TaxTMI 
TaxTMI 
2010 (8) TMI 11
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....pared to suit the special requirements of a customer on the basis of the order placed by the customer. The details of the software supplied are furnished at page 4 of the application. We may refer to few of them: 1. Geoframe Run Time which is the entry point for geologists wanting to run various geoframe modules. 2. Geoframe Data Monitor which is used to access the functions and utilities for seismic map and interpretation functions. 3. ISEX suit with all functionalities. It is described as a geoframe seismic interpretation module. 4. ASAP (Automatic Surface Air Picking) which allows the tracking of one or more events within a seismic volume. 5. Variance Cube which highlights the faults and subtle stratigraphic features from seismic volumes. 1.1. The applicant has stated that the software was sent by air. The airway bill mentions ONGC to be the consignee of the software packages and the Bill of Entry shows the importer as ONGC. Under the terms of the agreement, namely, Software Licence Terms and Conditions, "Customer shall own and have title to the tangible media in which the software is delivered. Title to the media shall pass to customer in the country of origin....
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....g: i. Whether the income arising to the applicant from offshore supply of the software under the terms of the agreement with the buyer would be said to accrue or arise or deemed to accrue or arise in India under the provisions of the Income-tax Act, 1961 ("the Act")? ii. Whether income from supply of software would be taxable as royalty income under section 9(1)(vi) of the Act or under Article 12 of the Double Taxation Avoidance Agreement between India and the Netherlands (hereinafter referred to as "DTAA")? 2.1. The applicant's senior counsel had stated on 10th Februry, 2010 that the applicant does not need a ruling on the 1st question. 3. Now, we may briefly refer to the terms of contract between the applicant and the ONGC which is styled as "Software licence terms and conditions" (SLTC). The opening clause says that the applicant grants to the customer (ONGC) a exclusive, non-transferable licence to use software and its associated proprietary information. As already noticed, under clause (1) of STLC, it is specified that the title in relation to the software package supplied shall pass on to ONGC at the applicant location (country of origin outside India). The other ....
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....stablishment in India, the only crucial question that needs to be considered is whether the income arising from the offshore supply of the software would be taxable as 'royalty' income under section 9(1)(vi) of the Act or under Article 12 of the DTAA between India and the Netherlands. This is the only question which according to the applicant needs to be resolved in the present case. If the fee received by applicant is in the nature of royalty, it is taxable in India both under the Income-tax Act as well as the Tax Treaty. 4.1. The relevant sub-clause in Explanation 2 to Section 9(1) (vi) which defines 'royalty' reads as under: Explanation 2: For the purpose of this clause 'royalty' means consideration (including any lumpsum consideration but excluding any consideration ………. under the head 'capital gains)' for - Xx xx xx xx xx (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of....
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....law relating to sale of goods and, therefore, the said expression shall bear the same meaning as it has in the Indian Sale of Goods Act. Looking at the Treaty, we have Article 2(2) which clarifies how the undefined terms shall be understood. In substance, it says that an undefined term shall have the meaning which it has under the taxation law of the State concerned. When the term is not defined in the taxation law (Income-tax Act), the definition in the law governing the subject-matter ought to be adopted, more so when there is no basic difference between the statutory definition and the ordinary legal concept. Section 16 of the Copyright Act lays down that no person shall be entitled to copyright or any similar right in any work otherwise than under and in accordance with the provisions of this Act or any other law in force." After referring to the above passage the Authority observed thus in Dassault Systems case: "There is no good reason to think that under the I.T. Act, the concept of copyright has to be understood differently from that evolved under the law of the land. The reference of the Revenue's representative to the provisions in Section 115A(1A) and the 3rd Expln....
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....cluding consulting, training, out-sourcing, customization or development for any third party.....Licensee may make the necessary number copies of the licensed program for installation and one copy for back-up per machine in support of licensee's authorized use. 17………Can it be said that the one time payment based on standard price minus discount paid by VAR to the applicant is in the nature of royalty? It depends on the question whether any rights that the applicant granted to the licensee/end-user include the right of using the copyright. Alternatively, going by the language of I.T.Act, the question is whether any right in respect of copyright has been transferred. It is here the distinction between the use of copyrighted article and the use of copyright has been stressed. The copyright which is a species of intellectual property rights belongs to the owner or its assignee if any. The ownership thereof carries with it a bundle of rights which are by and large directed towards commercial exploitation of this intangible property right. Those rights attached to copyright are enumerated in Section 14 of the Copyright Act, 1957. If any of these rights are parted with in favour ....
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.... of the licencee/customer is what is contemplated by the definition clause in the Act as well as the treaty. As observed earlier, those rights are incorporated in Section 14. 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, in our view, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. However, where, for example, the owner of copyright over a literary work grants an exclusive license to make out copies and distribute them within a specified territory, the grantee will practically step into the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. As the right attached to copyright is conveyed to such licensee, he has the authority to commercially deal with it. In case of infringement of copyright, he can maintain a suit to prevent it. Different considerations will arise if the grant is non-exclusive that to confined to the user purely for in-house or internal purpose. The transfer of rights in or over copyright or the conferment of the right of use of....
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....ty, the customer has no right to deal with the product just as the owner would be in a position to do. In so far as the licensed material reproduced or stored is confined to the four corners of its business establishment, that too on a non-exclusive basis, the right referred to in sub-clause (i) of Section 14(a) would be wholly out of place. Otherwise, in respect of even off the shelf software available in the market, it can be very well said that the right of reproduction which is a facet of copyright vested with the owner is passed on to the customer. Such an inference leads to unintended and irrational results. We may in this context refer to section 52(aa) of C.R. Act (extracted supra) which makes it clear that "the making of copies or adaptation" of a computer programme by the lawful possessor of a copy of such program, from such copy (i) in order to utilize the computer program, for the purpose for which it was supplied or (ii) to make back up copies purely as a temporary protection against loss, destruction, or damage in order to utilize the computer program for the purpose of which it was supplied" will not constitute infringement of copyright. Consequently, customization o....
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....of time and make a business out of it, then, it would fall within the ambit of the phrase "use or right to use the copyright". What rights of exclusive nature attached to the ownership of copyright have been passed on to the subscriber at least partially? Is the licensee conferred with the right of reproduction and distribution of the reproduced work to its own clientele? Can it be publicly exhibited or its contents be communicated to the public? Is the applicant given the right to adapt or alter the "work" for the purpose of marketing it? The answer is obviously - no. The underlying copyright behind the database cannot be said to have been conveyed to the licensee who makes use of the copyrighted product." 9. The crucial clauses in the Agreement concerning Dassault Systems are substantially similar to the clauses in the agreement relevant to the present case. In Dassault case, the product was to be hosted on a server located outside India and the end-user in India will electronically download the same by accessing the weblink directly on its computer system. In the applicant's case, the title to the tangible media containing the software has been delivered to the customer in th....
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....nt of licence) in respect of the computer software by a non-resident manufacturer along with a computer based equipment under a scheme approved as per the 1986 Policy on computer software export, software development and training, is excluded from the purview of 'royalty' clause. It does not, however, mean that wherever computer software is transferred on outright sale basis or is leased or licensed, it would become royalty income. Whether or not the income is in the nature of royalty has to be judged with reference to the exhaustive definition in Explanation 2. In this context, sub-clause (v) of Explanation 2 which has been referred to by both sides become relevant. It is in the light of the language of that clause one has to see whether the income in question ought to be treated as 'royalty'. The transfer of rights envisaged by sub-clause (v) should be in respect of the 'copyright' among others. Mere transfer of computer software de-hors any copyright associated with it does not fall within the ambit of the said clause (v). That is what has been held in the two rulings referred to earlier. 11. Then, coming to section 115A, it prescribes the rate of tax applicable to a foreign ....
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....uch licence constitute an infringement of copyright. Examples of such arrangements include licences to reproduce and distribute to the public software incorporating the copyrighted programme, or to modify and publicly display the product." Though this interpretation is not conclusive, it can be taken into account as throwing light on the scope of the relevant Article. In fact, what is stated in the OECD commentary accords with the views expressed by this Authority in the earlier rulings referred to supra. 12. The learned departmental representative, in the course of last hearing, made an endeavour to bring the income within the scope of 'fees for technical services' seeking support from the ruling of this Authority in the case of Airport Authority of India (AAR No. 819 of 2009). Relying on the same decision, it was contended that clause (ii) of Explanation 2 to Section 9(1)(vi) would come into play. The contention of the learned DR on this aspect is summarized as follows: The software appliances supplied and licensed by the applicant are highly specialized in nature. Mere supply of media containing software does not serve any purpose. The domain knowledge and expertise has....
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....enance contract was to be provided by the said company but not the applicant. The payment will be made to that company directly by ONGC. It is therefore clear that the applicant has not undertaken any technical services and made available to ONGC its technical knowledge and expertise. The fact that 20% payment was to be made only after successful commissioning does not really alter the nature of the contract. We have to see the predominant nature of the contract between the parties. Once the software is supplied by the applicant and it is found to be operational on commissioning, the applicant's primary responsibility is discharged. It is not a case where, as in the case of Airport Authority of India, the software required site-specific modifications/adaptations. In Airport Authority case{323 ITR 211}, it was observed that the software was part of the package of setting up upgraded automation system and it had no value unless the supplier shares the technical knowledge, information and experience with the user and suitably equipped the personnel of AAI to handle the system by themselves. In this context, it was observed by this Authority. "We are of the view that the said paymen....