software. This was the genesis of the present applications.It was the contention of the assessee that the appellate order of the Tribunal suffered from various mistakes which were apparent on record. Hence, the appeal order passed had to be recalled.

The assessee also filed affidavits to support its contentions that the Tribunal had proceeded to decide the appeals on the basis of concession given by the Counsel of other four appeals filed by M/s Lucent Technologies GRL LLC, USA. It was further submitted in the affidavit that the assessees herein had sought opportunity to be heard in respect of arguments advanced by the counsel of M/s Lucent, but the Tribunal had proceeded to decide the appeals without affording opportunity to the assessees. It was further submitted that the assessee’s counsel was not present when the appeals of M/s Lucent were heard by the bench. The affidavit further states that the observation made by the Tribunal that "the assessees herein had admitted that there was supply of software without purchase of equipment/hardware either from the same party or from any other party" was an erroneous statement. In the rejoinder, the revenue had stated that certain representatives of M/s Reliance Communications were present at the time when the appeals of M/s Lucent were heard. The assessee in its rejoinder, submitted that the Tribunal did not afford opportunity to the assesses on the arguments advanced by M/s Lucent, even though the same was specifically sought for by the assessees. It was further submitted that the Tribunal ought to have heard the assessees because, once the credit was granted to Lucent, the purpose of appeal u/s 248 of the Act gets defeated and the assessees would never be able to claim any refund of taxes deducted even if the issue was decided in favour by the higher appellate authorities.

Tribunal held that,

+ the main contention of the assessees is that the Tribunal did not follow the co-ordinate bench decision rendered in the case of Solid Works Corporation and the same has resulted in a mistake apparent from record;

+ in support of this contention, the assessees have placed their reliance on the decision rendered by Supreme Court in the case of Honda Siel Power Products Ltd, wherein the Apex Court has held that the Tribunal was justified in exercising its power u/s 254(2) when it was pointed out to the Tribunal that the judgement of co-ordinate bench was placed before the Tribunal when the original order came to be passed but it had committed a mistake in not considering the material which was already on record;

+ identical question was also considered in the case of Mohan Meaking Ltd Vs. ITO, wherein the Third member has held that the non-consideration of a judgment cited before the Tribunal constitutes a mistake apparent from record. The effect of non-consideration of the decision of Tribunal cited before it was discussed by Jurisdictional Bombay High Court in the case of DSP Investment Pvt Ltd Vs. ACIT;

+ admittedly, in the instant cases, the Tribunal has not dealt with the case of Solid work Corporation, even though the same has been relied upon by Counsel appearing for the assessees and the Tribunal has also recorded the same in its order. In the foregoing case laws, it has been stated that non-consideration of the decision rendered by the co-ordinate bench on identical issue would result in a mistake apparent from record. Accordingly we find merit in the contentions of the assessees that the impugned order of the Tribunal suffers from mistake apparent from record;

+ the next main contention of the assessee is that the Tribunal has misread the decision rendered by Delhi High Court in the case of Ericsson. The A.R stated that the Delhi High Court has amply clarified that the software would not be royalty even if was supplied separately. Accordingly it was submitted that the manner in which the Tribunal has sought to distinguish the decision rendered by Delhi High Court is contradictory to the observations made by Delhi High Court. On a perusal of submissions made by the assessees, which are extracted above, we find merit in the contentions of the assessee that the Tribunal has not properly read the decision rendered by the Delhi High Court;

+ we notice that the assessee has submitted that the software purchased by it is specific to run the hardware and its functionality is that of embedded software. This aspect has been distinguished by the Tribunal by observing that the software has been purchased separately. The A.R submitted that the assessee has purchased software and hardware together in some cases, but the Tribunal has failed to consider those cases, even though the CIT(A) has analysed each of the agreements for purchase of hardwares/softwares. He submitted that these facts show that the Tribunal has not properly considered all the cases of software and decided the issue by generalizing the facts, which renders the order erroneous;

+ we have noticed that the assessees have submitted that the software purchased by them is specific to run the hardware and hence it was not a case of shrink wrapped software. Further the Hon’ble Delhi High Court has held in the case of Ericsson that the software would not be royalty, even it was supplied separately. All these points support the case of the assessee that the Tribunal has misread the decision rendered by Delhi High Court in the case of Ericsson. We also notice that the Tribunal has committed an error in not appreciating the facts prevailing in the instant cases. Hence we find merit in the contentions of the assessees that the impugned order of the Tribunal suffers from mistake apparent from record;

+ in view of the foregoing reasons alone, we are of the view that the impugned orders passed in Reliance Group cases deserve to be recalled;

+ accordingly, we hold that the impugned orders passed in Reliance group of cases suffers from mistake apparent from record on account of non-consideration of the decision rendered by co-ordinate bench on identical issue and also on account of misreading of decision rendered by Hon’ble Delhi High Court in the case of Ericsson (supra). Accordingly we recall the impugned orders in exercise of powers granted u/s 254(2) of the Act.

Assessee's MA allowed