TaxTMI 
TaxTMI 
2017 (11) TMI 981
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....s and in law in computing the total income of the appellant for the year at Rs. 3,80,43,400 and raising a tax demand of Rs. 38,04,340 (excluding surcharge & education cess) as against NIL as computed by the appellant. 2. The Ld. AO has erred; in law in considering revenues from non-exclusive and non-transferable license agreement as royalty income taxable under section 9(1)(vi); and 3. The Ld. AO has erred in law in considering revenues from non-exclusive and non-transferable license agreement under Article 12(3) of India USA Double Taxation Avoidance Agreement ('DTAA') as Fee for technical Services/Fee for included Services. 4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to initiate" penalty proceedings' under section 271 (1)( c) of the Act without appreciating the fact that there has been no concealment of income/revenues by the assessee. 5. The above grounds are mutually exclusive' and without prejudice to each other. 2. The sole issue raised by the assessee is the taxability of receipts on supply of software which has been treated as royalty and held to be taxable both under section 9(1)(vi....
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....nse, display or otherwise distribute or make the Program available to any third party. Unless otherwise expressly stated in this Agreement or the Applicable Supplement, the Program may not be used (a) in the performance of services for or on behalf of any third party or as a service bureau or (b) in connection with the analysis of any Code other than the Managed Code Base. Except to the extent Black Duck may, in certain jurisdictions be required by law to permit reverse engineering. Customer may not modify, disassemble, decompile or otherwise reverse engineer the Program nor permit any third party to do so. Black Duck reserves all rights not expressly granted to the Customer under this Agreement. The use of Black Duck's intellectual property beyond the scope of the license expressly granted is acknowledged and agreed to be outside the subject matter of this Agreement. 5. The Assessing Officer required the assessee to show cause as to why receipts from providing software license to its customers along with certain services, should not be taxed as 'royalty'. In response the assessee filed its detailed submission vide letter dated 3/2/2015. The sum and substance of assessee's submi....
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....to section 9(1)(vi) and also Explanations 4 and 5, which was added by the Finance Act, 2012 with retrospective effect from 1/6/1976. Thus, he held that in terms of such amendment in section 9(1)(vi), the Legislature made it amply clear that transfer of any right, including granting of a license in respect of copyright, shall be taxed as royalty. Not only that, he also held that definition of royalty as contained in Explanation 2 to section 9(1)(vi) and also definition given in Article 12(3) of India USA DTAA, both take into account the industrial as well as copyright royalty. AO also referred to various CBDT Circulars and came to the conclusion that receipts of assessee pertaining to licensing of software are taxable as royalty under section 9(1)(vi). Thereafter, he proceeded to hold that even under the treaty, the payment received by the assessee was in the nature of royalty within the terms of Article 12(3) of India USA DTAA also. In his order, he has referred to various Literatures and Report on High Level Committee on Taxation and e-Commerce and other commentaries to justify the intention of the Government of India and code of royalty as defined in the treaty. He also referred ....
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.... holding that the Hon'ble Delhi High Court has not examined the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd. (supra). 8. Before us, the ld. Counsel for the assessee, Shri Abhimanyu Jhamba, submitted that the assessee being a nonresident company and is tax resident of USA, has short shelter of treaty under India-USA DTAA. He submitted that it is settled proposition of law at least in the jurisdiction of Hon'ble Delhi High Court, that amendment in the domestic legislation i.e. in the Income Tax Act by Finance Act, 2012 by way of insertion of Explanation 4, 5 and 6 to section 9(1)(vi) whereby scope and definition of royalty has been expanded retrospectively, cannot be imported into the treaty. In support, he strongly relied upon the judgment of Hon'ble Delhi High Court in the case of DIT vs. Nokia Networks [2013] 358 ITR 259 (Del). He further submitted that so far as issue of permanent establishment in India is concerned, the Assessing Officer and the DRP have not mentioned anything despite assessee's categorical submission before both the authorities, this inter-alia, can be inferred that question of taxability under Article 7 do....
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....re in this case also similar kind of software license was given and even the terms of agreement was by and large same. In that context, the Hon'ble Delhi High Court held that India-USA Treaty still recognizes the difference between a copyright and a copyrighted article. The Hon'ble High Court after referring to another decision of the Hon'ble Delhi High Court in the case of DIT vs. Nokia Networks (supra), held that, firstly, amendment in section 9(1)(vi) cannot be read into treaty; and secondly, granting license to use copyrighted software for licensees' own business purpose, cannot be brought to tax under Article 12(3) of India USA DTAA. The Hon'ble High Court has also dissented from the judgment of Hon'ble Karanataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd.(supra) which has been strongly referred and relied upon by the revenue authorities. He further relied upon the decision of ITAT Mumbai Bench in the case of ADIT vs. Baan global, 29 ITR (Trib.) 73, wherein the Tribunal, after detailed discussion on various provisions of copyright and the judgments of various High Courts on similar set of facts and software license agreement, held that payment received for ....
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....f the parties. Each Supplement will be governed by this Agreement and upon execution by both parties, will automatically become a part of this Agreement. Additional or different terms in any purchase order or similar document provided by customer will not modify or add to the terms of this Agreement or any Supplement. 10.12 Assignment: This Agreement and the rights granted under it may not be assigned or transferred by wither party without the written consent of the other party, except to a successor in interest in the event or merger or acquisition of such party. If Customer assigns this Agreement as described in this section, additional business terms may apply to the acquiring company (e.g. limitation in the size of the Managed Code base) as further described in the applicable supplement." 12. Then he pointed that Supplement Agreement indicates that there are unlimited number of users; unlimited size of managed code base; and terms of supplement agreement shall prevail in the event of any conflict between the terms of Supplement Agreement and Master License and Subscription Agreement. Lastly, from the sample copy of supplement agreement he pointed out that access is ....
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....n the applicable Supplement; and (b) For the number of users designated in the applicable supplement to use the program internally, solely in accordance with its documentation and in connection with a Managed Code base of a sixe no greater than the megabyte limit set forth in the applicable supplement. 2.4 License Restrictions: This is not a perpetual license, and customer has no right to retain or to use the Program after termination of the Applicable Subscription period for any reason. Customers may not permit access or use of the Programs for any users other than the Users licensed and paid for by the Customer. Customer may make a reasonable number of copies of the Program exclusively for inactive back up, disaster recovery, failover or archival purposes. Customer has no right to rent, lease, assign, transfer, sub license, display or otherwise distribute or make the Program available to any third party. Unless otherwise expressly stated in this Agreement or the Applicable Supplement, the Program may not be used (a) in the performance of services for or on behalf of any third party or as a service bureau or (b) in connection with the analysis of any Code other t....
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....ind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with 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 or property which are contingent on the productivity, use, or disposition thereof; 15. The main emphasis is on use of or the right to use of any copyright of a literary; artistic; or scientific work, which indicates that an exclusive right to use any copyright in an article (which is in the nature of literary; artistic; or scientific work) has to be given. Since the copyright has not been defined or explained in the treaty, therefore, meaning assigned of the copyright under the domestic law, i.e. Copyright Act, 1957 can be referred for understanding the true purport and meaning of copyright. Section 14 of Copyright Act, 1957 defines the copyright in the following manner:- 4.Meaning of copyrig....
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....Certain acts not to be infringement of copyright. -(1) The following acts shall not constitute an infringement of copyright, namely: (a) a fair dealing with a literary, dramatic, musical or artistic work not being a computer programme for the purposes of- (i) private use, including research; (ii) criticism or review, whether of that work or of any other work; (aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy- (i) in order to utilise the computer programme for the purposes for which it was supplied; or (ii) to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied;" 17. The aforesaid section also makes it amply clear that private use including research or to utilize a computer programme for the purposes for which it was supplied or make back-up copies is purely for the temporary protection against loss; destruction or damage in order to utilize the computer programme for the purpose for which it was supplied. This d....
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....ed, sold, sub-licensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. * The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasofts written consent. The software contains a mechanism which Infrasoft may activate to deny the licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, were owned by or duly licensed to Infrasoft. [Para 85] * In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. * Distinction has to be made between the ....
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.... to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. * The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the ownertransferor who divests himself of the rights he possesses pro-tanto. [Para 89] * The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from ....
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....or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. * What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and, thus, the payment for the same is not in the nature of royalty. [Para 94] * It is not necessary to examine the effect of subsequent amendment to section 9(1)(vi) and also whether amount received for use of software would be royalty in terms thereof for the reason that the assessee is covered by the DTAA, the provisions of which are more beneficial. [Para 95] * The amount received by the assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. [Para 96] * What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. * The right t....
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....al part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not he used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer 10 the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC), wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, 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 design....
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....s not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." 56. A fortiorari when the assessee supplies the software 'which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty.' 6. This Court also noticed that the ITAT had in addition relied upon other judgment of this Court i.e. DIT v. Nokia Networks, or [2013] 358 ITR 259/212 Taxman 68/[2012] 25 taxman.com 225." 21. Now before us, the ld. CIT D.R. had tried to canvass a point that in the Supplement Agreement there is a stipulation of unlimited number of users and unlimited size of managed code base; and also access has been granted to all companies within Robert Bosch group. He has also referred to corresponding managed code base as given in point 1.5 of the Master License and Subscription Agreement. (as reproduced in the fore....
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....dia, Germany, United States, and Singapore. It was clarified by the Ld. Counsel that the standard format of the order form is used but a different agreement is entered within such entities in various locations. But as the column 3 in the table enunciates, the software is sold to be run only on one server in India. Hence, the argument of the Ld. CIT DR that access is granted to all servers is not correct. Software is sold to be used only on one server in India and not in other jurisdictions. Further, Ld. Counsel clarified that clause 2.3 of the licensing agreement uses the word 'applicable supplement' which suggests that supplement would be different for different customers depending upon various customers. Though the order form is standard, but they may be different in supplement agreement so as to number of users, manage code, size base for different customers. It is only with a view to provide flexibility to customers, the clause subscription to overnight the Master Licensing agreement have been inserted. Thus, he submitted that the reference made by the ld. CIT D.R. to these clauses and also supplement will not change the basic fact that what has been sold by the assessee is pur....