AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 80
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding Reliance Communication Ltd. (RCL), Reliance Telecom Ltd. , Reliance BPO Ltd. and Reliance Communication Infrastructure Ltd. RCL. is engaged in business of telecommunication. Other three entities were also connected with wireless telecommunication network in India. For that purpose, they entered into various contracts with non-resident-entities and made certain payments for purchase of software. The assessees made applications u/s. 195 of the Act, requesting the AO. s to allow them to make payments to non residents without deducting tax at source. However, the AO. s held that payments made by them to the non residents were taxable in India, that they should deduct tax at source before making such payments. Accordingly, the assessees deducted the taxes. 2. Aggrieved by the orders of the AO. s, passed u/s. 195(2)of the Act, the assessees preferred appeals before the First Appellate Authority(FAA)and made elaborate submissions. Considering various clauses of the Contracts entered in to by the assessee with the suppliers, he held that the assessees did not own any rights for transferring the soft....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that to reproduce the work in any material form including the storing of it in any medium by electronic means covered under the definition of computer programme, that the assessee had stored or reproduced the software in equipment and therefore payment made by it for purchase of software fall under the definition of royalty, that as per section 30 of the ICA the assessee had received interest / rights to use the software and therefore the same fell under royalty, that there were no decisions which had considered section 30 of the ICA, that as per section 51 of the ICA copyright in a work would be deemed to be infringed when any person, without a licence granted by the Owner of the copyright did anything. He relied on the judgments of Synopsis International Old Ltd. (212 Taxman 454), Samsung Electronics Co. Ltd. (345 ITR 494) of Hon'ble Karnataka High and argued that payment made by the assessee for purchase of software was royalty payment, that it was liable to deduct TDS for the said payments, that the Hon'ble Karnataka High Court had considered the provisions of the ICA and had rightly held that payment made for use of software was copyrigh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....igned the Software Contract to Lucent (Pg. 290-294, Vol. 44). He contended that payment made to Lucent/other vendors for the purchase of software in pursuance of the aforementioned Contracts did not constitute royalty, as per the definition given under the Act and the DTAA. s. 3. 2. He referred to the definition of 'royalty' given under the India-USA DTAA and argued that as per the definition, the term royalties included any payment towards the use or right to use any copyright, that royalties as a subject-matter of a copyright connoted only the payments for the use i. e. exploitation of such copyright in the software, that it was different from the use of the copyrighted article i. e. the software itself, that the acquisition of a product (software)-in which the subject matter of copyright was embedded-did not amount to use of or right to use the copyright of such product(software), that to constitute royalty, a person must be entitled to utilise the copyright in a manner which was otherwise protected by the relevant copyright law in favour of the Owner of such copyright, that the use of or the right to use the software was not the same as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ayment was not royalty, that payment made for purchase of software was for the use of copyrighted article which was distinct from the copyright, that the same did not constitute royalty under the provisions of the Act as well as DTAA. 3. 4. Regarding software being a process /an Invention/an Equipment, he submitted that after the order of the Solid Works(supra)the Tribunals and/or High Courts had considered the arguments advanced by the DR, that they had deliberated upon the arguments of Software being a Process/an Invention, an Equipment, that the judicial forums had decided the issue in favour of the assessee after considering all the arguments advanced by the Department, that the case of Poompuhar was of no help , that in that matter the Hon'ble Madras High Court had held that ship was an equipment, that the same is therefore not relevant to decide the issue raised in the present case, Referring to the provisions of the ICA, the AR stated that same were already considered in the various decisions by the Hon'ble High Court as well as Benches of Tribunal including Jurisdictional Tribunal. In that regard he relied upon the cases of ZTE Corporation (392 ITR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supra). the AR stated that the Hon'ble Delhi High Court in the case of M Tech India (P. ) Ltd. (381 ITR 31) had considered the decision of the AAR in Citrix Systems Asia and had held that payment made for purchase of software as a product would be treated as a payment for purchase of software rather than payment for use or right to use software. About Millenium IT Software (338 ITR 391)and IMT Labs (India) (P. ) Ltd. the AR submitted that both the AARs were considered in Citrix Systems (supra) which in turn had been considered by the Delhi Tribunal as well as the Delhi High Court in Halliburton and M. Tech's case, that the AARs were only applicable to the assessee who applied for and not to other assessee. Referring to the matter of Rishiroop Chemicals Pvt. Ltd. (supra), the AR submitted that the Tribunal in that case had held that in case of conflicting decisions of the High Court other than jurisdictional High Court, the view which appeared better had to be adopted or under certain circumstances, the view which was favourable to the tax payer would prevail, that in the case of Vegetable Products Ltd. (88 ITR 192) the Hon'ble Apex ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er is the government or if the license agreement is a private contract. We would like to refer to the case of Ahmedabad Manufacturing and Calico Printing Mills (139 ITR 806), wherein the word royalty has been defined as follows: "In the case of secret processes, patents, special inventions, when right of exploitation is given by the Owner of the inventions, patents, etc. , to a third party instead of outright sale, then for the right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be correlated to the extent of the exploitation. It is in this sense that licence agreements for the exploitation of patents, inventions, etc. , are being entered into in modern commercial world and as part of such agreements, even knowledge derived from his own experience and technical know-how for the most economical and efficient user of the patents, inventions, etc. , are parted with by the Licensor to the licensee. Payments of this kind are known as royalties. This is also evident from several double taxation avoidance agreements bet....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect of such property. According to sub-clause (iii) of the Explanation, even consideration paid for use of intellectual property would qualify as "royalty". Clause (vi) makes payments made for services rendered in connection with activities referred to in sub-clauses (i) to (iv), (iva) and (v) "royalty" for the purpose of section 9 . Explanation 2 has to be read as part and parcel of section 9(1)(vi) of the Act. " 4. 1. For taxation purposes the term royalty has to be understood in the manner it has been defined by the Act/tax treaties. Section 9(1)of the Act reads as under: The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India : XXXX (vi) income by way of royalty payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssment 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 assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. 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- the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret-formula or process or trade mark or similar property ; (iii) the use of any p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any other similar technology, whether or not such process is secret ; In the tax treaties, entered in to with above mentioned five countries, the term royalty has been also been dealt with. We are reproducing the relevant portion of the DTAA. s. Article 12 of Australia India DTAA contains following provisions about Royalty: (3) The term "royalties" in this article means payments or credits, whether periodical or not, and, however described or computed, to the extent to which they are made as consideration for : (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right ; (b) the use of, or the right to use, any industrial, commercial or scientific equipment ; (c) the supply of scientific, technical, industrial or commercial knowledge or information ; (d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Indo-USA tax treaty and it reads as under: "3. The term "royalties " as used in this article means: "(a) payments of any kind received as consideration for the use for 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, trademark, 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 were contingent on the productivity, use of disposition thereof; A comparison of the provisions of DTAA. s and the section 9 of the Act clearly reveal that term royalty does not connote the same meaning even if both are casually glanced at. In the DTAA. s royalty means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ic) Pte. Ltd. Singapore. 26. 5373 Singapore Nortel Network Singapore Pte. Ltd 27. 4278 Singapore Nortel Network Singapore Pte. Ltd. 28. 4279 Singapore Nortel Network Singapore Pte. Ltd. 29. 4284 Singapore Nortel Network Singapore Pte. Ltd. 30. 5467 Singapore Sun Microsystem Pte. Ltd. 31. 5470 Singapore Sun Microsystem Pte. Ltd. 32. 4920 Singapore Sun Microsystems Pte. Ltd. 33. 4305 Sweden Envilogg AB 34. 4245 Sweden Envilogg AB 35. 4249 Sweden Envilogg AB 36. 4251 USA Ericson Communication Wireless Inc. 37. 4285 USA Ericson Wireless Communication Inc. 38. 4286 USA Ericson Wireless Communication Inc. 39. 3431 USA Lucent Technologies GRL LLC 40. 3432 USA Lucent Technologies GRL LLC 41. 3433 USA Lucent Technologies GRL LLC 42. 3434 USA Lucent Technologies GRL LLC 43. 3435 USA Lucent Technologies GRL LLC 44. 3436 USA Lucent Technologies GRL LLC 45. 3437 USA Lucent Technologies GRL LLC 46. 34....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tte/CD or 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. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the 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. A transaction of sale of computer software package off the shelf is clearly a sale of "goods" within the meaning of that term in section 2(n) of the Andhra Pradesh General Sales Tax Act, 1957. The term "all materials, articles and commoditites" in section 2(h) of the Act includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes. The theory of 'copyrighted article' and 'copyright itself', as propoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ers of software with the assessees. First of all, we would like to reproduce the salient clauses of the agreements entered in to by the assessees with one of their suppliers of the USA i. e. Lucent Technologies GRL LLC(Lucent). The Equipment Contract (Page 1-55 of the PB, Vol;. 44) Clause 1. Background Reliance desires to obtain certain Equipment to support the Wireless Reliance Network. The Vendor shall perform all specific Vendor responsibilities set forth in this Wireless Equipment Contract, including applicable Purchase Orders and the Specifications. Notwithstanding the foregoing sentence, Vendor shall be responsible for providing the Equipment under this Wireless Equipment Contract in accordance with the Documents. This Wireless Equipment Contract is subject to the terms and conditions set forth in the Wireless Network General Terms and Conditions executed by the parties as of the date hereof (tL the General Terms "). 1. 2 Objectives Reliance requires equipment that fully supports: (a) the Initial Wireless Reliance Network cind the Wireless Reliance Network as specified in the relevant Document. The Ve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he export to be put on ship/airport in accordance with the Documents. . . . . . . . . . . . . . . 3. 1. 4 The Software supplied under this Wireless Software Contract is standard software that Vendor would supply to ant other Person seeking to establish wireless technology networks similar to theWireless Reliance network. The GTC Contract(Pg. Nos. 102-289 of Vol. 44): Clause 1 of the GTC Contract (Pg. 108 of Vol. 44) deals with the background of the Contract. Relevant extract of the same is as under: 1. 1. 1 Reliance desires to construct a telecommunications network in the republic of India and to provide advanced optical, wireless and wireline voice, video and data services across the Republic of India and throughout other wereas of the world, either directly to its end customers or through services resold by other telecommunication carriers. Reliance and its Affiliates had been providing GSM mobile wireless services in seven (7) telecommunications circles and basic telecommunications services in one (I) telecommunication circle. . . . . . . . . . . . . " XXXX 15. 1. 1 Sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation, in accordance with and pursuant to the relevant Documentation, shall not constitute 'modification' of the Software provided always that Reliance may only change, amend or modify Software which is designed for 'customer access' and to be so modified. 15. 2. 1 Except as otherwise expressly agreed by the Parties in writing, all Custom Work Product shall be the sole and exclusive property of the Vendor, including, without limitation, all copyrights, trademarks, patents, trade secrets, and any other proprietary rights inherent therein and appurtenant thereto, and the vendor hereby grants Reliance a perpetual, irrevocable, exclusive, fully paid-up, unrestricted license, without any additional charges, to use copy, sublicense and transfer such Custom Work Product within the Wireless Reliance Network. With respect to Custom Work Product that Vendor had developed or created at the direction of Reliance that is not based on existing Vendor software, and that is not intended for use in Equipment supplied by the Vendor, Vendor hereby gran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hip, operation and maintenance of the Software together with Licensor supplied equipment and hardware on Owner's network. Remaining clauses of the Agreement reads as follows: 42. 3 The aforementioned licenses set forth above are hereinafter be referred to as the 'software license'. Such Software License shall not be transferred assigned sublicensed by or used by outsources of Owner without Licensor's express written consent.... 42. 4 The rights and obligations of Owner the Software Licenses shall survive the termination of all or any portion of the Order. In the event that Owner to pay applicable and undisputed for the Software, Licensor may terminate owner's right to use the Software to which such charges apply... 42. 5 Owner shall have the right to translate, abridge and / or make as many numbers of copies of the Documentation as reasonably required for Owner's internal business purpose . Further, Owner shall have the right to make as many copies of the Software as are necessary for the use of the Software in accordance with this agreement. Owner shall reproduce all copyright notices as provided in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ird party that in any way limits or restrict its ability to perform this Agreements and; (viii)Licensor shall not disclose to Owner, nor make use in the performance of this Agreements, any trade secrets or other proprietary information of any third party, unless Licensor may do so without Licensor or Owner incurring any obligation (past pr future) to such third party for such disclosure or work or any future application thereof, except the obligations of "Non disclosure" as required by Section 21 of this Agreements. " 6. 2. Main clauses(Clause 42)of the agreements with Hewlett Packard Singapore (Sales)Pte Ltd. , a non resident entity from Singapore read as under: 42. 1. Upon delivery of software, the SELLER shall grant to Owner or its Affiliates (and to third Parties whom Owner or its Affiliates have contracted to operate the Owner's network on their behalf (and to the extent of the same) by OWNER and/or its Affiliates, a perpetual, irrevocable, nonexclusive, royalty free license, for the use of such Software in object code form and the Documentation, inter alia, for storing, loading, &....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... dispute, all the Owner'S right under the Purchase Order shall continue in fu. 1 force and effect, and SELLER will not terminate the; Software Licenses, and so long as Owner continues to pay SELLER applicable fees, SELLER will not terminate, suspend, interrupt or delay maintenance and support of the Software. 42. 4. The Owner shall make copies or adaptations of the Software for archival purposes or when copying or adaptation is an essential step for the authorised use of the software. 42. 5. Owner shall not translate, reverse engineer, modify, decompile, disassemble or create derivative works from the Software except as expressly provided under applicable law. However, tailoring of the Software by use of the utilities provided In the Software shall not be construed as modification of the Software. 42. 6. Owner shall not use the Software for (i) commercial time-sharing with non-affiliate third parties: (ii) rental, lease, and sub-licensing to non-affiliate third parties; and (iii) service-bureau purposes. " 42. 7. SELLER shall obtain and keep valid (either perpetually or t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of the Vendor and hereby agrees to provide, simultaneous with the delivery of the Software. I (one) complete, unabridged copy of the Documentation in printed format and / or machine-readable form as it exists at that point in time. The Vendor further agrees to provide updated copies of the documentation as and when they become available during this Agreement 2. 2 Ownership Reliance hereby acknowledges that Vendor is and shall remain the sole and exclusive Owner of the rights, title and property in Software and the Source Code to the Software, save and except on the occurrence of any of the release events set out in Clause 10. 1 [Source Code Escrow]. 2. 3 Copies Reliance and its Affiliates shall have the unlimited right to translate, abridge and/or make : as many copies of the Software and/or Documentation as are reasonably necessary for Use of the Software. Reliance agrees that the rights & title in such copies shall at all times remain vested in the Vendor and agrees to reproduce on all such copies, all , copyright notices as provided on the original Software. 2. 4 Restrictions on Use The grant of li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t to its employees and legal advisors on a "need to know" basis; b) not make any copies of Software or Documentation or Parts thereof, except for archival backup purposes: c) When making permitted copies as aforesaid transfer to the copy/ copies any copyright or other marking on the Software or Documentation. d) Not de-compile, disassemble or reverse engineer the Software; and e) Not remove any trademark, trade-name, proprietary, copyrights, trade secret or warning legend from the Software, Documentation or copies thereof : and f) Not translate, adapt, arrange or error correct or make may other alteration of the Software or documentation ; and g) Not use the Software or Documentation for any other purpose than permitted in this Article 20, License or sell or in any manner alienate or part with its possession. h) Not use or transfer the Software or Documentation outside India without the written consent of Supplier and after having received necessary export or re-export permits from relevant authorities. 7. After considering the various clauses of the above mentioned agreements, we are of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... its wireless network only'. Thus, it is clear that it was prevented from utilising the software for commercial uses. Had the ultimate authority been with the assessee, it could have used the software in the manner it wanted. It could make copies of Software or the documentation or parts thereof for archival purposes only. Restriction on copying the software clearly establishes that the suppliers of the softwares were the sole and exclusive owner of the rights, title and property in Software and the Source Codes. Software. Agreements forbid the assessee from transferring, assigning, sub-licensing, using by outsourcing, decompiling, reverse-engineering, disassembling/decoding the software. None of the agreement talks of transferring of copyright to the assessee by the suppliersrather it is clearly mentioned in the agreements that copyright would remain with them. Agreements provide returning of the copies of the software to the vendors upon termination or cancellation of the agreements. So, we hold that the consideration paid by the assessee to the suppliers for acquiring copy of software was not for the 'use of copyright or transfer of right to u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot obliged to deduct tax at source. 8. 1. Submissions of the DR in respect of software being Process/, Invention/Equipment were considered in the matter of ZTE Corporation(supra). The Tribunal, in the case of Baan Global BY(71 taxmann. com 213), held that receipts from sale of shrink-wrapped software cannot be considered as royalty within the meaning of DTAA as the same is consideration for the copyrighted product and not for the use of copyright. In the said case, the assessee was engaged in the business of development and sale of software and other services related to software products. While deciding the issue, the Tribunal observed that the sale of software cannot be held to be covered within the expression 'use or process'. Further, in the cases of Shell Information Technology International BV(80taxmann. com64), National Stock Exchange of India Ltd (supra), First Advantage(P. )Ltd. (163 ITD 165)Datamine International Ltd. (68 taxmann. com97);Black Duck Software Inc. (86 taxmann. com 62);I. T. C. Ltd. ( 79 taxmann. com 206), the Tribunal has considered the term 'process' while deciding the issue of software is not royalty. We also find....