TaxTMI 
TaxTMI 
2016 (3) TMI 280
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.... October 2006 (during the relevant AY 2007-08). Pursuant to the acquisition, the name of the company has been changed from 'Unilever India Shared Services Limited' to 'Capgemini Business Services (India) Limited' with effect from 14 May 2007. During A.Y 2007-08, the assessee had primarily provided business process management services in the areas of finance accounts, operational control assessment, administration of foreign exchange, one off consultancy projects and competitors' intellectual study to Unilever group companies. The services rendered by the assessee have been in the nature of 'Information Technology Enabled Services' (ITES) / 'Back Office Support Services'. Considering that the Unilever Group had an indirect equity stake in excess of 26% in the assessee for the period from 1 April 2006 to 11 October 2006, the transactions between the assessee and Unilever group entities came under the purview of 'Indian Transfer Pricing (TP) Regulations'. The assessee had selected the Transactional Net Margin Method (TNMM) as the most appropriate method to determine the arm's length price for the provision of ITES to group entities and had selected comparable companies renderin....
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....s between the Appellant's international transactions with overseas Unilever group entities for the period: - prior to the acquisition of Appellant's shareholding by Capgemini Group; and - post such acquisition. c. disregarding the Appellant's contemporaneous TP documentation and conducting his own comparability analysis which is not in accordance with contemporaneous documentation requirement under Indian TP regulations, having failed to appreciate that in the case under consideration, none of the conditions set out in Section 920(3) of the Act are satisfied; d. selecting companies that are not comparable to the Appellant vis-a-vis its AEs, for the determination of the arm's length price; e. using current year's financial data (i.e. Financial Year 2006-07) for the comparable companies for benchmarking the Appellant's international transactions pertaining to business process management services rendered to AEs; f. not granting a working capital adjustment to the Appellant to account for the differences in the working capital cycle of the comparables vis-à-vis the Appellant; and g. denying t....
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....5 comparables for arriving at arm's length price for determining the transfer pricing adjustments. The TPO had accepted the analysis of the assessee using the TNMM as most appropriated method for determination of ALP of international transactions whereby the operating margin of the assessee was compared vis-à-vis its transactions with Unilever group entities during the period prior to 11.10.06 with its operating margin from transactions with Unilever entities in post 11.10.06 period. This internal comparison was done by the TPO as the functions' profile of the assessee in pre and post scenarios had remained the same. The TPO also carried out external comparability analysis. According to the analysis report given by the assessee the ratio of OP/OC (Operating profit/operating cost) was given at 19.91% whereas as per the comparables taken by the TPO, the OP/OC ratio came to 28.23%. The short contention of the Ld. A.R. before us has been that the assessee otherwise will be satisfied if the comparables introduced by the AO are taken for analysis except the two i.e. Mold-Tek Technologies Ltd. (SCG) mentioned at Sl. No.20 and in case of Vishal International Technology Ltd. ment....
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.... book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that i t i s a leading provider of engineer ing and design services wi th specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble shooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints e....
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....ishal International Technology Ltd. was relatively very low as compared to that of the assessee. The Vishal International Technology Ltd. had outsourced significant parts of operations and did not have so much employees' salary cost as was in the case of the assessee and therefore the business model of the Vishal International Technology Ltd. was different. The Ld. A.R. has relied in this respect to the decision of the Hon'ble Delhi High Court in the case of "Rampgreen Solutions Pvt. Ltd. vs. CIT" in ITA No.102 of 2015 decided vide order dated 10.08.15. The business model of the Vishal International Technology Ltd. being different on the ground that it was indulged in out sourcing of its operations has not only been considered by the special bench of the Tribunal but also by the Hon'ble Delhi High Court in the case of "Rampgreen Solutions Pvt. Ltd." (supra). 5. Considering the above facts on the file and the submissions made by the Ld. Representatives of the parties, in our view, the Mold-Tek Technologies Ltd. and Vishal International Technology Ltd. cannot be taken as comparables. 6. We, accordingly, direct the AO to exclude Vishal International Technology Ltd. and Mold-Tek ....
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.... invited our attention to section 884 of the 'Internal Revenue Code' which deals with the branch profit tax. He, in this respect, has argued that the 'accumulated earning tax' and the 'branch profit tax' are the different taxes which have been dealt by different sections. Section 531 of the Internal Revenue Code deals with imposition of 'accumulated earning tax,' whereas, section 884 deals with 'branch profit tax'. The Ld. A.R. has further invited our attention to page 1167 of the paper book which is the "Official Technical Explanation of the Convention and Protocol between the US and India". This technical explanation is an official guide to the convention/DTAA. The scope of Article II relating to "Taxes Covered" has been explained in the said guide/technical explanation. It has been specifically provided that the taxes covered in the case of US, as indicated in paragraph 1(a) of Article II, are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). The Article specifies that the Convention does not apply to the accumulated earning tax (Code section 531), the personal holding company ta....
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.... so as to classify it as royalty or fees for technical services. In para 7.3 of the impugned order, the DRP, after perusal of the documents submitted by the assessee, has held that the software purchased was a one "off the shelf" product. However, the DRP further observed that the software was not sold but a license was given to the assessee to use it in a particular manner in consideration of the license fee. Even after obtaining a copy of the software, the assessee required permission to use the software by way of activation on a certified machine. Therefore, payment made by the end user was towards license to use copyright in software and not for sale of software. The DRP, therefore, held that the license to use the software would fall under the purview of royalty. Being aggrieved by the above finding of the DRP, the assessee has come in appeal before us. 11. We have heard the rival contentions and have also gone through the records. The Ld. A.R. of the assessee has contended that 'MFG Pro Software' purchased by the assessee is an accounting software and is available off the shelf. QAD Singapore Pvt. Ltd. supplied the said software to the assessee company outside India on a c....
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....his respect. The contention of the Ld. AR, on the other hand is that the definition of royalty, since provided in the DTAA is to be looked into only and that the definition, if any, provided under the Act is to be ignored. 13. After hearing the Ld. Representatives of the parties, the first and foremost question for adjudication before us is as to whether the definition of 'Royalty' as provided under the Income Tax Act is to be taken or that which has been provided in the DTAA with Singapore. 14. The Ld. D.R. at this stage relying upon the decision of the Hon'ble Madras High Court in the case of "Vrizon Communication Singapore vs. ITO" 361 ITR 0575 (Mad.) has contended that in 'Para 100' of the said decision, the Hon'ble Madras High Court has observed that the definition of royalty under DTAA and the Indian Income Tax are in paramateria. He has further stated that the said decision of the Hon'ble Madras High Court in the case of "Vrizon Communication Singapore" (supra) has been followed by the Mumbai Bench of the Tribunal in "Viacom 18 Media Pvt. Ltd. vs. ADIT (International Taxation) reported in (2014) 44 taxman.com 1 (Mumbai). He, therefore, has vehemently contended that the....
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....tion relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall n....
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....rated media or other information storage device and includes any such programme or any customized electronic data. Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), ....
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....resident into the clause (b), i.e. in relation to payment made by a resident Indian and read the clause(b) in terms of clause(c), even then what the 'royalty' may constitute will be the income payable in respect of any right, property or information used or services utilized for the purpose of business or profession by such resident to a non resident. However, vide explanation 2 the vast definition provided in sub clauses (a), (b) & (c) of section 9(1) (vi), have been restricted only to the consideration paid for the items as mentioned (i) to (vi) of Explanation 2. However, 'Explanation 4' inserted by Finance Act, 2012, provides that the transfer of rights in respect of any right, property or information includes and has always included the right for use or right to use a computer software including granting of a license. We find that so far as Income Tax Act is concerned, 'computer software' has neither been included nor is deemed to be included within the scope or definition of 'literary work' in any definition or explanation provided under the Act. The term 'literary work' has been separately mentioned under clause (v) to Explanation 2 to include the consideration paid for the s....
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....ssessable as "royalty", the definition in the DTAA has been left unchanged. In "Siemens AG" 310 ITR 320 (Bom), it was held that amendments cannot be read into the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as "royalty" despite the retrospective amendments to the Act. The relevant findings of the Hon'ble Delhi High Court as given in para 23 of the said decision, for the sake of convenience are reproduced as under: "The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighted article" as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a cop....
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....idance Agreement, unless the said DTAAs are amended jointly by both parties. 22. Further, we find that in all the decisions of the Hon'ble High Courts relied upon by both the Ld. Representatives of the parties i.e. not only in the decisions relied upon by the assessee of the Hon'ble Delhi High Court in the case of "Infrasoft Ltd." (supra) and "Ericson A.B." (supra) but also in the decisions relied upon by the Revenue i.e. "Samsung Electronics Company Ltd. & Others" (supra), "Synopsis International Old Ltd." (supra) and of the Tribunal in the case of "Reliance Infocom Ltd." (supra), the different Benches of the High Courts and the Tribunal have been unanimous to hold that as per the law laid down by the Hon'ble Supreme Court in the case of "Union of India vs. Azadi Bachao Andolan" (2003) 263 ITR 607, that where a specific provision is made in the DTAA, that provision will prevail over the general provisions contained in the Income Tax Act if, the same is more beneficial to the assessee as provided under section 90 of the Income tax Act. All the Hon'ble High Courts (supra) have also been unanimous to further hold that the definition of 'royalty' is restrictive in DTAA whereas the ....
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....A with Singapore for the purpose of ready reference is reproduced as under: Art 3. "(2.) As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State concerning the taxes to which the Agreement applies." 24. Hence, the question before us, at this stage, is whether the term 'literary work' as mentioned in the definition of royalty in the treaty would include 'software' or not? We note that the term 'Literary work' covers work, which is expressed in print or writing irrespective of the question of its literary merit or quality. It must be expressed in some material form, i.e. writing or print or in some form of notation or symbols, which means in a form capable of either visually or audibly recreating the representation of the original work. As per the provisions of section 2(o) of the Indian Copyright Act, 1957 the term 'literary work' includes computer programs, tables and compilations including computer data base. Therefore, the computer software has been recognized as a copyright work in India, if they are original int....
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....aper describing the licence terms, contained inside the box and wrapped in transparent paper along with the computer software installation and diskettes or the owner's manual. These agreements contain typical clauses on anti-reuse, anti-reverse engineering and limited copyright provision. Sometimes, these may have clauses disclaiming of warranties and liabilities. End user is bound and is considered to have agreed with the license, if he tears open the package. Shrink wrap agreements do not follow the normal practice of an agreement between the parties, where the terms of an agreement are negotiated between the parties. The other popular way of transfer/sale or licensing the software is through 'Click Wrap' agreements. In these licenses, software developers do not receive a signed agreement from the user instead of he relies on the customers manifestation of ascent via the internet. The user generally is asked to review the terms of the agreement and indicate the ascent by clicking on the button/icon at the end of the license. The button or the icon provided in these agreements is generally 'I agree' and 'I decline'. The 'I agree' or 'Ok' button/icon constitutes agreement to the....
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....nsfer of part of the copyright and transfer of right to use the copyright for internal business of the assessee as per the terms and conditions of the agreement. It was therefore held that the contention of the assessee that there was no transfer of copyright or any part thereof under the agreements entered into by the respondent with the nonresident supplier of software cannot be accepted. The Tribunal in the said case has also relied upon another decision of the Hon'ble Karnataka High Court in the case of "CIT vs. Synopsis International Old Ltd." (2013) 212 taxman 454 wherein the Hon'ble Karnataka High Court has observed that even in case of end-user software license agreement granted for a non exclusive, non transferable, without right of sub license of use of the licensed software and design techniques, that does not take away the software out of the definition of the copyright. Even if it is not a transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the license makes it abundantly clear that there is transfer of certain rights which the owner of a copyright possesses in the said computer software/progr....
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....elhi High Court has held that the copyright is distinct from material object. It is intangible, incorporeal right in the nature of privilege, quite independent of any material substance such as manuscript. The transfer of the ownership of a physical thing in which copyright exists comes to the purchaser with the right to do with it whatever he pleases, except the right to make copies and issue them to the public. Just because one has the copyrighted article, it does not follow that one has also copyright in it. 31. Now, after going through the divergent views of the different Benches of the High Courts on this issue, the question that arises before us as to whether the sale of shrink wrapped software can be said to be sale of 'Good' or grant of 'License to use'. Section 2 (7) of the Sale of Goods Act, 1930 defines 'good' as 'every kind of movable property other than actionable claims and money, and includes stock and shares, growing crops, grass....' This definition of 'goods' thus includes all types of movable properties, whether tangible or intangible. The Hon'ble Supreme Court in the case of "Tata Consultancy Services vs State of Andhra Pradesh" 271....
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....puter software and not the disk or the CD upon which such software is loaded. As understood by us, what the 'computer programme' or the 'software' is an expression of work/ideas written on a media in a computer programming language and that is why it has been included worldwide in the category of literary work. As per the definition provided in section 2 (ffc) of the Indian 'Copyright Act 1957' "Computer programme" means 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 achieve a particular result; As per Explanation 3 to section 9(1)(vi), the computer software has been defined as follows: " 'computer software' means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data." Hence, like any other literary work, computer programme can not be read or utilized without downloading on a media like hard disk, CD, floppy or any other such device. As an author of a literary work may be having some ideas in his mind in an intangible form but the co....
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....oduct and he is entitled to fair use of the product. The restriction or the terms mentioned in the paper/cover are the conditions of sale restricting misuse and can not be said to be license to use. However, the purchaser is entitled to perform all or any of the activities which is essentially required for the fair use for the purpose for which the product is purchased by him. Section 52 of the Copyright Act expressly recognizes such a right of the purchase which we will discuss in later part of this order. Further, the computer software as generally observed has a shorter life cycle. When a shrink wrapped software is sold, the owner gets the price of the copy of the product/work. Even if the owner/licensor has fixed the duration or the time limit for the use of the product, on the expiry of which the same becomes unusable, he in-fact receives the price for the expected life of the work and product. In such case the purchaser pays the price for the product itself and not the license to use. 34. The next contention of the Revenue is that in case of software Licenses, the copyright owner gives a license to use the copyright in the software and that the owner of software exercises ....
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....mined whether the statutory rights of the purchaser/user of the software can be curtailed or done away by the terms of the above explained shrink wrapped or click wrapped mass licenses/ agreements. Firstly there are severe doubts about the enforceability of such agreements. In the so called internet license agreement, the end user is supposed to click the icon 'I agree' which means that the end user has agreed to the terms of the license agreement. However, it may be noted that such agreements do not ask the name or address or other details of the user. It is not mentioned in such type of agreements that who is using the product. It is the computer upon which such software is loaded that can be said to have agreed to abide by the terms of the software license as the user remains unidentifiable. In such type of software licenses, there are certain inbuilt mechanism made by the buyer preventing the misuse or infringement of the copyright in the product; the moment the end user attempts to violate such conditions, such software becomes inoperative on the computer or sometimes also damage the other data/applications on the computer. However, for the enforceability of such license agree....
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....e agreement, there are certain conditions which are in violation of the provisions of the Contract Act, then such conditions cannot be enforced and even under some circumstances, the whole contract can be held to be void. These terms of the mass software license are in the shape of 'standard terms' which the licensee or the user of the product often ignores while accepting the license before downloading the software. The courts in India in such a situation have opined that such standard conditions put in a contract which are often in the form of standard format and being so much detailed and numerous and are generally not read by the other party/buyer of the product, should be fair and any unfair condition restricting the users' rights relating to the goods or the services availed of, which can be held to be unreasonable and against the public policy, cannot be enforced. Thus these licenses create a clear conflict between copyright law and contract law, which have different purposes and objectives. The technological restrictions such as encryption technology and transactional design having restrictions on the development, use, services, may be called in question under the Competiti....
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....wner/purchaser of the work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it cannot be said that the user has infringed the rights of the purchaser, who in fact has paid the consideration to use the copyrighted work. The use of information in the work by the purchaser for which he purchases such a product/diskette/CD ROM is thus comes within the scope of fair use. Copyright does not protect the fair or exclusive use of the information rather, the purpose of copyright protection is to regulate the dissemination of information viz. production of the copies of the copyrighted work/information and distribution thereof. The use of information viz. a new technology or invention can, however, be protected under the Patents Act, 1970. However, it is pertinent to mention here that even under the Patents Act 1970, the computer Software can not be patented. The computer software, subject to certain exception, have been specifically excluded from patentable items under the Patents Act, 1970. 40. At this stage, we think it appropriate to discuss here the relevant provisions of the Copyright ....
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....ht in the work, unless he was not aware and had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or (b) when any person- (i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or (ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or (iii) by way of trade exhibits in public, or (iv) imports into India, any infringing copies of the work Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer. Explanation.- For the purposes of this section, the reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an "infringing copy" 42. Certain provisions of section 52 of the Copyright Act which are relevant are also reproduced as under: "52. Certain acts not to be infringement of copyright.-(1) The following acts shall not constitute an infringement of copyright, namely: (a) a fair dealing with a....
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....work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work and as per section 51 of the Act, copyright in a work shall be deemed to be infringed when any person without license granted by the owner of the copyright or in contravention of the conditions of a license so granted does anything, the copyright of the owner is stated to be infringed. However a perusal of the above provisions of the Copyright Act also reveals that even in some cases unauthorized uses of a copyright work is not necessarily infringing. An unlicensed use of the copyright is not an infringement unless it conflicts with one of the specific exclusive rights covered by the copyright statue. Further there are certain exceptions also. As per the proviso to sub clause (iv) to the clause (b) to section 51, import into India of one infringing copy of any work for the private and domestic use of the importer will not be considered as infringement. Further, the section 52 of the Act provides for certain other exceptions and the doing of such acts as mentioned u....
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....ight has passed. The proviso to section 57 of the Copyright Act has further clarified that the author of the work shall not have right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub section (1) of section 52 applies. 47. Further in case of imported software i.e. if the original work has been published outside India, as per the provisions of the Copyright Act, apart from the work being original and not copied from elsewhere, the work should be first published in India or if the work is published outside India, the author on the date of publication, if the author is dead, at the time of his death, should be citizen of India. In case of unpublished work, the author on the date of making of a work should be a citizen of India or domicile in India. Section 40 of the Copyright Act 1957, provides for International Copyrights. As per the section 40 of the Act, the Government of India may by an order published in the official gazette direct that all or any provisions of this Act shall apply to the work published or unpublished in any territory outside India. Such a right is extended in relation to countries which have entered....
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....ork/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957. 49. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, such as the use of it for the purpose for which it is supplied and to make backup copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is purchased etc. as provided under section 52, then in that event it cannot be said to be an infringement of copyrights of the author or owner of the work. As held by the Hon'ble Karnataka High Court in the case of "Samsung Electronics Company Ltd. & Others" (supra) while relying upon Article 3 sub section (2) of the DTAA with US as the identically worded article being there in almost all the tax treaties with other countries, that any term not defined in the co....
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....thus as per section 90 of the Income Tax Act, definition of 'royalty' as provided in the DTAA will prevail as over the general definition of 'royalty' provided under the Income Tax Act. Hence, without expressing our opinion or any view in relation to the definition of 'royalty' vis-à-vis 'computer software' as provided under the Income Tax Act, we have given our findings only in respect of the scope of 'royality' under the DTAA. 51. In view of our detailed discussion made above, the assessee can not be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of 'good' by the owner. The consideration paid by the assessee thus as per the clauses of DTAA can not be said to be royalty and the same will be outside the scope of the definition of 'royalty' as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not cons....