TaxTMI 
TaxTMI 
2016 (7) TMI 1135
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....m/2010 which has been filed against order dated 30th July, 2010 passed by CIT (Appeals)-10, Mumbai for the quantum of assessment passed under section 143(3) for the assessment year 2006-07. In the grounds of appeal, the revenue has raised following grounds: "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that consideration received on sale of computer software programme i.e. C D Rom as business income instead of "Royalty Income" treated by the AO after detailed reasoning". 3. The facts in brief as culled from the impugned order of CIT(A) are that, assessee-company is a non-resident company registered under the laws of Netherlands. It is engaged in the business of development and sale of computer software and provides other services in relation to its software product. The assessee in India had entered into a 'Distribution Agreement' with INFOR Global Solutions India Pvt. Ltd. (herein after referred to as INFOR India), which is an Indian subsidiary company for supply of its software to Indian customer on which it receives a fix percentage sum as per the agreement. INFOR India is an independent distributor of computer software whi....
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....ta Information Technology Ltd v DCIT [2006] 7 SOT 465 (Bom) 5 Sonata Information Technology Ltd v ADIT [2006] 103 ITD 324 (Bang) 6 ACC Ltd v CC [2001] 128 ELT 21 (SC) 7 IMP Power Ltd v ITO [2006] 9 SOT 165 (Bom) 4. The Ld. AO examined the legal aspect in detail and ultimately held that, the payment received by the assessee for sale of software is nothing but "royalty" not only under the Income Tax Act but also within the meaning of India-Netherland DTAA and accordingly, assessed receipts @ 15% being tax rate applicable to the 'royalty income' as per Article 12 of DTAA. However, before coming to this conclusion, he has passed a very detailed order dealing with the various legal aspects like, the meaning of software as defined in Explanation 3 to section 9(1)(vi); explanation to section 80HHE; guide lines under OECD Commentary; etc. He also dealt, whether the sale of software can be treated as sale of goods or not and for this proposition he also distinguished the decision of Supreme Court in the case of Tata Consultancy Services v State of Andhra Pradesh, reported in [2004] 271 ITR 401 as relied upon by the assessee and also interpreted the concept of 'royalty' based on c....
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....s copyrighted software product as against the payment of or any copyright itself as contemplated in the definition of 'royalty' under the Act. The customer does not have a right to use the copyright embedded in the software. In other words, Indian customer is not permitted to make copies and sell the software except for limited right to access the copyrighted software for his own business purpose and not to acquire any right to exploit the copyright in the said software. The term "use of copyright" enforces or encompasses the exploitation of a right embedded in the copyright and here in this case merely a user right has been given in a limited manner and consideration paid for such limited right cannot be reckoned as use of right to use a copyright. Thus, in terms of Article 12(4) also, the said payment does not fall within the scope of royalty. Further, the assessee referred to the definition of term of copyright given in the Copyright Act, 1957 and drew specific attention to section 14 to contend that under the definition of Copyright Act also there cannot be any right to use copyright. Besides this, the assessee relied upon following decisions: S.No. Case Law Citation 1 A....
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....any kind received as consideration for the use of or right to use any copyright of a literary, artistic, or scientific work including cinematographic films, any patent, Trade mark, design or model, plan secret formula or process or for information concerning industrial, commercial or scientific experience" And held that:- 1.4.6 In view of above, it can clearly be seen that the definition of royalty in Article -12 of the DTAA is more restrictive than what is provided in Section 9(1)(vi) of the Act. 1.4.7 The appellant is a tax resident of Netherlands and therefore is entitled to the benefit of the India - Netherlands DTAA over the provisions of the Income-tax Act. The definition of royalty in Article 12(4) of the India-Netherlands DTAA states that any "payment of any kind received as consideration for the use of or right to use, any copyright of a literary, artistic, or scientific work including cinematographic films, any patent, Trade Mark, design or model, plant secret formula or process or for information concerning industrial, commercial or scientific experience" would qualify as royalty. 1.4.8 Definition of copyright is not provided in the India - Netherlands DTAA and th....
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....wholly. Hence, for reasons stated as above and on the basis of the various decisions cited above, it is held that the Indian customer have acquired only a copy of software and did not acquire any copyright over such software as envisaged by section 14 of the Copyright Act. Under these circumstances, payment / consideration received by the appellant cannot be said to be payment for the use of or right to use of copyright. Thus, payment received amounted only for sale of copyrighted article and does not amount to royalty within the meaning of Article 12(4) of the India-Netherlands DTAA. Accordingly, it is held that the AO has not justified in holding the payment / consideration received by the appellant in the nature of royalty. The payments under consideration are therefore in the nature of business income of the appellant. Since the appellant has no PE in India the consideration received by it is not taxable in India. In the light of these facts the addition of Rs. 3,75,25,291/- made by the AO is therefore deleted" Thus, he held that the consideration received by the assessee on sale of computer software in India cannot be taxed as "royalty". 8. Before us, the Ld. DR relying upo....
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....nly a sale of copyrighted article. Regarding reliance placed by the Ld. DR on Karnataka High Court decisions in CIT vs Synopsis International Old Ltd. and CIT vs. Samsung Electronics Co. Ltd, (supra), he submitted that, Hon'ble Delhi High Court on several occasion had a chance to dealt with these decisions of the Hon'ble Karnataka High Court and their lordships have not only distinguished the same, but have not followed the ratio after detailed reasoning. He also filed a separate compilation of various Delhi High Court and ITAT decisions and submitted that the payments made to acquire software products either independently or embedded in a hardware or any product or sale of any copyrighted article, the consideration received would have to be treated as payment for purchase of the product rather than consideration for the use of the patented or copyright itself and, therefore, cannot be considered as royalty. The lists of the decisions filed are as under:- S.No. Name Citation 1 The Principal Commissioner of Income Tax Vs M. Tech India (P) Ltd. (Delhi High Court) ITA 890/2015 (Del) 2 Commissioner of Income Tax v Dynamic Vertical Software India (P) Ltd. (2011) 332 ITR 0222 ....
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....g Abrasive Ltd vs Asst. Commissioner Of Income Tax, Circle 8, Ahmedabad [2011] 44 SOT 652 (Ahd) 6 TTK Prestige Ltd. vs ACIT [TS -555-ITAT-2014(Bang) 10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of "royalty" or business income. In case, if it is a 'business' income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India and if it is a "royalty", then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within the terms of "royalty" under Article 12(4) of India-Netherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo- Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the tr....
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....ived as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience". From the plain reading of the article it can be inferred that, it refers to payments of any kind received as a consideration for the use of, or the right to use any 'copyright' of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as "royalty", it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting 'royalty' in Para 4 are for a consideration for the 'use of' or the 'right to use' any copyright.......... The key phrases "for the use" or "the right to use any copyright of"; "any patent.......; "or process", "or for information.........,"; "or scientific experience", etc., are impor....
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....fer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental 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 copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) In the case of cinematograph film, - (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) In the case of sound recording, - (i) t....
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....new enlarged definition of 'royalty'. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of "royalty" in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the 'royalty' has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty. 13. Now, we come to the various decisions relied upon by the parties. Before us, the Ld DR has heavily relied upon the two decisions of Karnataka High Court, one in the case of Synopsis International Old Ltd. (supra) and other in the case of Samsung Electronics Co Ltd. (supra). Both....
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....oduct with the owner retaining his copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has is necessary to invoke the royalty definition. Viewed from this angle, a nonexclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rig....
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....were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. Xxx xxxx xxxxx xxxxx xxxxxx xxxxx xxx xxxxxx 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We....
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....elhi High Court relying upon its earlier two decisions in the case of DIT vs Ericson, [2012] 343 ITR 470 and DIT vs M/s Nokia Networks, reported in 358 ITR 259 (Del) concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. The relevant observation of the High Court in Alcatel Lucent (supra) in this regard reads as under: "We have noticed, at the outset, that the ITAT had relied upon the ruling of this Court in Director of Income Tax V. Ericsson A.B. (2012) 343 ITR 470 wherein identical argument with respect to whether consideration paid towards supply of software along with hardware - rather software embedded in the hardware amounted to royalty. After noticing several contentions of the revenue, this Court held in Ericsson A.B. (supra) as follows: "54. It is difficult to accept the aforesaid submissions in the facts of the present case We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods.....
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....tes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. TAXPUNDIT.ORG Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes... In Advent Systems Ltd. v. Unisys Corpn, (925 F. 2d 670 (3rd Cir. 1991)), relied on by Mr. Sorabjee, the c....
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....issed. 14. Now, we shall take ITA No.3049/Mum/2011; The aforesaid appeal is arising against the impugned order dated 25.02.2011 passed by CIT(A)-11, Mumbai in relation to the order passed under section 201/201(1A) in the grounds of appeal the assessee has raised following ground: "On the facts and circumstances of the case and in law, the ld. CIT(Appeals) erred in holding that consideration received on sale of computer software programme i.e. C.D. Rom is not a "Royalty Income" as per the Article 12(4) of DTAA between India and Netherlands ignoring the facts of the case and detailed reasoning given by AO". 15. As admitted by both the parties, issue involved in this appeal is exactly the same. Accordingly, our finding given in the aforesaid appeal will apply mutatis mutandis in this appeal also and accordingly, the ground raised by the revenue is treated as dismissed. 16. Now, we shall take up assessee's appeal in ITA No.776/Mum/2013 for the AY 2006-07 arising out of Final Assessment order dated, 11.10.2012 passed under section 144C(5) r.w.s. 148 in pursuance of the direction given by the DRP-I, Mumbai under section 144C(5). 17. At the outset, it is noted that appeal filed by ....
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....at the licensee obtains a "right to make a copy of the software of the equipment in the object code form", without appreciating the fact that the Appellant does not have a right to create copies of the licensed software as specifically stated in the Agreement. 5. The Hon'ble DRP erred in holding that the Appellant had exercised the right which amounts to exercise of a copyright provided under the Copyright Act, without appreciating the fact that the Appellant doesn't have the right to access or copy the unique license key that is required to make the software functional / operative. 6. The Ld. AO and the Hon'ble DRP erred in law in treating the software as a secret process and a property similar to patent, invention, design, secret formula, thereby treating the sale of software products as transfer of rights in the software. 7. The Ld. AO and the Hon'ble DRP has erred in treating the sale of the software products which is a copyrighted article as 'use or right to use of a copyright'. 8. The Ld. AO and the DRP further erred in law in passing the order based on the above contention without considering the various judicial precedents cited by the Appellant in its written submi....
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....alty" payment is Rs. 4,65,46,164/- received towards sale consideration for computer software products supplied by the assessee to its Indian subsidiary. The said sale consideration of CD Rom has been treated as 'royalty' by the AO by and large on the same footing and reasoning as has been discussed in the appeal herein above and accordingly the same has been taxed under the DTAA. As admitted by the parties the facts remain pari-materia. 20. However in this year Ld. DRP has raised certain additional points, in this appeal which reads as under:- "The assessee's submission has been considered. As regards the royalty under the domestic law the provisions of section 9(1)(vi) have been amended by the Finance Act, 2012 and explanation 4 has been Inserted therein. The said explanation specifically provides that use of computer software would amount to royalty. As regards application of the DTAA it is relevant to refer to pare 2 of article 3 Indian Netherland DTAA, The said article provides that for interpreting any provision of the convention, when any term is not defined therein, the term shall have same meaning that it carries under the domestic law of the stale applying the conventio....
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.... above reasons, the facts of this case shows that this is not the case of a sale of copyrighted article but a case of use of computer software resulting in exercising of copyright. For all the above reasons, the action of the AO to tax the same as royalty is upheld. 21. After considering the direction of the DRP and also the order of the AO, we find that the issue involved herein is exactly same as has been decided in ITA No.7048/Mum/2010, except that the Ld. DRP has decided the issue against the assessee, by taking additional reasoning that now in wake of new Explanation 4 to section 9(1)(vi) that has the enlarged the definition of "royalty" should be read into DTAA by virtue of Article 3(2). On this aspect we have already dealt with and have given our reasons that, the amendment carried out in the domestic law with retrospective effect will not automatically alter the provisions of DTAA. Article 3(2) of DTAA provides that, as regards the application of the Convention by one of the States any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies. This en....
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....ystems may also contain software programs for which Licensee is not granted a license for use. Licensee may not make any use of any such software programs for which Licensee is not expressly obtaining a license for use under this Agreement. Any rights not expressly granted in this Agreement are expressly reserved. Licensee also has the right to use the Component Systems, in Object Code form temporarily on the Equipment, for disaster recovery of Licensee's computer operations (i.e., loaded on a separate, non-production, off-powered server)". "Source Code". Unless otherwise explicitly provided in an Order Form, Licensee has no license to access or use, or any other rights in or to, the Source Code for a particular Component System. If the Order Form grants Licensee a license to use Source Code for a particular Component System, then Licensee has the limited right to use such Source Code to modify such Component System for its own, internal computing operations. Subject to the foregoing, Licensee will not disclose all or any part of the Source Code for a Component System to any person except Licensee Employees who, before obtaining access to the Source Code, have been informed by Li....