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2016 (12) TMI 1353
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....ts that the re-assessment is bad in law and action of the CIT(A) of upholding the action of the AO be reversed. Ground 2 - Re-characterization of income received from licensing of software as 'Royalty' and consequent disallowance - Rs. 14,400,044 2.1 The learned CIT(A) erred in upholding the disallowance made by the Assessing Officer (AO) in respect of income received from licensing of software by re-characterizing the same as 'Royalty' under the Double Taxation Avoidance Agreement ('DTAA') between India and Netherlands. 2.2 The learned CIT(A) failed to appreciate that the income was in the nature of business income and in the absence of a Permanent Establishment (PE) in India would not be taxable in India. 2.3 The Appellant submits that the disallowance of Rs. 14,400,044 made by the AO and confirmed by the learned CIT(A) is unwarranted and be deleted. Ground 3 - Treatment of the Appellant as not being the beneficial owner of the income from licensing of software (without prejudice to Ground 1 above) 3.1 The learned CIT(A) erred in upholding the finding of the AO in taxing the income received from licensi....
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....e of software should be taxed as "Fee for Technical Services". In the assessment order, the AO treated the income received by the assessee from sale of licence of software as royalty income amounting to Rs. 1,44,00,044/-. The claim of the assessee was that the aforesaid income was not liable to be taxed as royalty income but it was in the nature of business income and the same was not taxable in absence of PE of the assessee in India. But, Ld CIT(A) did not accept the submission of the assessee and upheld the order of the AO. 5. During the course of hearing before us, the Ld. Counsel of the assessee made detailed arguments to demonstrate that the transaction of sale of software by the assessee company to Indian customers did not give rise to any kind of transfer of right in the copyright. Our attention was drawn upon various agreements entered into between the assessee and the Indian customers and foreign holding company of the assessee. Our attention was also drawn on various clauses of the master agreement entered into by M/s Quad Inc. with Unilever N.V for sale of licensed products, i.e. ERP software by the said company or through its subsidiaries to Unilever group. It was de....
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.... circumstances of the case. The brief background is that assessee, viz. Qad Europe B.V. is a company incorporated in Netherlands. It is also a tax resident of Netherlands. It is a 100% subsidiary of Qad Inc., USA (in short, Qad Inc.) which is the ultimate parent company of Qad group. Qad Inc. was engaged during these years in the development and sale of Enterprise Resource Planning (ERP) software products. As per the global arrangement, the said company acted as a distributor of aforesaid software products only in USA and Latin American countries, whereas the other Qad group companies worldwide, including the assessee company, undertook marketing responsibilities for countries other than USA and Latin American countries. 9. During the years before us, the assessee company purchased software from Qad Inc. and resold the same to multinational companies outside USA and Latin American countries. These facts were demonstrated with the help of financial statements of the assessee company. Further facts are that Qad Inc. had entered into a multinational software product licence agreement dated 01-06-1977 (called as 'Master Agreement') with M/s Unilever N.V., a multinational company inc....
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....rmat that needs a special device or software. Yet it is a sale. Limitless ITunes users can buy the song simultaneously. This is a sale to each of them. In the case of CD containing software, say for example Microsoft Word, the medium would again be the CD holding the intellectual property, which would be the software technology. This would also be a sale, despite the fact that this same software technology could be put on unlimited number of CDs and sold to multiple users simultaneously. Effective control of that particular software on that one CD is passed to the buyer. The buyer could use it, alienate it, destroy it, and do anything at all that he likes with it. If he made illicit copies of it, this would constitute infringement; and that in itself would not make the transfer of the software on a CD a service. Even if the buyer transferred this non- transferable software, it would amount to a breach of contract provided in the CD package, just as it would under Monsanto India's sub-licensing agreement. However, this does not do anything to disqualify the transaction itself from being a sale. These are all sales. Para 46. In fact, we believe that this sub-licensing of....
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.... argument is that it tries to draw a completely unnecessary distinction between the technology and the medium in which it is delivered. Neither is the subject of the levy. The subject of the levy is not the technology nor the medium. It is the license; and the terms of that license are determinative. Where a license is purchased, it is still a sale, although what the user has 'purchased' is the right to use the software. Every license has a unique key and every sale is therefore uniquely identified. The purchase is therefore a transfer of the right to use that particular, identified software. The proprietory rights to the software do not have to be 'sold' or 'transferred '. Microsoft and Adobe retain all those rights, and all intellectual property continues to vest in them. This is, therefore, a transfer of the right to use that software, and to that extent, the intangible (the software) is sold; but the terms of that license allow the software vendor to retain complete seizin and dominion over all intellectual property rights. The transfer is not of those intellectual property rights, but of the right to use an identified and identifiable version of that so....
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....translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. Our above also finds support from certain other provisions of the Copyright Act." 12. Thus, from the above judgments, it may be noted that in the above said cases it has been held that in absence of transfer of rights to authorise doing of certain acts as mentioned in sections 2, 13 & 14 of the Copyright Act it cannot be said that there was transfer of copyright. Therefore, in view of these judgments it was vehemently argued that the payment on sale of software shall not fall within the definition of 'Royalty', as per DTAA. 13. Turning back to the facts of this case, it is noted that the rights and obligations of the parties, i.e. the assessee and its customer, viz. HLL flow from the Master Agreement. Therefore, the relevant clauses of this agreement were examined by us, and are reproduced below:- "Article 2-Licenses: 2.1 Grant: Upon issuance of a Purchase Order by any Participant to QAD, QAD shall, in consideration of the license fee to be paid, grant....
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....any portion of the object code. Participant may not use QAD Products without object code modules. The object code contains license number, date of license and other license information. This information is placed in the object code portions to prevent unauthorized and unlicensed distributions of the Products. Participant may not subvert or change any of this information. 9.2 Ownership of Modifications: The parties hereby agree that the ownership of all intellectual property rights embodied in, or by, any modification to the Programs created by, or for, Participant under this Agreement, shall vest solely in QAD. Participant hereby assigns all rights title and interest in all such modifications to the Products to QAD." (emphasis supplied in bold and underline) 14. On the basis of analysis of the relevant clauses of the Master Agreement and other facts brought before us, salient features of the agreement defining rights and obligations of the parties can be summarised as under:- i) The assessee Company has granted to HLL a non-exclusive, non- transferable, license for perpetual use. ii) The license was for use of Product on one Hardware System. A....
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...., magazine or similar periodical; iv) in relation to a musical work, any arrangement or transcription of the work; and v) in relation to any work, any- use of such work involving its rearrangement or alteration; 16. Now, if we analyse and compare various provisions of the Copyright Act with the relevant clauses of the master agreement, it is noted that the said agreement does not permit HLL to carry out any alteration or conversion of any nature, so as to fall within the definition of 'adaptation' as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of HLL in India and no right was given to HLL for commercial exploitation of the same. It is also noted that the terms of the agreement do not allow or authorise HLL to do any of the acts covered by the definition of 'copyright'. Under these circumstances, the payment made by HLL cannot be construed as payment made towards 'use' of copyright particularly when the provisions of Indian Income-tax Act and DTAA are read together with the provisions of the Copyright Act, 1957. 17. Further, it is also noted by us....
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.... not: a. Contrive for the software to be executed by more than the number of simultaneous users for which you have purchased seats; b. modify, translate, reverse engineer, decompile, disassemble or create similar or derivative software programs based on software products you have purchased; or c. assign, rent or lease any rights in the software or accompanying documentation in any form to any third party without the prior written consent of DCL or its authorized channels which, if given, is subject to the third party's consent to the terms and conditions of this agreement." 6. This clause fairly indicates that the end user can install the software on any number of computers, make copies for back up purposes for his own use only but with the qualification that he cannot operate/execute simultaneous copies of the software product more than the purchased seats. For example, if three copies of a product are purchased, these three software can be installed in any number of computers, but, at a time the usage cannot by of more than three seats. If only one copy is purchased, that can be installed by the end customer on any number of computers, but, at a time only one ca....
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....etrospective amendment is made to the provisions of the Act governing the deductibility of the expenses, the same shall apply under the Treaty as well. 8.2. Article 3(3) of the DTAA provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning tax to Which the Convention applies. The nitty-gritty of Article 3(3) in the present context is that if a particular term has not been defined in the Treaty but the same has been defined in the Act and further there is a retrospective amendment to that term under the Act, then it is this amended definition of the term as per the Act, which shall apply in the Treaty as well. If however a particular term has been specifically defined in the Treaty, the amendment to the definition of such term under the Act would have no bearing on the definition of such term in the context of the Convention, unless the DTAA is also correspondingly amended. A country which is party to a Treaty cannot unilaterally alter its provisions. An amendment to a Treaty can be made bilaterally after entertaining deliberations from both the countries ....
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....rmula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic." 10. Para 1 of this Article provides that `Royalties' arising in India and paid to a resident of UK may be taxed in UK. Para 2 provides that such royalties may also be taxed in India. As the assessee is a resident of UK,income from royalties arising in India, is otherwise chargeable to tax in India at the stipulated rate of tax. But in order to tax any amount under this Article, it is sine qua non that the receipt must fall within the scope of `Royalties' as defined in para 3 of the Article 13. The AO has enclosed the case of the assessee within sub-para (a) of para 3. It is apparent that sub-para (b) of para 3 of Article 13, dealing with consideration for the use of any industrial, commercial or scientific equipment etc., has absolutely no relevance in the present context as no equipment has been ....
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....e 13 along with literary, artistic or scientific work, patent, trademark etc. Such language of the DTAA is in sharp contrast to the specific use of the term `computer software' or `computer software programme' together with literary,artistic or scientific work, patent, trademark etc. in many DTAAs. To illustrate, Article 12 of the DTAA between India and Malaysia defines 'Royalties' to mean `payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work........... plan, know how, computer software programme, secret formula or process.....' Similarly, the DTAA between India and Kazakhstan defines the term 'royalties' in Article 12(3)(a) to mean : '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 software, cinematograph films...'. Similarly, the DTAA with Turkmenistan also defines `Royalties' in Article 12 to mean : 'payments of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work, ..... computer software, any patent, trade mark...'. It....
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....isions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely :- "a. in the case of a literary, dramatic or musical work not being a computer programme,- i. to reproduce the work in any material form including the storing of it in any medium by electronic means, ii. to issue copies of 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 rental does not apply in respect of comp....
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....c. as royalties, there can be no question of including consideration for the use of a literary or artistic work, etc. within the ambit of `Royalties' as per Article 13(3)(a) of the DTAA. 12.7. There is another dimension of this issue. While going through the Distributors Agreement, we have noted that the assessee has simply purchased shrink-wrapped software or off- the-shelf software from the Corporate. The assessee was not allowed to use the copyright of such software, which obviously vest in the Corporate. Since the assessee itself has not acquired any copyright in the mining software, it cannot resell or transfer anything more than what it has acquired. We, therefore, hold that the consideration received by the assessee for sale of shrink wrapped software cannot be considered as `Royalties' within the meaning of Article 13 of the DTAA as the same is a consideration for sale of a copyrighted product and not use of any copyright. 13.1. Now we take up the contention of the ld. DR that provisions of section 9(1)(vi) should be applied to determine the taxability of the amount. It was contended that as the ld. AR has admitted the amount of sale of software covered un....
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....our by choosing to be governed by the DTAA. 14.1. Be that as it may, we find that there is another aspect of the matter. This is without prejudice to our finding that consideration for sale of software does not fall within the scope of the term `Royalties'. Even if the view point of the AO is accepted for a moment, with which we do not really agree, that such amount falls under para 3(a) of Article 13, in our considered opinion, even then the amount cannot be taxed as `Royalties' because of the operation of para 6 of Article 13, which reads as under : - "6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishm....
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....sal of the aforesaid decision, it is clear that all the arguments have been duly analysed and addressed by the bench while deciding this issue. The articles of DTAA between India and Netherlands are identically worded. No amendment has been brought out in the DTAA so far. Article 12(4) of DTAA between India and Netherlands defines the term 'Royalty'as under:- "4. The term "royalties" as used in this Article means 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 motion picture films and works on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." 20. It may be noted from the above said definition that it is identical to the definition given in the Indo UK DTAA. Further, this definition does not include the word 'computer programme' or 'software'. It has been held by the bench after making analysis in detail that the payment is made for the customer for using the software as such and not the 'process' involved in ....