TaxTMI 
TaxTMI 
2017 (3) TMI 142
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....nd NPL it was agreed that NPL would grant licence to the appellant herein, a perpetual, non transferable non exclusive non sub licensable right in respect of those components of the software set out in Schedule-I to the said agreement. The preamble to this agreement refers to the fact that NPL is a developer and owner of copyright in respect of various software packages and that the appellant herein is desirous of using the NPL software package identified in Part-B of Schedule-I to the agreement subject to certain terms and conditions. Clause-3 of the agreement regarding grant of licence is as follows :- "3. Grant of Licence 3.1 Subject to the terms and conditions set forth in this Agreement, and in particular, the payment of the Licence Fees by ITC in accordance with this Agreement, NewsPage grants to ITC a perpetual, non-transferable (except as set forth in this Agreement), irrevocable, non-exclusive, non-sub licensable right: 3.1.1 in respect of those components of the Software (together with any Customisations thereof) licensed by reference to the number of users, for up to the Designated Number of Users to Use the specified Version of the Software; and 3.1.2 in res....
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....y third party or otherwise generally, to provide any Services: 4.2.1 unless specifically included as part of the Services in Schedule 2, and if so, only in accordance with the terms thereof. NewsPage may sub contract all or any part of the services with the prior written consent of ITC. However, NewsPage acknowledges that it shall, at all times, remain responsible for the Services provided by such sub- contractors. Clause-5 of the Agreement provides for consideration payable by the appellant to NPL for the rights conferred under the Agreement and the mode of payment of consideration and are not very material for rendering a decision on the issue that arises for consideration in this appeal. Clause 8 of the agreement deals with the intellectual property rights that are conferred under the agreement and it reads as follows :- "8. Intellectual Property Rights 8.1 Save for the Software Licence granted to ITC in Clause 3, all rights, title and interest in and to the Software (except in any Agreed Customisation(s) or Customisation otherwise commissioned by ITC), including without limitation, any patent, copyright, registered design, trade mark, goodwill or other industrial....
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....TC and NewsPage specifically agree otherwise in writing." Clause 9 of the agreement regarding confidentiality of information provides that the appellant herein shall maintain confidentiality of information in the form of software it receives under this agreement and it provides that the appellant herein will not reverse engineer, decompile or dissemble any part of the software or source code of the software. Schedule I and II to the agreement regarding software licence details and services to be provided by NPL under the agreement are given as Annexures 1 and 2 to this order. 4. In the light of the above terms of the agreement that the question whether the sums paid by the Appellant to NPL is in the nature of "Royalty" chargeable to tax in India has to be decided. 5. NPL is a foreign company and is a tax resident of Singapore. Under section 4 of the Act, the charge to tax is on the total income of every person. Section 5 of the Act explains the scope of total income of every person. Section 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received in India and any income which accrues or arises in India or ....
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....India and therefore the issue in this appeal will have to be confined to the question only as to whether the payment in question by the appellant to NPL is in the nature of royalty. We may also clarify here that there is a vague reference to the payment in question being in the nature of "Fees for Technical Services rendered" in para 21 of the CIT(A)'s order but the case of the AO as well as the CIT(A) is as to whether the payment in question is in the nature of "Royalty" and therefore that will be the only issue that arises for consideration in this appeal. 6. The definition of royalty as given in Article-12(3) of the DTAA is as follows: "Article 12(3): 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: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or informat....
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.... definition of "Royalty" as given in the DTAA as discussed in para-5 of this order and for other reasons that will be set out later. 10. On the question whether the payment in question is in the nature of royalty under the DTAA, the AO after extracting the definition of "Royalty" under Article 12(3) of the DTAA, expressed the view that the term royalty in the treaty is same as in the domestic law and it refers to: 1) patent, trademark, design or model, plan, secret formula or process. 2) Information concerning industrial, commercial or scientific experience. 3) Industrial, commercial or scientific equipment 4) Literary, artistic or scientific work including cinematograph films. According to him, mere use in the case of first three categories was royalty and in case of fourth category alone it was necessary that there should be use of copyright right. According to him, the minor differences were- 1) in case of first category, instead of transfer of any right, the treaty uses the word 'right to use' 2) the treaty uses specific words 'copyright of literary, artistic or scientific work' whereas domestic law says 'copyright, literary, artistic....
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....the form of a booklet with detailed drawings etc. It is in the physical form but it does not qualify as a tangible property or a copyrighted item. It comes under the know-how royalty. Similar is the case of software. Even the standardized software will fall under the category of know how royalty. The AO further observed that even if it is presumed that software on carrier media disks or tapes is an copyrighted article and not an intangible property, then sale of software on a CD will not be royalty but if the same software is downloaded on internet with the permission of developer, it would not be an article. Consequently, it would be in the nature of royalty. According to him taxability of a payment for acquisition of the same property cannot be determined on the basis of method of deliver. According to him the fact that the payment is made for the use of contents in a CD is alone relevant. Therefore software cannot be classified as copyrighted article. 12. For the above reasons, the AO came to the conclusion that the payment in question was in the nature of "Royalty" and that the appellant ought to have deducted tax at source at the time of making payment to NPL. Consequently ....
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....o section 9(1)(vi) of The Income Tax Act is concerned, the relevant part of the said provision is reproduced as under: "Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a ....
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....ing 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." The expression computer software was not specifically defined in the Act or the DTAA prior to insertion of Explantion-4 to Sec.9(1)(vi) of the Act. Therefore prior to such insertion, one has to look at the provisions of the Copyright Act, 1957 which defined various forms of intellectual property in India. We have to clarify that Explanation-4 to Sec.9(1)(vi) of the Act was inserted by the Finance Act, 2012 w.r.e.f 1-6-1976 which enlarges the definition of "Royalty" and therefore not beneficial to NPL in so far as it treats mere "right for use" or "right to use" a computer software as distinct from the definition in Article 12(3) of the DTAA which refers to 'use of' or the 'right to use' 'any copyright of literary, artistic, scientific work including. In view of Sec.90(2) of the Act NPL can opt to be governed by the DTAA which is more favourable rather than Explanation-4 to Sec.9(1)(vi) of the Act which imposes a tax burden on NPL. The question whether Explanation-4 to Sec.9(1)(vi) wh....
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....eveals that the computer software is included in the definition of literary 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 such as to reproduce the work, to issue copies, to make 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. A combined reading of clause-3 and clause-8 of the Agreement dated 15.12.2008 between the appellant and NPL, clearly shows that the Appellant had only a right to use the computer software and did not have right to use copyright in the computer software. In other words none of the rights as is envisaged under Sec.14(a) or (b) of the Copyright Act, 1957 was conveyed by the agreement dated 15.12.2008. Therefore the payment in question made by the Assessee to NPL cannot be regarded as "Royalty". As we have already observed the Act does not specifically include "computer software" in the term "literary work" and under such circumstances, if....
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....t be allowed to have the same retroactive effect on an international instrument affected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. As held by the Hon'ble Supreme Court in "Azadi Bachao Andolan" (2003) 263 ITR 607, these treaties are creations of a different process subject to negotiations by sovereign nations. Therefore insertion of Explanation-4 in the definition of "Royalty" in Sec.9(1)(vi) of the Act by the Finance Act, 2012, w.r.e.f. 1-6- 1976, has no effect whatsoever and the issue has to be decided in the light of the definition of "Royalty" as contained in the DTAA read with the relevant provisions of the Copyright Act, 1957. 23. The learned counsel for the Assessee also addressed arguments to the effect that the right to use the software in the present case is akin to sale of copyrighted article rather than sale of copyright. Reference was made to the decision of the Hon'ble Delhi High Court in the case of Direct....
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.... consideration received by the NPL was not royalty. The receipts would constitute income from business in the hands of NPL and since NPL did not admittedly have a permanent establishment in India its' income from business cannot be taxed in India in the absence of a permanent establishment. 24. We are of the view that the view expressed by the Hon'ble Delhi High Court in the case of DIT Vs. Ericsson AB, New Delhi (Supra), which is favourable to the Assessee, should be followed and therefore we hold that the consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a permanent establishment. 25. The learned DR submitted that the Appellant, whose obligation is to deduct tax at source u/s.195 of the Act, cannot place reliance on the DTAA as NPL could do in defence of non taxability in India of income deemed to accrue and arise in India and in this regard relied on the decision of the decision rendered by the ITAT Bangalore Bench in the case of Vodafone South (....