TaxTMI 
TaxTMI 
2018 (5) TMI 1861
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....for short, at Rs. 131.01 lacs) and Tata Consultancy Services Ltd. (TCSL) (Rs.36.08 lacs) for the relevant year qualify as 'Royalty', as contended by the Revenue, or as 'business income', as claimed by the assessee. The assesseecompany, a foreign company, with no business presence/permanent establishment (PE) in India, its' business income is not taxable in India under the Indo-German Double Tax Avoidance Agreement (DTAA), while the 'royalty income' would attract tax at the rate of 10% under Article 12 thereof. 3.1 The background facts are that the appellant is a manufacturer of automotive software and offers flexible and innovative software solutions for connected car infrastructure, human machine interface (HMI) technologies, navigation, driver assistance, electronic control units (ECUs), and software engineering services. The Appellant for the relevant year licensed its software to two Indian customers, as afore-noted, which the Revenue contends to be royalty and, hence, taxable, refuted by the assessee. 3.2 The relevant provisions (in the relevant part) of the domestic law and DTAA, defining the term 'royalty', are as under: Domestic Law 'Income deemed to....
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....anation 4.- For the removal of doubts, it is hereby clarified that the 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 a licence) irrespective of the medium through which such right is transferred. Explanation 5.- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India.' Indo German (DTAA) As per article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Germany:- "ARTICLE 12 - Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. ....
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....nnection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement." 3.3 We may at this stage set out the respective cases of both the sides. The assessee's case, firstly, is that the computer software is not a copyright. Reference to the Copyright Act, 1957 by the Revenue is not valid as the term 'royalty', as defined in the Indo German Tax Treaty, does not ....
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....ion system being now-a-days increasingly found in cars, which include graphics as well. The customer, it was explained, has no right to use the EB Guide Software in its own products, though can be used as a tool for developing HMI or HMI based product, i.e., licensed products, by its customers. It is similar to preparing a 'word document' using the commonly used software 'Microsoft Word'; the word document belongs to the user, while the copyright in Microsoft Word vests in Microsoft Corporation. Likewise, the HMI model developed by RBI belongs to it, while the copyright in EB Guide Studio belongs to the assessee. The Revenue's case is that the development license is a full-blown agreement, allowing the user to internally develop, configure and adapt the software, so that the same can be used in the products manufactured which may be sold or licensed ('the licensed product') by it. Sub-licensing right allows the user to further sub-license the right to reproduce and distribute the licensed product to third parties. The restriction on the reverse engineering is subject to the rights granted under the license, viz. for copying, integration and compilation of the software into licen....
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....ighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached 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 confer....
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....rights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of 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 th....
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....not satisfied, and toward which it observes some indica and facts, which find mention in the operative part of the judgment, reproduced hereinabove. The rights granted in that case, it concluded, were limited to those necessary to enable the licensee to operate the program. It was therefore a case of a limited right to use the copyrighted article, and not a copyright in the software or a right to use the same (copyright). 3.6 The question that therefore arises next for considering and answering is whether the licensed product/s developed by using the assessee's software EB Guide Studio is a derivative program, or not. This is as the other rights afore-stated (at para 3.5) are clearly not applicable in the instant case, nor are claimed to be so by the Revenue. A derivative is something which has been developed or obtained from something else. The matter, it may be appreciated, thus, given the clear law laid down by the binding decision afore-referred, is essentially one of fact. The question to be asked in this regard is if the HMIs developed using the software EB Guide Studio could be so developed independent of the latter. The answer, surely, is in the negative; the same admitt....
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.... Deliverables by the licensee as permitted thereby'. 'Deliverable' is defined to mean the EB Product under customization as applicable (cl. 2.8). However, even if a standard software, delivered without any customization, could EB Guide Studio possibly be regarded as sans any IPR? Why, any program is a product of human intelligence and, thus, has inherent IPRs? Customization only means the changes, extension or adaptions to the EB products as carried out by EB (assessee) pursuant to requisition therefor by a customer, formalized through an agreement (cl. 2.4). Not surprisingly, the license agreement itself employs the word 'royalties' in conjunction with the license fee (cls. 6.1 & 6.2), even as the Revenue points out. Significantly, the supply of the licensed products by the assessee's customer (RBI) using EB Guide Studio, statement of which it is under the license terms obliged to furnish to EB on a monthly basis, is taken into account, raising the invoice on RBI on that basis (cl. 6.5). This itself establishes the license fee for the same to be a royalty. Further, if the supply of the licensed product so created/produced for consideration to its' customers by the user is not comm....
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....ate derivative works of any of them (clause 4.5). Even if, as contended, there is a restriction on reverse engineering - being allowed on a case to case basis - the licensor being certainly entitled to know the purpose for which its licensed software, and the information, viz. object codes, being shared, is to be used, it is of little consequence. This is all the rights necessary to develop the HMI have been or are to be allowed. Why, for all we know, reverse engineering may not be required for the same. If anything, it gets clarified from the said clause that derivative works are in contemplation on the basis of the development license. It is in fact upon considering all these aspects that we have - in the preceding part of this order, found the licensed product/s (HMI/s) are developed only on the basis/ edifice of the software licensed, and is thus a derived program, on the supply of which therefore EB keeps tab. The sale/license (or sub-license) of the licensed product by the customer is only a commercial exploitation of the assessee's software. These rights do not obtain in the case of Infrasoft Ltd. (supra), in which case the Hon'ble Court found the rights granted to be limite....