AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 135
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.... its own name. According to the applicant by using software and techniques, it has developed copy righted products on several topics which were electronically stored on its server outside India. 2. The applicant has raised the following questions for ruling from this authority:- (a) Whether based on the facts and circumstances of the case, the payments received by SkillSoft Ireland Limited ("the Applicant") would be characterized as 'fees for technical services' ("FTS") under Article 12(3)(b) of the Agreement between the Government of the Republic of India and the Government of Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income("India-Ireland Treaty")? (b) Where the answer to Question 1 is in the negative, whether based on the facts and circumstances of the case, the payments received by the Applicant would be characterized as 'royalty' under Article 12(3)(a) of the India-Ireland Treaty? (c) Whether based on the facts and circumstances of the case a Permanent Establishment ("PE') is created for the Applicant in India under the provisions of Article 5 of the India-Ireland Treaty? (d) Where the answer to Qu....
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....ment SkillSoft India is a distributor and has the right to license, market, promote, demonstrate and distribute SkillSoft Products by providing online access to SkillSoft Products in the Territory (i.e. India). The SkillSoft products purchased by SkillSoft India from the applicant are licensed to Indian end users/customer under the Master License Agreement between SkillSoft India and Indian endusers. SkillSoft India grants to the Indian end-users a non-exclusive, non-transferable license to use and to allow the applicable authorized audience to access and use the SkillSoft Products. This agreement is primarily in the nature of a software/conduct licensing agreement whereby the Indian end-users/customers are permitted to access the elearning platform and the educational content. 6. In the application the applicant has mentioned that the payments for SkillSoft Products are not for services that are managerial or consultancy or technical in nature but instead for a product. According to the applicant the end line software platform should be regarded as software and not services. As regards the second component comprising education content, the applicant has submitted that such cont....
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.... distinction between copyright and copyrighted article and stated that payment received was in respect of copyrighted article. He further argued that Indian end-users were granted only non-exclusive and non-transferable license and therefore it was not covered under the definition of copyright. The applicant's counsel also tried to explain that SkillSoft products may also be considered to be in the nature of "information technology enabled services" (ITES) and for this purpose he cited notification dated 18th September, 2013 issued by Central Board of Direct Taxes in respect of "Safe Harbour Rules". It may be relevant here to point out that these rules are applicable only to the person who has exercised a valid option for application of safe Harbour Rules. In this case the applicant has not exercised such option and is not covered under these rules. In order to support his argument that no right in the Copyright as defined under section 14 of the copyright Act, 1957 has been granted for the use by the Indian end-user or SkillSoft India, reliance was placed on the ruling of this authority in the case of FactSet Research Systems Inc.(supra) saying that the facts are similar to that o....
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.... in these types of transactions would be dealt with as business profits in accordance with Article 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the Distributor having the right to reproduce the software), or whether the software is subject to minor customization for the purposes of its installation." 12. Relying further on the decision in the case on the Dassult Systems (supra), wherein it was held that even though 3 parties were involved, the arrangement does not result in a royalty, the applicant's counsel cited the observations of Hon'ble Supreme Court in the case of Sun Engineering Works Pvt. Ltd. (supra), as under:- "A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this court, to support their reasoning. In Madhav Rao Jivaji Rao Sindia Na....
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....ree of cost); (b) To provide maintenance, support, and professional services in connection with the Products; and (c) To perform all obligations of Reseller, and honor all rights granted, to its customers, relating to the Products under all agreements and commitments existing on or before the Effective Date and all Customer Agreements following the Effective Date, including, but not limited to, right or obligations relating to the renewal of subscription based licenses, the support and maintenance of Products. Subject to the restrictions stated in this Agreement and any Order Form issued under this Agreement, SkillSoft grants to Customer and Customer accepts, a non-exclusive, non-transferable license (without the right to sublicense) for the License Term set forth in the applicable Order Form, to use and to allow the applicable Authorized Audience to access and use the SkillSoft Products(s) set forth therein for internal training purposes only. 16. The counsel for the Revenue further brought our attention to the Master License Agreement (MLA) between the Indian customer and SkillSoft India. He particularly pointed out clause 2.1 of this agreement as under:- Subject t....
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....rm "royalty" under the Act, the consideration paid to him is not liable to be taxed in India. It is submitted that as the Article which is licensed in this case and the consideration paid to the same does not fall within the definition of royalty, under Article 12 the assessee is not liable to pay tax. 39. It is no doubt true the provisions of the DTAA override the provisions of the Income-tax Act. In the DTAA for the term 'royalty' means payments of any kind received as a consideration for the use of the right to use any copyright of literary, artistic or scientific work whereas in the Income-tax Act, royalty means consideration for the transfer of all or any rights including the granting of a license. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-sect....
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....ould have been unlawful. 43. A license is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software license. The answer is, briefly, that in some cases the license will be a permission to use confidential information, and in virtually in all cases it will be permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software license will be akin to a license of confidential information or know-how. The owner or licensor of a copyright, has a right to grant permission to use the software or a computer programme, in respect of which they have a copyright, without transferring the right in copyright. It is one of the rights of a copyright, owner or licensor. Without such right, being transferred, the end-user has no right to use the software or computer programme. 45. As is clear from the description of the agreement it is an enduser software license agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licensee a ....
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....ce of business or business connection in India, (ii) the non resident has rendered services in India. Therefore, the object is to tax on the income of a non-resident, if it has accrued or arisen in India and one such income from royalty. 20. As regards the terms of the agreement with the end user it was pointed out by the Revenue that the clauses related to the license (2.1) and SkillSoft Product being the property of the applicant (2.2), warranty (5.1) and products (1.3) are similar in the case of the applicant as well as in the case of Synopsis International Old Limited. It was also pointed out that in the case of the applicant it is a 3 Tier transaction involving 3 parties and 2 agreements whereas in the case of Infrasoft and FactSet India (relied upon by the applicant) 2 parties are involved with one agreement only. 21. The counsel for the Revenue further citied the case of Citirx where this authority has held that the payment received by the applicant or the distributor for sale of its software product is in the nature of royalty within the meaning of section 9(1)(vi) of the IT Act as well as article 12 of the DTAA. It was contended that the facts of the present case are....
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....ogramme. The support activities include product version updates, the subscription advantage news and updates and secure portal access. Ingram facilitates execution of the subscription programme in the same manner as the case of software products. All transactions between Ingram and the applicant are on a principal to principal basis. Ingram effects direct sales to the customers at its discretion and earns a profit on every sale based on a percentage of the sale price." 22. We have carefully gone through the facts of the case, extensive arguments put forward by both counsels and several case laws cited by them. It is necessary in this case to first understand the facts clearly. In the application the applicant has given the description of its business. A SkillSoft Product consist of two components. The first is course content and the second is the software through which the course is delivered to the end customer. The applicant enters into a Reseller Agreement with the SkillSoft India for sale of SkillSoft Products. SkillSoft India buys the SkillSoft Product from the applicant and sells the same to the Indian end-users under the master license agreement, which is primarily in the....
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....e two countries involving adjustments and compromises. According to Bennion on Statutory Interpretation 'the words in a treaty have to be given meaning not strictly according to rules of interpretation of statutes, but the meaning of the diplomat rather than a lawyer'. So, when the convention speaks of royalty, and defines it, it must be understood as it is commonly understood. There is much to be said for the argument on behalf of the Revenue, that we should not feel ourselves constrained by the definition of copyright in s.14 of the Copyright Act, a definition that explicitly states that it is for the purposes of that Act, especially when construing the tax convention. 31. The article speaks of the use of or the right to use of any copyright. Use of a copyright takes place when the copyright is used. This is distinct from the right to use a copyright. The two expressions are used disjunctively and the expression used is 'or'. The context does not warrant the reading of 'or' as 'and'. If so, the consideration received for permitting another to use a copyright is also royalty. 32. Considerable arguments are raised on the so-called distinction between a copyright and copyright....
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....ity in the case of FactSet (relied upon by the applicant) that 'By an inclusive definition in section 2(o) of Copyright Act, computer programmes and computer databases are included within the ambit of literary work.' There is no need to further discuss this aspect. The applicant's counsel has further tried to say that such software shall be covered under ITES. However, this is a fallacious argument because the notification dated 18th September, 2013 issued by CBDT defining ITEA does not apply to the applicant. This notification is only meant for such eligible assesses who have exercised a valid option for application of Safe Harbor Rules. The analogy drawn by the applicant's counsel to the on-line banking facility provided by a bank or to an e-library (book) is also not at all appropriate. As mentioned earlier, SkillSoft Products consist of the software through which the course content is delivered to the end-customer who gains access to a especially designed software for understanding the content. We have also gone through a demo of the website of the applicant and could see that they were marketing several copyrighted software containing simulation exercises and such software sim....
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....tion of fact on the basis of which it can be decided whether the nature of license granted by the applicant would result in royalty or not. We find that similar issue was involved in the case of Citrix as well as Synopsis. The Hon'ble High Court in the case of Synopsis had examined clause 2.1 of the agreement entered into between the parties which dealt with grant of rights. It was provided therein that Synopsis granted licensee offering a non-exclusive, nontransferable license, without right of sub-license, of use the software and design technologies only in the quality authorized by a licensee in accordance with the documentation in the use area. In the present case also the reseller agreement grants to customer a non-exclusive, nontransferrable license (without the right to sub-license). The Hon'ble High Court had mentioned categorically that merely because the words nonexclusive and non-transferrable is used in the said license it does not take away the software out of definition of copyright. It was further held that even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid l....