TaxTMI 
TaxTMI 
2014 (12) TMI 430
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....soft had granted the assessee a right to use the software without any permission of commercial exploitation thereof. An additional ground also reads that once the assessee had made payment to a non-resident, it ought to have followed the procedure laid down u/s 195 of the Act. 3. In the course of hearing, the Revenue submits that assessee's payments made towards use of standardized software amounts to 'royalty' u/s 9(1)(vi) and under Indo Denmark Double Taxation Avoidance Agreement dated 25.9.1989 (DTAA), it ought to have deducted TDS u/s 195 of the Act. Per Revenue, the assessee should have also filed an application u/s 195(2) & (3) of the Act as per case law Transmission Corporation of A.P. Ltd vs CIT 239 ITR 587 (SC). It quotes case law of [2012] 345 ITR 494 (Karn) CIT vs Samsung Electronics Co. Ltd., [2012] 28 taxmann.com 162 (Kar.) CIT vs Synopsis International Old Ltd., [2010] 192 Taxman 80 CIT vs Sonata Information Technology Ltd, [2014] 146 ITD 460(Pune) Cummins Inc vs DDIT, [2014] 98 DTR (Mumbai)(Trib) 66 DDIT vs Reliance Infocom Ltd, [2012] 343 ITR 304 (AAR) ACCLERYS KK In re, and Civil Writ Petition Nos.3811 and 18886 of 2009 dated 24.8.2010 Infotech Software Dealers As....
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....licensed for one of the following: Windows 95, Windows 98, Windows NT Workstation, Windows 2000 Professional, or successor products to Windows 2000 Professional." The Denish group concern intimated the assessee on 23.1.2003 that in lieu of providing various software licences and software assurances from M/s Microsoft Corporation USA, it would be invoicing on yearly basis. On 23.6.2003, the said entity provided '2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals' and invoiced a sum of US $ 72,449. The assessee remitted this payment without deducting any TDS. The Assessing Officer proposed to treat assessee as the 'assessee in default' u/s 201(1) of the Act. 6. The assessee stated that its remittance made did not in any way comprise an income component being incurred towards acquiring and sharing of the software licence. It pleaded that there was no 'royalty' element involved as no copyrights under the said law were involved. The case was classified as of mere right to use the copyrighted software. Per assessee, it had only purchased a standardized software liable in the nature of 'goods' per Customs and Excise laws and Sales-tax laws. It quoted the DTAA to conten....
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....rd by the appellant and the facts on record. As against the observation of the A.O, the appellant has pleaded its case of nonI. taxability on the ground that the payments made to the nonresident company represented reimbursements/ recharge of expenses towards procuring 270 units of Microsoft licences for Microsoft office and Windows. Further Microsoft has granted only the right to use the software and has not permitted the buyer to commercially exploit the software. The transaction was nearly one of sale of goods. I have also perused the correspondence dated 23.1.2003 addressed to the appellant with regard to Microsoft licences cost sharing. It is clearly stated that a global enterprise arrangement with M/s Microsoft USA for providing various software licences and software assurances including upgrades for the regular office applications including the operating system in respect of India. Accordingly the proportionate cost of the Microsoft licences and software assurances would be invoiced to the appellant being its share. The invoice also describes the payment to be made for 270 seats of MS Office, Windows and Cals of 2003 Microsoft. I have also perused the relied upon orders in t....
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....quired a readymade, non-customized 'shrink wrap software' available in the market only for in-house use without any right to copy, refurnish, sale or display thereof. In software parlance, 'shrink wrap software' is a box containing the CD/DVD, user manual and the end user licence agreement. This box is wrapped in a plastic and called as 'shrink wrap software'. Per assessing authority, the assessee's acquisition of licence to use this software is covered by clauses (i) and (v) transfer of all or any rights (including granting of a licence) under explanation 2 of section 9(1)(vi) of the Act. The CIT(A) observes that the assessee had only been granted licence to use the software and not for commercial exploitation. He treats the transaction to be merely sales of 'goods'. The cost sharing formula is also referred to. Reliance is placed on the tribunal's decisions in Samsung Electronics Co. Ltd and Sonata Information Technology Ltd. cases(supra). The lower appellate order concludes that it is a case of acquisition of the readymade 'off-the-shelf' computer programme wherein no right is granted to utilize the copy right and merely involves a purchase of copy of a copyrighted article. 11.....
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....e, through a permanent establishment....... This Article further clarifies that in the latter instance, Articles 7 and 15 would govern the situation. In view thereof, it emanates that the recipient/beneficial owner in the present case is M/s Microsoft, USA. The remittee is only placing indent for all its group concerns for appropriate internal arrangement and convenience. Therefore, Article 5 of this DTAA does not help the assessee as operation of Articles 1 & 2 is only excluded when the beneficiary of the royalty is resident of the other Contracting state. Thus, we observe that the DTAA clauses support the Revenue qua taxability of the 'royalty' element in India. 13. In view of the aforesaid facts, relevant statutory provisions and contradicting stands of the parties, the issue which arises for our consideration is as to whether the assessee's act of acquiring '2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals' amounts to payment of 'royalty' or not? In order to get a clarity on the issue, we deem it fit to analyse the case law submitted by the parties as under: (A) The Revenue's list of judgments:- (i) CIT vs Samsung Electronics Co. Ltd. (supra). The payment....
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.... to do something lawfully what is not otherwise authorized and lawful to do so. It has been observed that a licence is no more than the right to do the thing actually licenced to be done. Per their lordships, a licence transfers interest to a limited extent. They have held that in software technology, a licence is one of the right of a copyright which entails payment of 'royalty'. It has been categorically held that for attaining or obtaining a licence, an exclusive right is not required. (iii) CIT vs Sonata Information Technology Ltd (supra). We find that this judicial precedent interprets ambit and scope of section 195 of the Act. Since we are right now concerned with only section 9(1)(vi), the same is not discussed at length. (iv) Cummins Inc vs DDIT (supra). The assessee was a US based Company. It had entered into an agreement of non-exclusive user right with the software firm Oracle. It had granted user rights of this Oracle software to its two Indian subsidiaries alike the present case wherein the Denish entity has acted at the behest of the assessee. A co-ordinate bench of the 'tribunal' after taking into consideration explanation 4 to section 9(1)(vi) and by follo....
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....ip involved. (ii) Tata Consultancy Services vs State of A.P (supra). this case law pertains to definition of 'goods' under the Andhra Pradesh sales tax law. It is made clear that we are dealing with an issue under the Income-tax which is a complete code in itself. Till there is enough clarity within the provisions of the Act, we do not deem it fit to venture in the other fiscal statues. So, applicability thereof is not discussed. (iii) CIT vs Dynamic Vertical Software Pvt. Ltd (supra). In this case, the assessee had purchased software from Microsoft and sold in open market. This is yet another case of a 'principal-toprincipal' relationship. The hon'ble Delhi high court has held that for purchasing software, the assessee had not paid any 'royalty' sum liable to be assessed under the provisions of the Act. The facts of this case law are not akin to those involved in the present case. (iv) DIT vs Nokia Networks (supra). The issue in this judgment pertained to 'accrual' of income in India on 'principal-toprincipal' basis. The hon'ble Delhi high court held that no 'royalty' had arisen in case of 'off-the-shore' purchases outside India as supplies were made overseas. We have a....
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....of software technology availed, invoice raised specifically quoting only licence and right of usage embedded therein. The issue is decided in the Revenue's favour. 15. The CIT(A)'s next finding is that this transaction pertained to sale of 'goods'. Admittedly, the present case involves only a licence pertaining to 'shrink wrap software'. There is no material to prove any 'goods' element in the '2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals'. The CIT(A)'s view does not refer neither to any statutory provision nor evidence on record. 16. The CIT(A)'s next finding is that the assessee has merely followed a cost sharing formula. In our view, this factor is also immaterial. We deem it fit to observe that cost sharing formula or any other method is only an internal arrangement. In determining 'royalty' payment, we have to refer to facts of the case vis-à-vis the statutory provision. Since the said conditions therein are satisfied, we hold that this formula in itself cannot defeat applicability of the TDS provision. Coming to the CIT(A)'s view that the assessee had merely acquired 'off-the-shelf' computer programme, we find that the case law of Samsung Elec....