TaxTMI 
TaxTMI 
2017 (8) TMI 446
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....July 5, 2012 for the assessment year 2009-10. In these appeals, the issues involved are interconnected and thus all these appeals were heard together and disposed of by this consolidated order for convenience and brevity. 2. First we take up the appeal of the Revenue having I. T. A. No. 1182/Delhi/2012 and the appeal of the assessee in I. T. A. No. 1225 related to the assessment year 2007-08. The grounds raised by the Revenue and the assessee in their respective appeals are reproduced as under : Grounds of appeal of the Revenue in I. T. A. No. 1182/Delhi/2012 (i) Whether on the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) had erred in characterising income from supply of off-the-shelf software and services ancillary and subsidiary thereto squarely covered in the definition of section 9(1)(vi) of the Act and article 12 of the Indo-Canada Double Taxation Avoidance Agreement and taxable as royalty, as step-in-aid to actual mining of mineral oils and thus chargeable under section 44BB ignoring the distinctive scheme of taxation of royalty in the Act. (ii) Whether on the facts and in the circumstances of the case, the....
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.... to add, alter, amend or withdraw all or any of the grounds of appeal herein and to such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 3. The facts in brief as culled out from the orders of the lower authorities are that the assessee, a firm constituted under the laws of Alberta Canada, is a resident of Canada. During relevant period, the assessee supplied software for seismic data processing and geological data interpretation to the companies involved in exploration and production of mineral oil. The assessee was also engaged in upgradation and maintenance of software already supplied for the purpose of exploration and production of mineral oils. For the year under consideration, the assessee filed return of income on October 30, 2007 declaring a total income of Rs. 8,09,010. The assessee offered receipts amounting to Rs. 80,90,071 from upgradation and maintenance services under section 44BB of the Income-tax Act, 1961 (in short "the Act") and the receipts amounting to Rs. 6,39,25,481 from supply of software was treated as sale of a copyrighted article and not offered to tax, claiming to be not subjected to tax in India.....
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....id instruction and thus the receipt from sale of software and support services, for a project not undertaken by the recipient, were in the nature of royalty under the provisions of section 44D/44DA read with section 115A of the Act. In respect of grounds raised in the assessee's appeal, the learned senior Departmental representative relied on the order of the Assessing Officer. 5. On the other hand, the learned counsel for the assessee submitted that the assessee during the course of the year under consideration, supplied software for the purpose of seismic data interpretation for their own business and at no point of time, the "copyright" or any other "intellectual property right" has been transferred to the purchaser of software. He further submitted that the issue of sale of software and taxability as royalty thereon, is no more res integra in view of the judgments of the hon'ble High Court of Delhi in the case of DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi), DIT v. Ericsson A. B. [2012] 343 ITR 470 (Delhi) and DIT v. Infrasoft Ltd. [2014] 3 ITR-OL 333 (Delhi) ; [2014] 264 CTR (Delhi) 329, wherein the hon'ble High Court has held that sale of software is aki....
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.... it may even fall within some clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. The relevant clause (iii) and (iv) of Explanation 2 to section 9(1)(vi) are 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-. . . (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 ;" 9. The learned Commissioner of Income-tax (Appeals) after taking into consideration the submission of the assessee that the consideration received for sale of the software by the assessee was for sale of the "copyrighted product" and following the decisions relied on by the assessee including the decision in the case of Ericsson Radio Systems A. B., Motorola Inc. and Nokia Corporation v. Deputy CIT [2005] 95 ITD 269 (Delhi) [SB]. The relevant finding of the learned Co....
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.... of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and the determinative factor would be as to where the property in goods passes. In the present case, the finding is that the property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) (supplies) to be segregated from the installation and only then would question of apportionment arise having regard to the express language of section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arise in India. 11. In the case of DIT v. Ericsson A. B. [2012] 343 ITR 470 (Delhi) also the hon'ble High Court held that since the transaction relates to supply of goods and both the transfer of property in goods and risk passed outside India, no taxable event took place in India. The hon'ble High Court further agreed with the submission....
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....opyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for 'copyrighted' article. This sale consideration is for purchase of goods and is not royalty. The licence granted 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 utilising 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. 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 cop....
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....t allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the assessee- company, the licensee to whom the assessee-company has sold/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. The licensee has been prohibited from copying, de-compiling, deassembling, or reverse engineering the software without the writ ten 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 Infras....
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....section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The licence granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product 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. Nokia Networks OY [2013] 358 ITR 259 (Delhi) as not amounting to acquiring a copyright in the software. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. The question of law is thus answered in favour of the assessee and against the ....
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....ty of tax at source on payment made by M/s. Reliance Industries Ltd. to the assessee, the Tribunal has examined whether the payment made by M/s. Reliance Industries Limited to the assessee was in respect of royalty under the Double Taxation Avoidance Agreement. The relevant finding of the Tribunal is reproduced as under : "49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD-ROM which can be said to be sale of 'goods' by the owner. The consideration paid by the assessee thus as per the clauses of the Double Taxation Avoidance Agreement cannot be said to be royalty' and the same will be outside the scope of the definition of 'royalty' as provided in the Double Taxation Avoidance Agreement and would be taxable as business income of the recipient. The asses see is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a licence provided by the owner in this respect and the same would not constitute infringement....
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.... be a non-resident. (ii) He should be engaged in the business of providing services, facilities and equipment for extraction or production of mineral oils. (iii) The provisions of sections 42, 44D, 115A or 293A should not apply. This section requires there to be a proximate and live nexus with the activity of prospecting, extraction or production of mineral oils. For examining this proposition help is taken of certain case laws which would be discussed later 4.6 The principles contained in the following case laws will also be used to determine the issue of nexus of appellant's business with activities allowed for computing income under section 44BB of the Act : (1) ONGC as Agent of Sea House Inc v. IAC reported in [1989] 29 ITD 422 (Delhi) (2) CIT v. ONGC Ltd. (No. 1) reported in [2009] 309 ITR 244 (Uttarakhand) (3) ARB Inc. v. Joint CIT reported in [2005] 277 ITR (AT) 209 (Delhi) ; [2005] 93 ITD 520 (Delhi) (4) ONGC v. Asst. CIT reported in [2007] 9 SOT 8 (Tri.-Delhi) ; [2007] 107 TTJ (Delhi) 551 ) (5) OHM Ltd., In re reported in [2011] 335 ITR 423 (AAR) ; [2011] 200 Taxman 7 (AAR-Delhi) ....
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....or that matters 'mining'. Also it needs to be seen whether the appellant's activities have any proximate nexus to prospecting for or extracting mineral oils. It is seen that the appellant markets software which analyses data which in turn aids in exploration of mineral oils. Thus this software would be a step-in-aid to the actual mining of mineral oils. In view of this position section 44BB, as requested for by the learned authorised representative vide his letter dated November 30, 2011, is applicable on the facts of this case. 4.8 Thus, it is held that all receipts from sale of software to the provision of maintenance, training, etc. are covered under section 44BB of the Act and will be taxed as such considering the law laid down as per the cases mentioned in paragraph 4.1 supra." 19. In the grounds raised before us, it is contended by the Revenue that income by way of royalty taxable under the provisions of section 44D/44DA read with section 115A, could not be covered under the provisions of section 44BB of the Act as clarified in the proviso thereto. 20. The relevant proviso below section 44BB of the Act reads as under : "Provided that this s....
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....o a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under section 44BB or section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the Central Board of Direct Taxes had accepted the said test and had in fact issued a circular as far back as October 22, 1990 to the effect that mining operations and the expressions 'mining projects' or 'like projects' occurring in Explanation 2 to section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non- resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act. W....
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....s and foreseeable potential. 20 6016 Opinion on hydrocarbon resources and foreseeable potential. 21 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for joint venture exploration program. 22 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs. 23 733 Repair of gas turbine, gas control system and inspection of gas turbine and generator. 24 741 Repair and inspection of turbines. 25 737 Repair, inspection and overhauling of turbines. 26 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines. 27 1522 Replacement of choke and kill consoles on drilling rigs. 28 1521 Inspection of gas generators. 29 1515 Inspection of rigs. 30 2012 Inspection of generator. 31 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines. 32 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33 2008 Expert advice on the device ....
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....nt order. Even otherwise, in view of the decision of the hon'ble Supreme Court in the case of Oil and Natural Gas Corporation Limited v. CIT [2015] 376 ITR 306 (SC), if the substance of the contract/agreement is connected with the prospecting, extraction or production of mineral oil, the income has to be assessed under the provisions of section 44BB of the Act. In the case, the assessee supplied software and provided software maintenance/support services in respect of software supplied, which were to be utilised in exploration of mineral oil, and thus the relevant income from sale of software and software maintenance/support services has been rightly assessed under section 44BB of the Act. 24. The second part of the contention raised by the Revenue is that the income from royalty was taxable under section 44DA of the Act and, therefore, in such case provisions of section 44BB were not applicable in view of the proviso inserted below section 44DA of the Act. The relevant proviso below section 44DA reads as under : "Provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this section." 25. We find that said provi....
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.... 27. It is well settled law that an amendment to the taxing statute, if results in higher tax burden on the assessee then it is prospective in nature and not retrospective. We find that this issue has been dealt elaborately by hon'ble High Court (Uttarakhand) in B. J. Services Company Middle East Ltd. v. Deputy DIT [2011] 339 ITR 169 (Uttarakhand). 28. We are not inclined to accept the contentions advanced on behalf of the Revenue, for the simple reason that the issue is squarely covered by the decision of the hon'ble Delhi High Court in the case of DIT-II v. OHM Ltd. [2013] 352 ITR 406 (Delhi) and by the decision of the Income-tax Appellate Tribunal in CGG Veritas Services SA v. Additional DIT (International Taxation) reported in [2012] 50 SOT 335 . Thus, grounds Nos. 2 and 3 of the appeal of the Revenue are dismissed. 29. The next issue is in respect of the ground raised by the assessee in its appeal. In the ground, the assessee has challenged assessment of income from sale of software to the entities engaged in exploration of mineral oil as taxable under section 44BB of the Act. 30. Before us, the learned counsel submitted that the issue of taxability of receip....
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....for oil and gas exploration" 33. Thus, we find that supply, installation etc. of software used for oil and gas exploration has been held as taxable under section 44BB of the Act. In the present case, the software maintenance/support services has already been accepted by the assessee as falling under section 44BB of the Act. Since the software maintenance/support services was carried in respect of the software sold by the assessee, both the activity of sale of software and software maintenance/support services are composite contract to be considered under section 44BB of the Act. In the instant case, the learned Commissioner of Income-tax (Appeals) has assessed the supply of software and software maintenance/support services as taxable under section 44BB of the Act. The hon'ble High Court of Uttarakhand in the case of CIT v. Halliburton Offshore Services Inc. reported in [2008] 300 ITR 265 (Uttarakhand) held that the amount paid or payable whether in India or outside India have to be included for the purpose of computing global receipts under section 44BB of the Act. The relevant finding of the hon'ble High Court as under (page 269) : "Thus, it is clear from the ....