TaxTMI 
TaxTMI 
2011 (9) TMI 86
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.... ICEL. After the installation is over and the software is given a line cutover, the applicant is required to provide at its own cost, maintenance and support services, via a help desk which will operate 24x7 through telephone, e-mail and facsimile number to fix or bypass programme errors. For installation and implementation of the Licensed Programme, applicant shall be paid Rs.4 crore. The software became live on 20.8.2009. The license to use the Licensed Programme is for 4 years and thereafter its renewal is left to the discretion of ICEL. 2. The applicant submits that after the installation and implementation of the Licensed Programme, the Agreement provides for payment of License Maintenance Fee from 1.1.2010 till 31.12.2014. The mode of the payment is such that a fixed amount of Rs.50 lacs per quarter is payable plus an additional fee based on the utilization of the Licensed Programme by ICEL, so much so that the total amount payable would not exceed Rs.150 lacs per quarter. There is further provision in SLMA for fee escalation upto 12% to accommodate inflation and operational cost. 3. Referring to the SLMA, the applicant submits that: i) The Licensed Programme ....
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....f the case, the applicant is/will be non-taxable under the DTAA entered into between the Government of India and the Government of Sri Lanka? 3. Whether, on the facts and in the circumstances of the case, the applicant providing maintenance service to ICEL could not be treated as having a Permanent Establishment ("PE") in India. 4. Without prejudice of above, whether on the facts and in the circumstances of the case, if the Applicant is not taxable in India for the fees paid by ICEL, would later be required to withhold tax u/s. 195 of the Income Tax Act, 1961 on the fees, and if ICEL has deducted withholding tax, will the applicant be entitled to get refund back? 5. Assuming that the applicant has no other taxable income in India, whether on the facts and in the circumstances of the case, the applicant will be absolved from filing a tax return in India under the provisions of the IT Act with respect to the fees? 6. The Learned DIT (Intl.Tax.) in her report submits that the payments to the applicant are taxable as 'Royalties' under the Act and under the DTAA with Sri Lanka. The applicant has granted a license to use the software developed by it. Software is not go....
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....he DTAA with Sri Lanka shall include especially: "The furnishing of services, including consultancy services, by an enterprise through employees or other personnel, where activities of that nature continue within the country for a period or periods aggregating more than 183 days within any 12 month period. It is argued that the applicant has undertaken a software development project to suit the requirement of ICEL. When the applicant's employees are in close association and coordination with the employees of the contractor in the development and customization of the software, the term, 'other personnel'will include such personnel. The entire period starting from the day the project started till the acceptance of the customized software with which ICEL would run the commodity exchange, would be includible for the purposes of counting the period to determine the PE. And then, considering the fact that the ICEL will continue to do business even after 4 years with the provision of new releases, the same software will continue with ICEL. Therefore it cannot be said that the stay of the employees of the applicant will not be for more than 6 months. As Schedule E to the Implemen....
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....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 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 hire, or offer for sale or hire, any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions;" 2. (o) literary work includes c....
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....yright Act as literary work. [M/s. Gracemac Corporation vs. ADIT and Microsoft Corporation vs. ADIT (ITAT Delhi)]. A number of judgments to this effect have been passed by the courts in USA. In Williams Electronics, Inc. v. Artic International Inc. 685 F.2d 870, 215 U.S.P.Q. 405 (3rd Circuit 1982). Third Circuit Court of Appeals rejected the argument that since the coding was in object code, it was a copy intelligible to humans and, therefore, outside the Copyright Act protection. In fact Courts in the USA have been awarding protection to not only the source code and the object code, but in some instances, the same has been extended to even "the overall structure" of a programme. Whelan Associates Inc. v. Jaslow Dental Laboratory, Inc. 230 USPQ 481 (3rd Circuit 1986). Reliance may also be placed on Article 10 of the Trade Related Intellectual Property Rights Agreement (TRIPs) which expressly provides that computer programs, whether in source code or object code, shall be protected as literary works under the Berne Convention, 1971, to which India is a party. 14. It has also come to our notice that during the process of registration of a copyright in a computer programme, the aut....
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....ntellectual property (copyright in the present case) is passed on to another firm. 18. We may further substantiate this by reading the definitions of Royalty under the Act. The definition under the Act is as under - .... "royalty" means the consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head (Capital gains) for- xx xx xx (v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work...." 'The phrase including the granting of a license' in the definition under section 9 of the Act is only explanatory in nature. It explains the term all or any rights in respect of copyright'. It is deemed that all or any rights in respect of a copyright whether under DTAA or the Act should be held to include the grant of a license. 19. Since a license gives a right to do something which would otherwise be unlawful, let us examine whether the ICEL would be liable for copyright infringement if it uses the Computer Programme without entering into the SLMA. 20. Section 52 specifies the acts which do not constitute ....
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.... of one right in respect of a copyright or work would amount to transfer or the use of copyright." 23. The ruling of this authority in Dassault Systems, referred to supra, has interpreted the phrase use of or right to use any copyright under Article 12.3 of the India-Japan Tax Treaty. It is in this context the ruling in Dassault Systems states that Different considerations will arise if the grant is non-exclusive that too confined to the use purely for in-house or internal purpose. The authority held that non-exclusive'and in-house'use of a software amounts to use of a copyrighted article and not use of copyright in the article. In doing so, the authority has conjointly read the phrase use of or right to use any copyright instead of reading independently the phrases use of' and right to use any copyright'. We find it difficult to agree that use purely for in-house or internal purpose is no use of' copyright or that use of'and right to use any copyright' have the same connotation. 24. The Applicant has pleaded that the Hon'ble Supreme Court in the case of Tata Consultancy Services referred supra, while dealing with the issue of off the shelf software (canned software), ....
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....PE in India or not under Article 5 of the DTAA. 26. Based on the above, we hold that since without the SLMA being in place, any usage of the computer programme by the customers would have amounted to copyright infringement, the payment made under the SLMA was for obtaining the right to use the copyright in the software and taxable as royalty under the DTAA and the Act. 27. The questions are answered as under: Ans.1 Fees paid by ICEL to the applicant is taxable as royalty under clause (v) of Explanation 2 to Section 9(1)(vi) of the Act. Ans. 2 As the fees payable by ICEL to the applicant arise in India, it is taxable under Article 12.2 of the DTAA in India. Ans.3 The applicant does not have a PE in terms of Article 5 of the DTAA. Ans. 4 The applicant is taxable on the fees paid by ICEL. The provision of withholding tax under Section 195 would apply. Ans. 5 As the applicant is liable to tax in India, it is required to file a return of income under the provision of the Act. (V.K.Shridhar) Member(R) The Chairman (adding) I agree with the conclusion arrived at by the Member(R). Considering that the question is cropping up again and again, I think it proper....
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.... owner of the licensed programme, it has, under the agreement, granted ICEL the right to use the licensed programme for the business operations of ICEL. Admittedly, this is done for a consideration. The question is, what is the character of the consideration received by the applicant under the transaction. 4. There is no dispute that the right to copyright is a valuable right. Copyright as such is not defined in the Income-tax Act or DTAA. But, it is a well-known right. The Copyright Act, 1957 protects that right in India. Under section 2(y) 'work' is defined, inter alia, as meaning a literary, dramatic, musical or artistic work. Under section 2(o), a literary work is defined to include computer programmes, tables and compilations including computer data-bases. Under section 2(ffb) a computer is defined as to include any electronic or similar device having information processing capabilities. Section 2(ffc) defines computer programme as meaning a set of instructions expressed in words, codes, schemes or in any other form including a machine readable medium, capable of causing a computer to perform a particular task or to achieve a particular result. Section 14 provides th....
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....applicant and over which it has a Copyright, royalty as defined in the Act? 6. What is sought to be argued is that when a software is permitted to be used and in this case copied also for the purpose of ICEL and its business, what is involved is a sale of a copyrighted article or grant of a right to use a copyrighted article, as distinct from the copyright itself and the licensing of the copyright itself alone attracts royalty as defined in the Act. It may be noted that neither the Income-tax Act nor the Copyright Act uses the expression, copyrighted article. It is an expression borrowed from the United States and from the OECD commentary. Under the Copyright Act, 1957 the owner of a copyright can deal with it in two modes. He can either assign his right wholly or partially, generally or with limitations, or he can grant any interest therein by license. What the applicant has done here is to grant a license to ICEL to use the software, the copyright over which it owns, for a consideration. This is a license recognized by the Copyright Act and it is a known mode of exploitation of a copyright. The applicant has not parted with its title over the copyright in the software. It has ....
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....consideration for the use of, or the right to use, any copyright'. The definition in the India-Sri Lanka DTAA is wider than the one found in the Income-tax Act. For, it takes in even the consideration received for permitting another to use a copyright. Even a right to use need not be conferred. 9. The definition embraces two situations. In the first, it need only be consideration received for permitting another to use a copyright. In the second, it is consideration for conveying a right in the copyright. The DTAA is seen to be wider in this context to rope in even a payment as consideration for mere use of a copyright as royalty. It is not necessary even to grant the right to use the copyright if one were to look at it literally, though the grant of a right to use could be said to be included in the grant of a right in the copyright. 10. In the present case, not merely the use is licensed but the licensee is given the right to copy it and use it wherever it is needed by it for its business. The right given for a consideration to copy the copyrighted software and use it for its own purposes by ICEL whenever and wherever needed by it, clearly attracts the definition of royalty ....