TaxTMI 
TaxTMI 
2018 (4) TMI 80
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce 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 software licenses, that they were not having the po....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncluding 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 copyright, that Hon'ble Court had also held that it was....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ol. 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 use of or the right to use the copyright of the softwar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oftware 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 80), Reliance Industries Ltd. (69 taxmann. com 311), Baa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 court had held that in case of difference in view, the view favourabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp;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 between the Govt. of India and foreign countries such as Sweden in which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp;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 information used or services utilised for the purposes of a business or profession carried on b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich 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 patent, invention, model, design, secret formula or process or trade mark or similar prop....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oned 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 mentioned in sub-paragraph (a), any such equipment as is mentioned in sub-paragraph(b) or any such knowledge or information as is men....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsideration 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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. But, the Act has expand....
X X X X Extracts X X X X
X X X X Extracts X X X X
....un 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. 3440 USA Lucent Technologies GRL LLC 47 837 USA Lucent Technologies GRL LLC 48. 3441 USA Lucent Technologies GRL LLC 49. 3442 USA Lucent Technologies GRL LLC 50. 3443 USA Lucent Technologies GRL LLC 51. 3444 USA Lucent Technologies GRL LLC 52. 4921 USA Techtronix Inc. 53. 4252 USA Tekelec Inc. 54. 4917 USA Tekelec Inc. 55. 4247 USA Ulticom Inc 56. 4306 USA Ulticom Inc. 57. 5075 USA Venturi Wireless Inc. USA 58. 5082 USA Venturi Wireless Inc. USA 5. 1. In t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 propounded by the Hon'ble Apex Court, has worked as a lighthouse for tax litigation related to copyright issues. Following the above judgment, Hon'ble High Courts of Delhi and Madras have held that the provisions of section 9(1)(vi) of the Act, cannot be applied to a situation of outright purchase and sale of a product. In the case of Vinzas Solutions India Pvt. Ltd. (392ITR155), the Hon'ble Madras High Court has dealt the issue. Facts of the matter were that the assessee was a dealer in computer software purchased from various companies. The AO disallowed the deduction u/s. 40(a)(ia) of the Act on the ground that the consideration for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Vendor represents, warrants and covenants that the Equipment shall he fully compatible with and fully supports the Objectives, as shall be demonstrated to Reliance, in part, in the Acceptance Tests. 3. 1. 1 The Vendor shall provide to Reliance the Equipment set forth in the Specifications as amended from time to time. Vendor's obligations hereunder shall include, but not be limited to the obligations to manufacture, supply (including inspection and expediting) and deliver the Equipment on FCA basis (read with Documents), to agreed international airport in the country- of the export to be put on sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Subject to the terms of this Section 15, upon delivery of Software, Vendor hereby grants to Reliance or its Affiliates (and to third parties whom Reliance or its Affiliates had contracted to operate the Wireless Reliance Network on their behalf (and to the extent of the same) upon payment (of, or agreement to pay, the relevant license fees by Reliance and/or its Affiliates, ajjerpetual, irrevocable, non-exclusive, unrestricted (within the Wireless Reliance Network), unlimited (where specifically so identified in the relevant Documents), royalty-free license, to use such Software for the benefit of Reliance in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rants 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 grants Reliance a perpetual, irrevocable, exclusive, fully paid-up, unrestricted license, without any additional charges, to use, copy, make Derivative Works from, modify, sublicense and transfer such Custom Work Product within the Wireless Reliance Network. Prior to the development of any Custom Work Product, Reliance and the Vendor shall agree in writing with respect to exploitation rights. 15. 2. 2 All intellectual property rights with respect to the Software (other than the Intellectual Property Rights) were and shall remain the sole and exclusive property of Vendor or its suppliers, including w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sor 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 the original Software and Documentation on all copies thereof, translations and abridgements thereof. Owner shall not remove nor alter, nor permit the removal or alteration of, any trademarks, copyright notices, tags, labels or other identifying markings placed on any software- 42. 6 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. 7 Owner sha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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, Installing, executing, displaying, analysis, configuration, training, implementation, interfacing and/or integration purposes for the benefit of Owner in connection with the Ownership, operation and maintenance of the Software in the Owner'S Data Centre. 42. 2. 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 SELLER'S consent except with respect to (i) the sale of the Owner'S net work (or any component thereof); (ii) the financing of the Owner'S Data Centre (or any co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ided 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 till replacement) all consents, authorizations, licenses, permissions or approvals, including but not limited to rights of access to and use the third party software, systems or other material required to validly and effectively provide and license the Software to Owner and its Affiliates Licensee ( " Required Consent"), at no additional cost or expenses to Owner, SELLER shall pay all fees and cost or expenses to Owner, SELLER shall pay all fees and cost (such as transfer, re-licensing or upgrade fees, termination or underutilization costs) associated with the Required Consents. Failure to obtain any Required Consent shall not relieve SELLEER of its obli....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 license under Clause 2. 1 above shall be subject to the following restrictions: Reliance shall not reverse engineer, decompile and disassemble the Software; Reliance shall not use the Software or Documentation copies of either, except provided under applicable and in accordance with the of this Agreement. Reliance shall not use Software for (ii) commercial sharing with non-Affiliate parties; and (iii) rental, sub-licensing to non-Affiliate third parties. Reliance shall not to the extent reasonably possible allow any non-Affiliate third party use of or access to the Software or the Documentation . 2. 5. Catalyst Vendor hereby agrees to grant to Reliance, the Source Code of "Catalyst" and a nonexclusive, &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 the opinion that below mentioned factors can be very helpful to solve the knotty problem of taxation of royalty payments to the non-residents. In such matters, what has to be seen is that as to whether: i) the software was sold in the same manner as wireless network equipment, ii) the software was an integral part of the wireless-equipment, which facilitated running of the said equipment, iii) the subject software had no independent value of its own, iv) copyrights in the software were transferred to the customers, v) access to the "source codes" in the software was granted to the assessee, vi) the payment for software was not related to the productivity, use or number of subscribers, vii) the customers did not have the right ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 use of copyright' the payment was made for the 'copyrighted article' and that the payments made by the assessee to the vendors of software cannot be taxed as royalty. 8. While deciding the appeals, filed by the 19 recipients, who are not part of the present appeals, the Tribunal or the Hon'ble High Courts have held that sums-received by them from the assessees for supply of software for wireless- network-were not taxable in their hands and that the payments could not be termed as royalty. Those suppliers are Nortel Networks India International Inc. USA, Team Telecom International Ltd. , Israel, Motorola Inc USA, Alcatel USA International Marketing Inc USA, ZTE Corporation China and Ericsson AB Sweden. All the above mentioned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nformation 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 that in the case of AVEVA Information Technology India (P. ) Ltd. (85taxmann. com 14), the Tribunal had considered the argument that software was Invention/Patent, etc. and had held that payment made for procuring and distributing copyrighted software was not royalty. Judgment of Samsung was considered in the cases of Solid Works Corpn. (supra);Shell Information Technology International BV(80taxmann. com 64); Shinhan Bank(76 taxmann. com 42);Baan Global BV (71 taxmann. com 213 ); Alcatel Lucent USA Inc. (ITA. s/1131, 7299 &7300/Mum/2010), National Stock Exchange of India Ltd. (supra), Lucent Technologies Hindustan Ltd. (348 ITR 196), Halliburton Export Inc(152 ITD 803), Halliburton Export Inc. (ITA 477 of 2014 of the Hon'ble Delhi High court). 9. We are....