TaxTMI 
TaxTMI 
2018 (1) TMI 793
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 12 of the Double Taxation Avoidance Agreement between India and Ireland ('India- Ireland Tax Treaty). 3. should have appreciated that in view of beneficial provisions of India-Ireland Tax Treaty, the, impugned payment towards supply of off the shelf software, would not be regarded as 'Royalty' under the India-Ireland Tax Treaty and hence not chargeable to tax in India. Non granting of credit of Tax Deducted at Source ('TDS'): 4. erred in not granting the entire credit of TDS amounting to Rs..1,23,61,709/-, disregarding specific direction of the Hon'ble DRP. Levying interest under Section 234B and 234C of the Act: 5. Erred in levying interest amount to Rs..51,17,981/- and Rs..3,22,384/- under sections 234B and 234C of the Act, respectively. 6. Should have appreciated the fact that as the Appellant is nonresident and its entire income is liable to tax deduction at source, interest under Section 234B and 234C of the Act cannot be levied. 7. alternatively should have appreciated the fact that as taxes were deducted on the receipts, question of payment of advance tax does not arise. Initiating Penalty Proceedings under Section 271(1)(c) of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e nature of a shrink wrapped/off the shelf software. However, the DRP placing reliance on the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd [345 ITR 494] and the decision of the Mumbai Bench in the case of DDIT v. Reliance Infocomm Ltd held payment made by RIL to the assessee is for the use of or right to use of copyright and is royalty within the meaning of Article 12 of India Ireland DTAA. Aggrieved by the final order of the learned AO (based on DRP direction), the assessee is in appeal before us. 7. Ld. Counsel for the assessee in regard to ground Nos. 1 to 3 submits that the software licensed to Reliance under the Software license agreement is off-the-shelf software. The software products provided under the said agreement are standard products already developed and made available to other customers. Under the said agreement, Reliance has acquired a license to use a copy of the software for its business purpose. The right to make multiple copies of the software is limited only for the purpose of Reliance's own operations. Reliance is not permitted to resell the software products and components or commercially exploit the same. The license is essentia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ware supplied by the Assessee to Reliance is a standard product already developed and made available to other comparable customers. 9. Learned Counsel for the assessee submits that the payments received by the Assessee is not for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process or information concerning industrial, commercial or scientific experience., but for use of a 'copyrighted article' which emanates from use of the 'copyright'. Ld. Counsel for the assessee referring to paragraph 3(a) of Article 12 (which defines the term 'Royalty' for the purpose of India Ireland Tax Treaty) submitted that it does not include supply of a 'copyrighted article' and only such payments, which have been made for the use of, or the right to use the copyright in the literary, artistic or scientific work will qualify as 'royalty' under the India Ireland Tax Treaty. The relevant extract of Article 12 of India Ireland Tax Treaty is reproduced below for ready reference: "3. (a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, al* the right to use, any copyright of literary....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e article on 'Royalty' and more so on taxation of software royalty. 12. He submits that copy of the order of the Hon'ble Tribunal is placed at page Nos. 155 to 160 of the paper book. Learned Counsel for the assessee drew our attention to the fact that the definition of 'Royalty' under the India Ireland Tax Treaty is pari-materia as that under India USA Tax Treaty and copy of the same is placed at Page Nos. 174 to 198 of the paper book. As the above decision of the Hon'ble Mumbai Tribunal has already decided the issue of taxability of supply of software under the same agreement in favour of lntec Ireland, Learned Counsel for the assessee submitted that the receipts from supply of software are not taxable in the hands of Intec Ireland as 'Royalty' under India Ireland Tax Treaty. Ld. Counsel for the assessee further reiterate that Intec Ireland does not have PE in India. Accordingly, amounts received by lntec Ireland from towards supply of software are not liable to tax in India. Learned Counsel for the assessee submitted that If two views are possible the one which is favorable to the assesse has to be accepted. 13. Ld. Counsel for the assessee placed reliance on the decision o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions available on this issue, relevant provisions of the Copyright Act, amended definition of 'royalty' and the definition of 'royalty' under the India-Singapore tax treaty has held that where the payment is made for the copyrighted article, the same cannot be considered as payment for the transfer of the copyright and accordingly, cannot be taxed as "Royalty". The Mumbai Tribunal has considered the decisions in the cases of Samsung Electronics Company Ltd. & Others [345 ITR 494], Verizon Communication Singapore [361 ITR 575], Reliance lnfocom Ltd. [37 CCH 0069], Viacomm 18 Media Pvt. Ltd. [44 taxman.com 1] (which were in favour of department) and has come to a conclusion that payment for use of software could not be treated as 'Royalty' under the India-Singapore tax treaty. 18. Learned Counsel for the assessee submitted that the decision of the jurisdictional Mumbai Tribunal has been rendered after considering all the factors and the same is directly applicable to the case of assessee. 19. He further submitted that the Hon'ble Mumbai Tribunal in case of Galatea Limited v. DCIT [46 ITR (Trib.) 690] (copy of the decision is enclosed at pages 347 to 364 of the paper book) has h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t taxable as 'Business Profits' in India. Accordingly, the receipt from license of software was not offered to tax by the Appellant in the Return of income. Copy of the acknowledgement of filing income tax return along with the computation of income and notes to return of income is enclosed vide page 72 to page 75 of the paper book. This position of the appellant in the return of income was on the basis of ITAT order in AY 2002-03 while adjudicating the case of Intec Billing America (on the very same agreement) wherein, the said revenue is held to be not taxable. 25. The Ld. Counsel for the assessee further submitted that tax Payer entitle to be governed by Provision of Tax Treaty to the extent beneficial as compared to the Income Tax Act. As submitted above, Intec Ireland is a tax resident of Ireland and hence, is eligible to claim the benefits of the Tax Treaty. Accordingly, as per the provisions of Section 90(2) of the Act, a non-resident assessee is eligible to be governed under the provisions of the Act or the Tax Treaty, whichever is more beneficial. 26. It is submitted that paragraph 3(a) of Article 12 (which defines the term 'Royalty' for the purpose of India Ireland ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred." 31. A comparison of the definition of 'royalty' as provided under the Tax Treaty and the Act shows that the same are not a paramateria with each other. The definition provided under the Tax Treaty is very short and restrictive definition, whereas, the definition of royalty as provided under the Act is very wide and inclusive. Since the definition provided under the royalty in the Tax Treaty is more beneficial to the Appellant. hence as per the provisions of Section 90, the definition of royalty as provided under Tax Treaty is to be considered in the present case. Accordingly, assuming without admitting that the receipts of lntec Ireland are liable to tax as per the amended definition of 'Royalty' in the Act, 'the said revenues would not be so covered by the favorable definition of 'Royalty' in the India Ireland Tax Treaty. 32. However, in the assessment order, the learned AO has not considered submission ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that despite the amendment to the Act (vide the Finance Act 2012), such payment would not be taxable as 'royalty' since there was no change in the treaty between India and USA (in this case payer was USA company). 37. The Jurisdictional Mumbai ITAT decision in case of Baan Global BV (ITA No. 7048/M/2010) has held that one contracting state which is a party to a treaty cannot unilaterally alter its provision and enlarge the scope of any term from the prism of its domestic law. If there is no amendment in the treaty and if any amendment is carried out under the domestic law then same cannot be read into the treaty. 38. Further, the Hon'ble Delhi High Court, recently in case of New Skies Satellite BV & Ors (382 ITR 114) has also held that the unilateral amendment made by the Parliament of a one state will not automatically amend the DTAA's signed by that state with the other. The Hon'ble Delhi High Court concluded that the amendment vide Finance Act 2012 will not affect Article 12 of the Tax Treaty. it would follow that the first determinative interpretation given to the word royalty' prior to the amendment in the Act will continue to hold the field for the purpose of assessment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urchase/supply/licence of software has been held to be not Royalty. In this regard while relying completely on the on the order of the AO, among others, it was submitted that for the reasons given in the foregoing submissions, the matter may be set aside back to the file of the Ld.CIT(A)/ Assessing Officer and in the alternative it was submitted that in order keep certain issues alive in appeal before the Hon'ble High Court, the following written submissions may kindly be taken on record. 41. In some of its recent decisions like DDIT (IT) Vs Reliance industries Ltd. (2016) 69 Taxamm.com 311 dated: 18/05/20 6, Galatea Ltd. Vs DCIT (IT) dated 29/06/2016, and ADIT(IT) Vs. Baan Global BV dated: 13/06/2016 the Hon'ble Mumbai Tribunal has decided the issue of Purchase/lease/supply of software whether shrink wrapped or embedded software in favour of the assessee by holding the consideration paid for purchase/lease/supply of software as not Royalty under the relevant DTAAs. While holding so the Hon'ble Tribunal has relied on the Delhi High Court decisions in the cases of DIT v. Infrasoft Ltd., 264 CTR 0329, dated 22-11-20131 DIT vs Nokia networks OY,', 358 ITR 0259, dated: 7-09-2012 and....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... ALTERNATE PLEA: In case, the matter in the present Appeal is treated as covered in favour of the assessee, the following alternate plea may kindly be taken on record so that the issues are kept alive in appeals before the Hon'ble High Court. 45. The main features of the Delhi High Court decisions in the cases of Infrasoft Ltd. (supra), Nokia networks OY, (supra) and Ericson A.B, (supra) and the decisions of the Mumbai Tribunal based on Delhi High Court are as follows: (i) that the license granted to the licensee permitting him to download the computer programme and storing it in computer for its own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purposes. The said process is necessary to make the program functional and to have access to it. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. (ii) there is no transfer of any right in respect of copyright to the assessee and it is a case of transfer of a copyright article. The payment is for a copyrighted article and represents the purchase price o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the copyright i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement (Para 24 of Samsung, supra) (iii) that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under s. 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licensee is in possession of the legal copy of the software under the licence. (Para 24 of Samsung, supra) (iv) hat what is supplied is the copy of the software of which the respondent supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under s. 52 of the Copyright Act. (v) In the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... hereby clarified that transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of licence) irrespective of the medium through which such right is transferred." "Computer software" has been defined in Explanation 3 to S.9(1)(vi) of the Act. 52. Ld. DR submitted that, the aforesaid Explanation 4 is clarificatory in nature, inserted retrospectively w.e.f 01-06-1976. If this Explanation is applied to the assessee's case, then the consideration received by the assesse is in the nature of Royalty both under the Act and under the DTAA. 53. On the issue whether the Amendments/Explanations inserted in the Income Tax Act can he read into the DTAA or not, in my respectful submissions and with utmost respect, the Delhi High Court in the case of Infrasoft, supra and other cases which have been followed by the Mumbai Tribunal seem to have misquoted the Bombay High Court while saying that Bombay High court in the case of CIT v. Siemens Aktiongesellschaft, 310 ITR 320) (BOM HC) held that Amendments in the Act cannot be read into the DT AA. Wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bombay High Court decision in the case Siemens AG. supra would reveal that: (i) In the operational part (paras 29 to 31) of the judgement in the case of Siemens AG, supra, nowhere it is mentioned that amendments in the I.T. Act cannot be read into DTAA. (ii) The nature of services rendered in the said case were found to be not Royalty under the DTAA though found to be Royalty under the Act (post 01-06-1976). Those services were found to fall under the expression "commercial or industrial profits' as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. Thus, the provisions of DTAA being more beneficial to the assesse were preferred over the provisions of the I.T. Act. (iii) In paras 13, 22 and 28 of its order, the Hon'ble High Court has approved the insertion of Explanation below S.9(2) inserted by the Finance Act 2007, thereby implying that the Clarificatory Explanations could be read into modern DTAAs. (iv) 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unts receivables and billing operations. Further, they also support localization of language, currency, calendar and regulatory and taxation framework of the user. In simple terms, the said software could be equated to 'Microsoft Excel' - wherein the user feeds the data/ information related to a particular customer or product in a blank worksheet. The data is processed by the modules in order to generate requisite output - an invoice, report, etc. The software's delivered to the users on physical electronic media, ex: compact disk, floppy, paragraph 6 'Deliver' clause of the Software Licence Agreement. 59. On perusal of the clauses of the above agreement, it is clear that Intec Ireland exclusively owns all the Intellectual Property Rights (IPR) in the software. Intec Ireland has merely granted a copyrighted article to Reliance and not the 'copyright in the article. Hence, Reliance does not use or have any right to use the copyright in the software products and lntec Ireland merely grants a right to use software for Reliance's own use in India. 60. The very same agreement and the Software supplied by the assessee to Reliance has been subject matter in dispute in the Assessment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ross basis as royalty under Article 12 of the India US tax treaty. 4. On appeal by the assessee, learned CIT(A) held that the payment in question was not in the nature of royalty and was payment for purchase of copyrighted article. It was in the nature of business profits; and since the assessee did not have a PE in India the same was not taxable, in view of Article-7 of the DTAA between India and USA. Addition made by the Assessing Officer was deleted by the learned CIT(A) giving rise to the present appeal by the revenue before the Tribunal. 5. We have heard the rival submissions. Agreement between the assessee and RIL provides only a license to use the software. Clause 2(a)(b) of the agreement provides for the terms of license and scope of permitted use. Clause (3) provides of confidentiality of information. Para 14.c provides that the software being supplied is a standard software provided to customers by the assessee. Perusal of para 2.a and 2.b of the Agreement clearly provide that RIL has only a perpetual, non-exclusive, irrevocable, non-transferable license to use the software and documentation. RIL is forbidden from modifying, adapting, translating, revers....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus, a transaction of sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act." 7. Thus computer software when it is put on to a media and sold has become goods like any other audio cassette or painting on canvas or a book. It is ceases to be transfer of intellectual property right. In fact, Bangalore Bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO, 92 ITD 366 (Bang) has also taken the view that in such a situation there is no acquisition of any right in software. Definition of 'royalty' is given in section (9)(1) Explanation (2) of the Act and the definition of Royalty in Article 12(3) of the Indo-US DTAA shows that definition of royalty under DTAA is more restrictive than what is provided in section (9)(1) of the Act. Under the definition as contained in DTAA, there should be a transfer of copyright. Sale of software by the assessee to the end user does not involve any transfer of copyright either in part or in whol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is purchased etc. as provided under section 52, then in that event it cannot be said to be an infringement of copyrights of the author or owner of the work. As held by the Hon'ble Karnataka High Court in the case of "Samsung Electronics Company Ltd. & Others" (supra) while relying upon Article 3 sub section (2) of the DTAA with US as the identically worded article being there in almost all the tax treaties with other countries, that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it is under the laws of that 'State' concerning the tax to which the convention applies. In view of above, when we see the definition as per the statutory provisions/domestic law of the country i.e. Copyright Act, 1957 of India which is the taxing State in this case, it is apparent that the fair use of the work for the purpose of which it is being purchased and doing of such other acts including making of copy for protection from damage or loss cannot, in any case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n "The Commissioner of Income Tax V. Vegetable Product Ltd." (1973) 88 ITR 192 and in "Mauri Yeast India Pvt. Ltd. V. State of UP." (2008) 14 VST 259(SC) (2008) 5 S.C. C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. Reliance can also be placed in this regard on the decision of Hon'ble Supreme Court in "Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another: (1997) 5 SCC 289. We accordingly adopt the construction in favour of the assessee. In view of our discussion made above, this issue is accordingly decided in favour of the assessee." 62. The Coordinate Bench in the case of Galatea Limited v. DCIT (supra) held that payment for the copyrighted article will not be taxed as "Royalty" as defined under the Article 12(3) of India-Israel tax treaty. The Bench observed as under: - "35. Thus, the status of the provisions in the treaty is kept same as was in the pre- amended law as contained in the provisions of the Act. According to these provisions of the treaty, as has been explained in various judgments, tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e." 64. The Hon'ble Delhi High Court in the case of Ericsson Radio Systems AB (supra) observed as under: - "Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-11 thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work. Section 2(o) of the Copyright Act 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. In the presence case, this has not been established, it is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act, 1957 stood vested in this 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". 65. The Coordinate Bench in the case of DDIT....