TaxTMI 
TaxTMI 
2017 (5) TMI 916
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....rcumstances of the case and in law, the Ld. CIT-A erred in holding that the payments made to M/s. Minitab Inc. (USA) for the purchase of computer software does not amount to business receipts in terms of Article 7 of Double Taxation Avoidance Agreements between India and USA. The appellant craves leave to add, amend, alter, modify and/or delete any of the above grounds of appeal on or before the date of hearing. 3. The assessee for financial year 2007-08 has procured a software product on which Minitab Inc. of USA has a copyright. No TDS was deducted by the appellant in terms of Article 7 of the DTAA between India and USA. Subsequently a notice u/s. 201(1) was issued for non deduction of TDS u/s. 195(1). It was explained to the Ld. A.O that M/s. Minitab Inc. is a company resident in USA and does not have any PE in India. Therefore, provisions of the DTAA between India and USA would be available to M/s. Minitab Inc, since, section 90(2) provides that the provisions of the Act would apply only if they are more beneficial to M/s. Minitab Inc. The Ld. AO rejected the claim of the assessee by holding that the assessee was getting only license to use the software and accordingly he....
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....e of ING Vysya (supra) has also held that payment for acquisition of software to use hi business is royalty. The facts of the present case are widely different than the facts of the Motorola case and are similar to the case of ING Vysya and Gracemac. Therefore, the judgment of Special Bench in the case of Motorola is not applicable to the facts of the present case for the detailed reasons discussed by Hon'ble Delhi IT AT and also as above in this order. Therefore, following the judgment of the' ITAT Delhi. in Gracemac and ITAT Bangalore in the case of ING Vysya, I hereby hold that the remittance made by the assessee to USA to purchase a shrink wrapped software for use in India under a non-exclusive and nontransferable license together with the right to receive technical services, updates and maintenance of the software, is taxable as royalty u/s. 9(1)(vi) of the Incometax Act and also under clause 12(3) of Indo-US DTAA. Therefore, the assessee was liable to do TDS u/s. 195 of the Income-tax Act before remitting the money to the US supplier. Hence, the A.O. is justified in treating the assessee as assessee in default and raising the demand u/s. 201 (1) and 201(1A) of the Inc....
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....nerally there are two types of softwares namely, "Unbranded software" which is specialised and exclusively custom made to cater to the needs of individual clients, and "Branded software" or "off-the-shelf software" which is standardised and marketed as such. When off-the-shelf software is sold there is no doubt that the essence of such transaction is an outright sale. The said software purchased by the appellant company is "off the shelf" software/Shrink wrapped Software. The appellant company is authorized to use only the software and cannot tamper/copy/sale the same to any other person. The said software is delivered electronically by downloads from the respective websites. Activation key/code is then e-mailed for initialization. Software is then installed by putting the activation key/code and prompt-based installation is done thereafter. Thus, the appellant company does the installation by itself and no onsite support is provided by any of the vendors. Source code is not made available to the appellant company and it is provided with Activation code only for installation. Therefore, the appellant company does not have any copyright to give it forward to any other person to use.....
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....t under the Indo-US DT AA, payment made for a copyrighted article is not "Royalty" and that only Article '7' is attracted. The OECD Commentary clarifies the distinction between the right to use copyright and transfer of a copyrighted article. According to OECD, only a transfer that enables a transferee to commercially exploit software copyright will give rise to royalty income. But where the transferee gets exclusive rights for use, though it is short of full ownership, it will nevertheless be a case of sale of software. In such cases, the transaction will be outside the tax net in India as the said transaction will give rise to business income and in the absence of Permanent Establishment (PE) in India of Minitab Inc. Of U.S.A, business income are not be chargeable to tax in India as per Article 7 of India -USA DT AA. There is no acquisition of the software rights in the present case and that the copyright will remain the property of the supplier. It is an outright sale of the software by the non-resident to the appellant company and thus the payment made by the appellant is not for "Royalty". The payments for obtaining computer software is in the nature of business ....
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....ven retrospective effect, in as much as it is clarificatory in nature. In this regard he submitted that whether amendment/explanations inserted in the Income Tax Act can be read into the DTAA or not has to be considered on the anvil of ambulatory approach to interpretation of treaty, as against static approach adopted by the Hon'ble Delhi High Court. He further submitted that Hon'ble Bombay High Court in the case of CIT vs. Siemens AG, 310 ITR 320 has approved the ambulatory approach. Ld. DR further submitted that eminent author Klaus vogel in his commentary has also supported ambulatory approach. According to this approach, law in force as per the domestic law would be law as it stands on the date of application of Treaty. As against this Static Approach considers that law in force as per the domestic law would be law as it stood on the date of entering into of Treaty. 11. Ld. DR further submitted that in a recent decision in the case of DIT Vs. New Skies Satellite BV & Others, 382 ITR 0114, dated: 08-02-2016, the Hon'ble Delhi High Court in paras 48 to 50 of its order seems to have corrected its earlier stand regarding decision of Bombay High Court in the case of Siemens A....
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....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 not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that a....
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....n 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), cable, optic fibre or by any other similar technology, whether or not such process is secret; 14. The term royalty has been defined in Article 12(3) of the INDO-USA DTAA as under:- "a) Payments of any kind received as consideration for the use of, or right to use, any copyright of a literary, artistic to use, any copyright of a literacy, artistic or scientific work, including cinematograph, films or work on films, tapes or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process or for information concerning industrial, com....
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.... the software vested with the US company and the assessee has no right in respect of the same except the license to use the software as expressly granted under the agreement. The Ld A.R submitted that the assessee has obtained only copyrighted article from the US company and not the copyright in the software. Accordingly he submitted that the payment made by the assessee to a copyrighted article, which is akin to "off the shelf" software is not royalty. He submitted that the Hon'ble Delhi High Court, in the case of DIT Vs. Ifrasoft Ltd (264 CTR 329) has taken its view in favour of the assessee in this matter and hence the decision rendered by Hon'ble Karnataka High Court, which was relied upon by the Ld D.R, need not be followed. He submitted that the identical issues have been decided by the co-ordinate benches of tribunal in various cases in favour of the assessee by following the decisions rendered by Hon'ble Delhi High Court. He submitted that the co-ordinate bench of Mumbai ITAT, in its recent decision dated 13-06-2016 rendered in ITA No.7048/Mum/2010 in the case of ADIT Vs. M/s Baan Global B V (now known as Information Global Solution (Barneveld) BV) has considered an identic....
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....ness for financial accounting, inventory management, HR management etc. INFOR India carries out marketing and sale of the software in India and places order with the assessee. The software supplied is then distributed to the Indian customers through INFOR. The consideration charged by INFOR India is based on terms agreed between the assessee and INFOR India as per the 'distribution agreement'. Under the terms of the agreement, as noted by the CIT(A), there is no transfer of any copyright in the software product. The payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT(A) in his order is reckoned as admitted facts. Now, on these facts, we have to decide, whether the payment r....
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....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 14 of 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 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 ofthe work; (vii)to d....
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....aid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. As noted by the CIT(A), under the terms of the agreement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling 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. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT(A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of "shrink wrapped software" off the shelf and hence, cannot be considered as a "royalty" within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright. 12. One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definitio....
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....) of the Copyright Act, 1957, makes it clear that a computer programme is to be regarded as a literary work. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. This was not established. It was not even the case of the Revenue that any right contemplated' under section 14 of the 1957 Act stood vested in the cellular operator as a consequence of article 20 of the supply contract. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article." Even assuming that the payments made by the cellular operator were regarded as a payment by way of royalty as defined in Explanation 2 below section 9(1)(vi), nevertheless, it could never be regarded as royalty within the meaning of the term in article 13, paragraph (3) of the DT AA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, wh....
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.... programme constitutes a "copyright". A right to make a copy of the software and use it for internal business by making copy of the same and storing it on the hard disk amounts to a use of the copyright u/s 14 (1) of that Act because in the absence of such a licence, there would have been an infringement of the copyright. Accordingly, the argument that there is no transfer of any part of the copyright and the transaction involves only a sale of a copyrighted article is not acceptable. The amount paid to the supplier for supply of the "shrink-wrapped" software is not the price of the CD alone nor software alone nor the price of licence granted. It is a combination of all. In substance unless a licence was granted permitting the end user to copy and download the software, the CD would not be helpful to the end user; (ii) There is a difference between a purchase of a book or a music CD because while these can be used once they are purchased, software stored in a dumb CD requires a license to enable the user to download it upon his hard disk, in the absence of which there would be an infringement of the owner's copyright. (TCS vs. State of AP distinguished as being in the context of....