The controversy over the interpretation of the term ‘royalty’ has come to the fore in light of two judgments of the Hon’ble Income Tax Appellate Tribunal in the past year, (1) the common judgment of the Hon’ble Delhi ‘H’ Bench (dated 26th October, 2010) in a set of cases (Gracemac v. ADIT, ITA Nos. 1331-1336/Del/2008, Microsoft Corporation v. ADIT, ITA Nos. 1392/Del/2005, Microsoft Regional Sales Corporation v. ADIT, ITA Nos. 1393-1395/Del/2005, the common judgment is hereinafter referred to as ‘Gracemac’); and (2) the judgment of the Hon’ble Mumbai ‘E’ Bench (dated 26th August, 2011) (ADIT v. TII Team Telecom International, ITA Nos. 3939/Mum/2010, hereinafter referred to as ‘TII Team’). The controversy – brewing now for quite some time – is essentially this: under what circumstances can the payment received for (what is loosely termed as) supply of software/rights in software be taxed as ‘royalty’ under Section 9 of the Income Tax Act, 1961, and under various Double Tax Avoidance Agreements.

History

This section was introduced in the year 1972 and subsequently amended from time to time. The scope of the said provision has been explained by CBDT from time to time through various circulars bearing Nos. 86 dated May 29, 1972, 93 dated 26.9.1972, 558 dated 28.3.1990, 681 dated 8.3.1994, 714 dated 3.8.1995, 723 dated 19.9.1995, , 715 dated 8.8.1995 and 13 dated 13.12 2006. This section has also been substituted by Finance (No 2) Act 2009.

Salient features

This section provides that tax is to be deducted at source against payments made to contractors/subcontractors. The followings are the salient features of the section as it stands today:

You do not require a magic wand to combat corruption. One little finger raised by Anna Hazare is enough. The seventy four year old Gandhian showed the nation how purity of thought integrated in to right action can bring down a tyrant government to its heels.

The State machinery put this man in jail and ended up self locking themselves by their own misdoings. They did not want to give him public space to hold his peaceful rally for more than three days and set a cap for 5000 campaigners. And now, they are hastily cleaning a public ground themselves to make it fit for his rally for fifteen days without any limit set for the participants.

Mark Twain once said: “Evolution is the law of policies: Darwin said it, Socrates endorsed it, Cuvier proved it and established it for all time in his paper on ”The Survival of the Fittest”. These are illustrious names, this is a mighty doctrine: nothing can ever remove it from its firm base, nothing dissolve it, but evolution.” Mark Twain in substance said that ‘even the most settled things in this world may get unsettled later’. The things which are held today as absolute may become relative in future, like the belief that earth is flat got changed later or that atom is the most basic unit of matter got changed after the discovery that even it has further components.

This is even so true in the area of Law, especially, the Income Tax Law. On number of occasions, the most settled legal positions have been unsettled either by retrospective amendments by the Legislature to nullify the decisions of Courts or by the Courts themselves by reversing the law laid down in the earlier decisions. Certain examples where the settled positions have been changed by the Courts are:

I. INTRODUCTION

The new Direct Tax Code1 (hereafter DTC) is all set to replace the Income-tax Act, 1961 with effect from 1st April, 2012, the basic objective behind its enactment being simplification of the language so as to enable better comprehension thereby reducing the number of law suits. Significant among the provisions that it introduces are the provisions aimed at tackling the problem of tax avoidance since this has been resulting in a major loss of revenue for the government. Certain legislative amendments2 had been made earlier to counter this particular problem but did not prove very effective since the tax payers found sophisticated methods to get passed them thereby necessitating further changes.

1. Re-assessment u\s 147:- Jurisdiction and its scope.

The decision of the Bombay High Court in the case of CIT vs. Jet Airways {I} Ltd. reported in [2011] 331 ITR 236 {Bom} presents an interesting authority on the subject of the scope of jurisdiction of an Assessing Officer to re-assess income believed to have escaped assessment.

The generally known line of thinking is that once an Assessing Officer has ‘reasons to believe’ that income of an assessee has escaped assessment, he can re-open the assessment by issue of a notice u\s 148.  In short, the formation of such belief is the founding material on basis of which he assumes jurisdiction to re-open the assessment. If these reasons do not exist, then the jurisdiction of the Assessing Officer becomes questionable and the Court can intervene to quash the re-assessment proceedings as ill founded. 

Come year 2011 and the MAT provisions under the Income-tax Act, 1961 (‘the Act’) shall complete around two decades of its existence in various forms and with most recent one being Section 115JB of the Act. However, controversies surrounding the interpretation of said provisions fail to die down. Further, with preference of investment-linked deductions to profit-linked incentives, it is envisaged that more and more corporate will be subject to MAT provisions in near future. Out of the tax controversies so created, this Article seeks to discuss about the meaning and scope of ‘net profit’ under MAT provisions of the Act.

Explanation 1 to Section 115JB of the Act defines the word ‘book profit’ to mean ‘net profit’ as shown in the profit and loss account prepared as per Section 115JB(2) of the Act, and as further increased by the amount(s) mentioned in clauses (a) to (i) [Upward Adjustments] and as reduced by amount(s) covered under clauses (i) to (viii) to said Explanation 1 [Downward Adjustments].

The doctrine of judicial precedents, judicial discipline, contempt and Res Judicata have been evolved to ensure stability and certainty in law and deterrent action in case of its violation by subordinate Courts and Tribunals. Otherwise, any judge could take any view on the interpretation of the law resulting in chaos. The subject can be divided into four heads as discussed below:-

I.         Judicial precedents

The subject of judicial precedents can be dealt with under the following heads:–

[1]      What is a precedent?

[2]      What is binding?

[3]      On whom it is binding;

[4]      When it is binding?

[5]      Remedy for curing the error in earlier decision.

[6]     Whether decisions of other courts are binding or only of persuasive value?

[7]      Decisions per incurium.

[8]     Decisions sub silentio.

[9]     Decisions on concession.

[10]    Decisions given exparte.

[11]     Doctrine of stare decisis.

[12]    Effect of retrospective amendment of law or validation statutes.

1.      Introduction

Income-tax Act, 1961 (hereinafter referred to as ‘The Act’) is the only legislation of our country which contain reference to several Central Acts and numerous State Legislations. It becomes very essential therefore, to know the provisions of general law with special reference to Transfer of Property Act, Registration Act, Stamp Act, Development Control Regulations, etc. so as to understand the various taxation issues relating to Real Estate Transactions. Some of the very important taxation issues relating to Real Estate Transactions and implication of s. 50C of the income-tax Act are also discussed in this paper.

2.      Development Rights

2.1    Capital Assets

The term “capital asset” is defined in s. 2 (14) of the Act to mean “property of any kind”, held by the assessee whether or not connected with his business or profession, but specifically excludes ‘stock-in-trade’ and other kinds of specified assets. Therefore, the definition is very wide and any kind of property except those falling in excluded category is a capital asset.

Respected Shri Ashvin Shah, the Chairman of the Convention, Members of the All Gujarat Federation of Tax Consultants and the West Zone of the All India Federation of Tax Practitioners, other dignitaries present, Members of the Bar and the Accountancy profession, ladies and gentlemen:

I consider it a privilege to be invited as the guest of honour for the valedictory session of the National Convention on Taxation – 2011 organised jointly by the All Gujarat Federation of Tax Consultants and the West Zone of the All India Federation of Tax Practitioners. It is nice to be back in Ahmedabad, though for a short period. I like the city for its warmth and hospitality and for the vibrant and good-natured people. During my brief stay here for about 9 months, we felt at home. The city is one of the few cities in India which still retain the old-world charm and welcome everyone cheerfully.