TaxTMI 
TaxTMI 
2017 (4) TMI 763
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....peals the core issue involved is, whether the payments received by the assessee from IT service providers, like WIPRO & IBM for providing network access to use copyrighted software is in the nature of "royalty" or not. 2. In order to understand the facts and implications thereof on the issue involved, we will take up the appeal for the A.Y. 2006-07, wherein the Revenue has raised the following grounds:- "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the payment received by the assessee for network access and related services is payment for acquisition of copyrighted software and not for any copyright over such software and hence the payments have wrongly been held by the AO as royalty. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that the payments in question were for the right of access and use of software (the intellectual property rights of which belong to the assessee) which would qualify as royalty under clause 4 of Article 12 of the DTAA between India and the Netherlands, being payments received for use of secret process." 3. The brief facts qua the issu....
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.... from external service providers l ike WIPRO and IBM, S/TI BV is engaged in providing the necessary network access and related services to such service providers as well. 3.4 For this purpose, reference can be made to the scope of services to be rendered by SITI BV to WIPRO under the Services Agreement (attached as Annexure 3) reproduced below: Article 3 - Provision of Services "SITI BV shall provide the IT Service Provider with the services." Further, 'Services has been def ined in Article 1 - Def initions as "the combined Sub-services provided by S/TI BV to the IT Services Provider under this Agreement, which Sub-services include the GI Services, the STO Services and the provision by SITI BV to the IT Service Provider and Service Personnel of access to and/or use of GI sof tware and/or Opt ional Software........ Similar provisions are contained in the agreement between SITI BV and IBM (attached as Annexure 4). 3.5 Taxability of the services provided by SITI BV 3.5.1 SITI BV is a company incorporated in The Netherlands. SITI BV is a tax resident of The Netherlands eligible to claim the benefits conferred by the Dou....
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..... In pursuance of the agreement entered into between the assessee and service providers, the amount received by the assessee in various assessment years are as under: Name AY 2006-07 AY 2007-08 AY 2008-09 Total Wipro 3,63,17,017 84,74,506 52,92,362 50,083,885 IBM 2,73,26,777 63,48,802 77,25,598 41,401,177 Total 6,36,43,794 1,48,23,308 1,30,17,960 91,485,062 According to the assessee this amount cannot be considered as 'royalty' and in absence of any PE, no business income can be taxed in India. 6. The learned AO referred to certain clauses of the MSA and held that the amount received from these IT service providers' for access/use of software were in the nature of 'royalty' not only within the meaning of the Act but also under the treaty. He discussed in detail the concept of royalty and observed that it connotes payment made to a person, who has an exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or a thing. He held that Explanation 2 to section 9(1)(vi) is applicable, because software is an intangible property and considerati....
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.... reveals that the agreement forbids Wipro/IBM from transferring or modifying the software. The agreement also forbids them decompiling, reverse engineering, disassembling or decoding the software. The agreement also provides that the end user shall use the software only for the operation and shall not sublicense or modify the software. The perusal of the agreement clearly reveals that WIPRO/IBM has got no right as envisaged in section -14 of the Copyright Act to duplicate the software, to issue copies of software in public or to reverse engineer, de compile or modify the software. Thus, sale of software by the Appellant to WIPRO/IBM cannot be said to be the transfer of the copyright either in part or in whole. Thus, consideration paid by WIPRO/IBM to Appellant for acquiring copy of software is not for the use of copyright or transfer of right to use of copyright. As mentioned above, copyright is different from the work in respect of which copyright subsist, WIPRO/IBM has only got a copy of software without any part of the copyright of the software. Thus, payment by WIPRO/IBM for acquiring copy of software does not amount to royalty within the definition of Article- 12(3) of the DTA....
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....M Netherland B. V., with contract number LDMO4/00005. ... "MSA Services" shall mean the IT services provided under MSA by the IT Service Provider either directly or as a sub-contractor of affiliate of IT Service Provider, as further described in a Statement of Work entered into by the IT Service Provider (or an IT Service Provider Affiliate,) and a Shell Company. "MSA Service Area" shall mean the physical separated and secured area as described in the MSA where (unless otherwise agreed in a particular Statement of Work for the MSA Services to be provided under that particular Statement of Work only) the MSA Services shall be provided by the IT Service Provider ... "Services" shall mean the combined Sub-services provided by SITI to the IT Services Provider under this Agreement, which Sub-services include the GI Services, the STO Services and the provision by S117 to the IT Service Provider and Service Personnel of access to and/or use 401 software and/or Optional Software, all as further specified in Exhibit A. "GI software" shall mean the mandatory GI client software that shall be provided by SITI to the IT Service Provider as part of the GI Services. The exact ma....
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....e IT Service Provider GI Focal Point shall only request SITI for access to and/or use of Optional Software, if the IT Service Provider requires such access and/or use in order to provide the MSA Services agreed in certain Statements of Work. The IT Service Provider shall ensure that the IT Service Provider GI Focal Point shall be duly authorized to financially commit the IT Service Provider for the order placed by the IT Service Provider GI Focal Point. The IT Service Provider shall furthermore ensure that the IT Service Provider GI Focal Point shall follow all instructions as may be given from time to time by SITI. Access/Use restrictions. The IT Service Provider shall ensure that: I) only Service Personnel with a strict need to use and/or access the GI software and/or Optional Software in order to provide MSA Services shall use and/or access the GI software and/or the Optional Software; and 2) such Service Personnel shall only access and/or use the GI software and Optional Software in a normal operational manner and only in so far as strictly necessary to provide USA Services; and 3) unless otherwise agreed with SITI, the GI software and Optional Software shall onl....
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....e Provider shall permit SITI or its authorizedrepresentative's at all reasonable times, to audit the IT Service Provider's and Service Personnel's access to and use of the GI software and Optional Software. The IT Service Provider shall cooperate with S111 in carrying out such audit. ARTICLE 5. INDEMNITY. 5.2.1. By SITI. SITI will defend, indemnify and hold harmless the IT Service Provider against any losses, damages, claims, suits, liabilities, judgments and expenses (including but not limited to attorneys 'fees and other costs of litigation) brought by a Third Party that the access and/or use of the GI software or Optional Software by IT Service Provider and/or the Service Personnel in accordance with this Agreement Infringes such Third Party's Intellectual Property Rights. As a condition of this indemnity, IT Service Provider shall (i) notify SITI promptly in writing of any allegation of infringement (ii) make no admission relating to the infringement; and (iii) allow SITIto conduct all negotiations and proceedings and give SITI all reasonable assistance. The foregoing indemnity shall not apply to the extent that the infringement or alleged infringeme....
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.... Party. ARTICLE 6. OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS. The Intellectual Property Rights in the GI software and Optional Software are owned by SITI and/or SITI's Third Party licensors and remain vested in SITI or its Third Party licensors (as applicable). SITI is not expected to make, create or generate any Work Products in the performance at the Services under this Agreement, however in the event that SITI does make, create or generate any Work Products in the performance of the Services, the Intellectual Property Rights in such Work Products shall vest exclusively in SITI and/or SITI's Third Party licensors as applicable. For the avoidance of any doubt, the ownership of/he Intellectual Property rights of any work product made. created or generated by the 11 Service Provider (or the IT Service Provider's affiliates as the case may be in the performance of MSA Services, shall he solely determined in accordance with the Statement of Work under which such MSA Services were provided. ARTICLE 8. TERMINATION OF THE AGREEMENT AND EFFECT OF TERMINATION. 8.2. Effect of Termination. Upon termination of this Agreement, for whatever reason, the IT Service P....
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.... the IT network of Shell Companies in so, far as required in order to provide the MSA Services and shall comply with all further instructions as may be provided from time to time by SITI with respect to the IT Service Providers access and use of the IT network of Shell Companies. Exhibit A: Services Section I GI Services The, following services are components of the GI Services and shall be provided by SITI under the Agreement to the IT Service Provider: I. Office Computing Services. 2. Messaging and Time Management services. 3. Information Access and Sharing services. 4. Remote Access Services. The above-mentioned services shall be provided by 5177 in the same manner as they are provided to other Shell Companies and in accordance with the relevant sections of the GI service level agreement as agreed between SITI and other Shell Companies. In the event of a conflict between the relevant sections of the GI service level agreement as agreed between SIT1 and other Shell Companies and the terms and conditions and Exhibits of this Agreement the terms and conditions and Exhibits of this Agreement shall prevail. The provision of the Services shall be governed....
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....and clearly states that GI/operational software shall at all times remain vested with the assessee. Similarly, termination agreement under Article 8.2 provides the immediate stop of access of using GI/operation software and the party shall return the software along with many other things. 10. The learned counsel further submitted that all these terms and conditions as enshrined in MSA will only go to show that the assessee does not in any manner give any right to use any copyright embedded in the software or to make copies or sell the software and only leant right to access/use the software for its own business purpose. WIPRO/IBM does not get any right per se in the software and, hence, such a payment cannot be treated as royalty. He contended that 'royalty' as per DTAA is different from the term 'royalty' as defined under the Indian IT Act, which has a much wider scope. Further, access to the software/network access is not a "process" as referred by the learned AO, because the assessee has not allowed WIPRO/IBM to use the "process" by using the software as they do not have any access to the source code. What is allowable for their use is their software product as such and not a....
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....ost respectful submissions, the Bombay high court decision in the case of CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom HC)rendered in the facts peculiar factscase has notbeen appreciatedin the proper perspective in various decisions of the Delhi high Court and Mumbai Tribunal relied upon by the assessee. While appreciating the Siemens AG, supra, the following facts may kindly be kept in mind: i) The exact question of law before the Hon'ble High court was NOT that whether Amendments in the I.T. Act can be read into the DTAA or not and therefore, the Hon'ble High Court cannot be said to have answered it as claimed. ii) In the said case, old DTAA (1960) between India and Germany was under consideration in which "Royalty" had not been defined.( Para 15). iii) "Royal ty" under the I.T. Act has been def ined in Explanation 2 to S.9(1)(vi), inserted by the Finance Act 1976 w.e.f 01-06-1976. iv) The agreements under consideration in the case of Siemens AG, supra which gave rise to the impugned income were entered into before 01-06-1976 when there was no definition of "Royalty" both under the I.T. Act and under the DTAA. The A.Y. under consideration in Siemens AG ....
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....ould be read into modern DTAAs. iv) Mumbai Tribunal , in the case of Viacom 18 Media (P. ) Ltd. (2014) 162 TTJ 336 (Mum) has explained the import of Bombay HC decision in right perspective in paras 16 and 17 of its order while rejecting the assessee's argument that the HC has held that amendments in the Act cannot be read into DTAAs. v) The Bombay HC has approved ambulatory approach (para 22) to interpretation of treaties against Static approach adopted by the Delhi HC. Klaus Vogel in his commentary has also advocated ambulatory approach. 12. After considering the aforesaid submissions and the relevant terms of 'Master Service Agreement' (as reproduced above) between the assessee and the IT Services providers, i.e., WIPRO/IBM, it is quite ostensible that:- • Firstly, any kind of right granted to WIPRO/IBM cannot be passed on or transferred to any other person and only WIPRO/IBM is legally permissible to exercise this right. • Secondly, the right to access/use of software is again subject to various terms and conditions, which has been highlighted under Article 4 • The right which has been given to WIPRO/IBM is not unfettered but h....
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....word "use of process", because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the various Courts have consistently opined that the definition of "copyright "as given in the 'Copyright Act, 1957' has to be taken into account for understanding the concept. Section 14of the said Act defines the 'copyrights' to mean as under: "14. Meaning of copyright - For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorise 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 ....
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....o the public. Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation". 13. Thus, the definition of 'copyright 'in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. Here in this case, none of the conditions mentioned in section 14 of the 'Copyright Act' is applicable as held by the learned CIT(A); and is also is evident from the terms of MSA, because no such rights has been given by the assessee to the IT Service providers. 14. Further by making use or having access to the computer programs embedded in the software, it cannot be held that either WIPRO/IBM are using the process that has gone....
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....d by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product 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 produc....
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..../licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, deassembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee Company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee 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 licensee shall return the software including supporting information and licence authorization device to Infrasoft. Xxx xxxx xxxxx xxxxx xxxxxx xxxxx xxx....
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....uct for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software". The ratio of the above decision clearly clinches the issue which is applicable in the case of the assessee also. This ratio and principle has been followed and reiterated again in the case of Principal CIT vs M.Tech India Pvt Ltd (supra) and again in the decisions of Alacatel Lucent, Canada, reported [2015] 372 ITR 476 , wherein Hon'ble Delhi 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 r....
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....efore, liable to sales tax. Following discussion in this behalf is required to be noted: - "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, 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 S....
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....rified as to why the said judgment of Madras High Court cannot be applied in such cases after observing as under:- "31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I, [2014] 361 ITR 575 (Mad), the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today, supra note 22 recognizes that the question will have to be decided and the submission argued, Verizon, supra note 23 cites no reason for the extension of the amendments to the DTAA. As regards the decision of Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra), referred to by d. CIT DR, the Hon'ble Delhi High Court has also dealt with this point and made distinction that the issue and situation before the Hon'ble Bombay High Cour....