TaxTMI 
TaxTMI 
2013 (8) TMI 952
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....nd Cummins Diesel Sales & Services (India) Ltd. (in short 'CDSS') which was claimed to have been received for information technology support but the A.O as well as the DRP have treated the said income as a royalty u/s 9(1)(iv) of the Act as well as within the meaning of Article 12 of the Double Taxation Avoidance Agreement (in short 'DTAA') between India and United States of America (in short 'USA'). We first dispose off the ground taken by the assessee challenging re-assessment proceedings more particularly in A.Y. 2004-05. 3. Briefly stated the facts are as under. The assessee is a foreign company incorporated in USA and is also a tax resident of USA. It is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. The assessee has a subsidiary in India called as Cummins India Ltd. (CIL) which was incorporated in 1962 as a JV with Cummins Engine company, US to manufacture internal combustion diesel engines. CIL manufactures diesel engines in the 200-2000 hp range and fiteration equipments. T....
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.... change of opinion. The A.O rejected the objection of the assessee by observing that no reasoned order was passed by the A.O while making regular assessment. The A.O also observed that the A.O has not expressed his opinion on the assessee's claim of exemption in respect of licence fee received from "CIL" and "CDSS" for information technology support. The assessee carried the issue before the "DRP" but without success. The assessee is in appeal before us. 5. The main thrust of the argument of the learned counsel is that the assessment proceedings initiated by the A.O u/s 147 is merely on the change of opinion . He submits that at the time of original assessment proceedings, the returned of income was having a note which has been considered by the A.O. The learned counsel also referred to the observations of the A.O in the original assessment order passed u/s 143(3) of the Act that the case was discussed and notes to the return of income and various submissions have been considered. The main reliance in the argument of the learned counsel was on the notes in the return of income and has argued that everything was placed before the A.O. and hence it cannot be said that there was fa....
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....and perused the records. In this case, the assessee filed a return of income u/s 139(1) of the Act for A.Y. 2004-05 declaring total income of Rs. 11,32,94,584/- on 29-10-2004. The assessee's case was selected for scrutiny and assessment was completed u/s 143(3) of the Act on 20-10-2006. Let us deal with the argument of the learned counsel that the re-assessment proceeding is based on mere change of opinion. We have examined and perused the original assessment order. We find force in the argument of the learned CIT (DR) that the assessment order is only of one page and cryptic which reads as under: "Return of income was filed on 30/10/2004 disclosing the total income at Rs. 113,294,580/-, The return was accompanied with the Audit Report in prescribed from 3CEB u/s 92E relating to International transactions. The case was selected for scrutiny and accordingly notice u/s 143(2) was issued to the assessee on 22.09,2005 and served on 01-10-2005. 2. Assessee company is incorporated in USA. It. is engaged in the business of Manufacturing of heavy-duty and mid range engines for tracks & buses & marine lodging, agriculture and rail applications. In response to notice u/s 14....
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....n received for facilitating grant of user rights in off-the-shelf software from CIL and CDSS amounting to Rs. 7,75,38,913/- in A.Y. 2004-05 and Rs. 62,769,649 in A.Y. 2006-07, respectively, are taxable as royalty u/s 9(1)(vi) of the Act as well as under Article 12 of DTAA between India and USA. The assessee had entered into an agreement with CIL and CDSS for grant of user rights in certain software. The software provided are third party software which has been procured by the assessee-company from "Oracle". It was claimed by the assessee that what is transferred under the agreements is the user right in the copyrighted software and not the 'use of copyright'. In the case of the assessee, the fees have been paid by CIL and CDSS to acquire the right to internally use and operate the software program. The assessee took a stand that the payments have been made for use of the right to use of or the right to use a copyrighted software. The assessee also contended that fees received by CIL and "CDSS" cannot be treated as royalty, nor it can be treated as fees for technical service. The A.O called for the agreements between the assessee and CIL/CDSS. The A.O has noted that on perusal of th....
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....opy of the original agreement with Oracle, a Software Company, from which the assessee had procured software in USA. As per the directions of the assessee, a copy of purchase order No. 749180 dated 16-12-1987 was filed with the letter stating that same is a copy of Software License and Service contract between Oracle and the assessee which is also placed on record. The learned counsel submits that the assessee had received different amounts from CIL and CDSS but limited controversy is in respect taxability of fees for grant of user right and related support service received from CIL and CDSS i.e. Rs. 77,538,913/- in A.Y. 2004-05 and Rs. 62,769,649/- in A.Y. 2006-07. He submits that in order to ensure and achieve the greater degree of operating efficiency in its business operations including management reporting vis-à-vis its subsidiaries, the assessee company decided to uniformly use the software across the world in Cummins Group entities and joint ventures including CIL and CDSS. He submits that from the said object, the assessee-company acquired various types of off-the-shelf software and granted user rights in the same to its subsidiaries/joint venture entities worldwide ....
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....d to the provisions of Copyright Act, 1957, more particularly the definition of the term "literary work u/s 2(o) of the Copyright Act 1957 as well as sec. 2(ffc) of the said Act which defines "computer program". He submits that in the present case, the CIL and CDSS used the software only for the internal use and have not been given right to perform or communicate to the public. Moreover, the Indian Affiliates do not have right to translate the software. He submits that there is difference between copy right and copyrighted article. He further submits that the definition of royalty has to be given a contextual meaning. The right to use in Article 12(3) of the Treaty refers to right to use the right in the copyright and not the Copyrighted article. He submits that as per the provisions of Copyright law, the copyright clearly vests in a person who has an exclusive right to do all or any of the acts mentioned therein to the exclusion of others. He also referred to 'Right to use" mentioned under the DTAA refers to the right to use of the copyright and not the copyrighted article. In support of this contention, he placed reliance on the following judicial decisions: a) DIT Vs. E....
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....the consideration received in the nature of licence fee from the Indian affiliate for the use of software is for the copy righted article. The learned CIT (DR) referred to the different terms between "Oracle" and the assessee-company and submits that by no stretch of imagination it can be interpreted that the assessee has no absolute right to use the software or to allow the use of the software to its affiliate or group company. The learned CIT (DR) placed his heavy reliance on the decision of the Hon'ble Karnataka High Court in the case of M/s Samsung Electronics Co. Ltd. (India Software Operations) and others 345 ITR 494 (Kar. H.C.). The learned CIT (DR) also placed his reliance on the following judicial decisions: (a) CIT Vs. M/s. Synopsis International Old Ltd.(2010-III-36-HC-KAR-INTL, judgment dt. 3-8-2010; (b) Millennium IT Software Ltd (2011-TII-25-ARA-INTL), judgment dt. 28-9-2011; (c) Acclerys K.K. AAR No. 989 of 2010, decision dt. 27-2-2012; (d) M/s. Ing Vyasya Bank Ltd (2011-TII-136-ITAT-BANG-INTL), decision dt. 5-8-2011. 13. We have heard the rival submissions of the parties and carefully examined the material on record. The assess....
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.... the documents placed before us, we are unable to arrive at a conclusion whether the software is off the shelf or customize but in our opinion otherwise also it is not going to make any difference as ultimately after examining the licence agreement, we have to determine the nature of payment received by the assessee from two affiliate companies. We first examine the terms of agreement between Oracle and the assessee company. As per the terms mentioned in the software licence and service agreement (hereinafter referred to as "the Agreement), as per the definition of the programme means the computer software owned and designated by the Oracle. The assessee is given nomenclature as a "Client" and the assessee is granted licence for using Software. It is asserted in the terms and conditions that the assessee is granted non-exclusive licence to use the programme solely for the assessee's internal data processing operations on the specific CPU designated in the relevant order form or on back-up CPU is inoperative if the designated CPU is inoperative. As per the terms, the assessee cannot use the programme for commercial time sharing, rental or service bureau use. The assessee acquired on....
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....affiliates of CUMMINS and its successors and assigns; of the Other Part. WHEREAS, CIL is desirous of acquiring certain software license/sub-license rights from Cummins; AND WHEREAS, the parties wish to make arrangement for CIL to pay Cummins for its proportional use of these software license and sub-license rights thereof; NOW THEREFORE, in consideration of the mutual promises of each party to the other herein, it is hereby mutually agreed as follows: 1. Scope of Work CIL hereby engages Cummins to license and sub-license certain software rights as described in the Scope of Work attached as Exhibit 'A' (collectively referred to as the "Licences".) CIL will be provided either continuously or as needed during the Term of this Agreement. The parties will make certain adjustments, deletions and adjustments to the license provided by mutual written agreement. No changes to the license may be made without prior agreement in writing. 2. Compensation In consideration of Cummins granting a sub-license for CIL to use the licenses, CIL shall pay Cummins according to the fees provided in Schedule 'B'. The rates specified under Exhib....
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....e the Licence provided at no additional cost to CIL. CIL may withhold payment of any consideration due and owing to Cummins pending Cummins performance of the remedy outlined above and may ultimately cancel such payment if Cummins fails to accomplish the remedy in a satisfactory and workmanlike manner. Additionally, Cummins agrees to refund any payments made by CIL, which pertain to Licence provided that violate the foregoing warranty. Cummins hereby assigns, and represents that it has the authority to assign / sub-licence, to CIL any and all manufacturer's and supplier's warranties, express or implied, representations, service agreements, patents and other indemnities, if any, with respect to products sold to CIL and upon written request from CIL, Cummins will take all reasonable action to enforce any such warranty, express or implied representation, service agreement, licence agreement/s or indemnity issued on or applicable to the products and materials which are enforceable by Cummins in its own name. 7. Ownership of Intellectual Property; Reports All reports and other work performed for or delivered to CIL under this Agreement shall be construed as wo....
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....shall be construed to place the parties in a relationship of partners, joint ventures, principal and agent, or employer and employee; and neither party shall have the power to obligate or bind the other in any manner whatsoever. Cummins acknowledges that it has freely and knowingly entered into this Agreement for separate and sufficient consideration unrelated to any other engagement relationship. Cummins acknowledges that any rights, benefits, or other terms and conditions of any such engagement relationship do not apply to and are excluded from this Agreement. 10. Notices Except as otherwise provided in this Agreement, all notices hereunder shall be given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, to the parties at their respective addresses set forth below, or to such other address as either party shall have furnished in writing to the other; If to CIL: Cummins India Ltd., • Kothrud, Pune 411 038 • India • &nbs....
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....compatible with the applicable law as it shall then appear. 15. As per the averments made in the agreement between the assessee and its affiliate, the agreement is for the "Licence or Sub-Licence for use of certain software rights" as described in Exhibit 'A' of the agreement. There is a clause for payment of fees and the fees are provided in schedule B. Both the affiliates have to make onetime payment of US $ 553125/- and $ 331875 respectively for the use of Oracle operation ERP licence fee for unrestricted use. Apart from the said payment, both the affiliate are also paying different charges as provided in Exhibit B for the usage of consumption except the amount of licence fee. The other terms are common. 16. In the case of Samsung Electronics Co. Ltd. (supra), the Hon'ble Karnataka High Court has examined the identical issue under provisions of sec. 9(1)(vi) of the Act as well as Article 12(3) of DTAA between Indo-USA. As per the terms of the agreement between the assessee and the Oracle what is transferred to the assessee is licence to use the software and copy right continued with the Oracle i.e. software company. It is pertinent to note here that as per the terms of agr....
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....ssee is under DTAA with USA. In the case of Samsung Electronics Co. Ltd. (supra), the issue was also of the software licence agreement. The operative part of the said decision is as under: "22. The question as to whether the payment made for import of software or supply of software by the non-resident Companies was royalty or not was not at all in issue in TCS's case and the question was whether canned software sold by the appellants therein amounted to sale of goods under the Andhra Pradesh General Sales Tax Act. Further, the issue of transfer of right to use the goods as per the expanded definition of 'sale' did not come up for consideration in that case. On the other hand, the issue in the present case is as to whether the payment would amount to 'royalty' within the meaning of Income Tax Act and DTTA. In the said TCS's case, it has been held that copyright in computer program may remain with the originator of the program, but the moment copies are made and marketed, it becomes goods, which are susceptible to tax. The contention of the assessee that the consideration received by the non-resident supplier towards the software products would amount to 'royalty' within the....
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....f 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 commercial rental or offer for sale or for commercial rental any copy of the computer programme; Provided that such commercial rentals does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) in the case of an artistic work:- (i) to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work; (ii) to communicate the work to the public; (iii) to issue....
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....above said provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under section 51 of the Act. However, if such copying of computer program is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrink-wrapped / off-the-shelf software into the hard disk of the designated computer and to take a copy for backup purposes, the end user has no other right and the said taking backup would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back up copy and right to make a copy itself is a part of the copyright. Therefore, when licence to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back up copy of the software, it is clear that what is transferred is right to use the software, an ex....
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....t and in view of the licence granted, the same would not amount to infringement under Section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software or off-the-shelf software is not the price of the CD alone nor software alone nor the price of licence granted. This is a combination of all and in substance, unless licence is granted permitting the end user to copy and download the software, the dumb CD containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music software as book and prerecorded music CD can be used once they are purchased, but so far as software stored in dumb CD is concerned, the transfer of dumb C.D. by itself would not confer any right upon the end user and the purpose of the CD is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if l....
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....ndent(s) were not liable to deduct any tax at source and pass the following Order:- All the appeals are allowed. The order passed by the Income Tax Appellate Tribunal Bangalore Bench 'A' impugned in these appeals is set aside and the order passed by the Commissioner of Income Tax (Appeals) confirming the order passed by the Assessing Officer (TDS)-I is restored. 18. The assessee has placed reliance on the decision of Delhi High Court in the case of Ericsson A.B. (supra), Motorola Inc (supra) in which the Hon'ble Delhi High Court confirmed the decision in the case of Motorola Inc. (supra). In our opinion, the said case is distinguishable on facts itself. In the said case, the issue was whether the software supplied is an integral part of GSM mobile telephone system which is used by the cellular operator for providing the cellular services to its customers and whether the consideration can be treated as royalty. The Hon'ble High Court held that the payment received by the assessee was towards title and GSM system of which software was an inseparable parts, incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore c....