TaxTMI 
TaxTMI 
2019 (5) TMI 535
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....d to as learned DRP) are erroneous and bad in law. 2. That on the facts and in the circumstances of the case the A.O. erred in taxing revenue earned by company, being a non-resident, from sale of software to Indian customers as 'royalty' and the learned DRP grossly erred in confirming the action of the A.O. 3. That on the facts and in the circumstances of the case the A.O. and the ld. DRP failed to appreciate that sale of software is not 'royalty' within the provisions contained in Article 12 of the India-Ireland DTAA. 4. That on the facts and in the circumstances of the case both the A.O. and the Learned DRP had failed to appreciate the difference between 'copy righted article' and 'copyright right' while holding the software income to be in the nature of Royalty. 5. That the assessee craves leave to add, to amend, modify, rescind, supplement or alter any of the grounds stated hereinabove, either before or at the time of hearing of this appeal. 3. However, in this appeal the assessee has raised a multiple grounds of appeal, but at the time of hearing, the Solitary grievance of the Assessee has been confined to the issue whether the considerat....
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.... contrary all Software and Professional Services deliverables, are licensed and not sold and the use of terms such as sale and "purchase" herein in connection with those items will be understood as a reference to the licensing to those items. With the exception of lest scripts and related documentation (collectively "TestScripts"), all software is licensed pursuant to the applicable end user license agreement (each a "EULA "). For Test Scripts and for all Professional services deliverables that do not constitute Software, Ixia hereby grants to Buyer a limited, non-exclusive, nontransferable, perpetual, worldwide license to copy and use such items only for Buyer's internal business purposes. As between Ixio and Buyer, Ixia is and shall remain the exclusive owner of all intellectual property rights in or related to any of the Products. " The buyer's right to use the software is absolute and is perpetual i.e. forever. The buyer thus becomes the owner of that copy of the software with limitations like the buyer cannot resale the software. The buyer can customise the software to suit it needs but cannot modify the software the software are generally encrypted, only exe ....
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....ew our attention to Article 12 of the India-Ireland DTAA, an extract of which is reproduced as under: "The term 'royalties' as used in this Article mean 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 film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience". Based on a reading of Article 12 of the India-Ireland DTAA, in the given case of the company, the consideration received for sale of software would only be classified as "royalty" if the company has allowed the use or right use the 'copyright' in the software supplied to the Indian customers. In the backdrop of the above discussion, the company would like to submit that in view of the definition provided in the Article-12 of India-Ireland DTAA for 'royalty', which means consideration for use orrightto use any copyrig....
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....bility of any remittance, as royalty, concluded in the facts of the case that "what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income."Similarly, in another judgment pronounced in the case of DIT Vs. Ericsson A.B. 343 ITR 470, wherein the issue was relating to taxability of payments received against supply of GSM mobile telephone system, which consisted of both hardware and software, the Hon'ble Delhi High Court held that there was no wayin which an independent use of software could have been made. The High Court observed that the embedded software merely facilitated the functioning of the equipment and the GSM supply contract could not be bifurcated into hardware and software. The High Court then went on to record the principle towards taxability of payments made against supply of software and concluded that there is a difference between copyrighted article and copyright right. In the facts of the case it was decided that the payment was for mere usage of copyrighted software and therefore such payments were not covered under the definition of royalty provided ....
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....ference: "India - Ireland - ARTICLE 12 - ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties or 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. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this Article 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 film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience....
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....acting State, due regard being had to the other provisions of this Convention." After going through Article 12 of India vs. Ireland DTAA,as mentioned above, we note that the term'royalty' is defined to meanpayments 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 film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience. It is abundantly clear and we also note that from a consideration of the various decisions of the Supreme Court and the High Courts and the Circular No. 333, dated 2-4-1982, it would be clear that where the provisions of the DTAA are more beneficial than provisions of the Act, the provisions of the DTAA would prevail. We note that in the assessee`s case under consideration, the buyers of the software are not allowed to sell/distribute the copies of the software to the third parties. What t....
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....sferred 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 the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the 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. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred....
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....llow it merely on the ground that the department is in appeal against the said decision before the Hon'ble Supreme Court. We note that an appeal before the higher forum doesn't vitiates the validity of the said judgment of Hon`ble Delhi High Court in the case of Infrasoft (supra).The mere fact, that further appeal has been filed, in no way, means that thesaid judgment of Hon`ble Delhi High Court in the case of Infrasoft (supra), under consideration is not operational and effective. Unless and until the judgment of Hon`ble Delhi High Court is reversed by Hon`ble Supreme court, the same has to be given due effect. Judicial discipline demands that once an order has been passed in the assessee's own case, lower authorities are duty bound to act in accordance with the same. Therefore, we are of the view the ld DRP erred in not following the judgment of the Hon`ble Delhi High Court in the case of Infrasoft (supra). 10. We note that the assessee, a non-resident company, has earned revenue from supply of software to its Indian customers. As per the terms of the contract, the assessee provided a licensed software to its customers ( vide point 2 at Page nos. 17 of the paper book).....
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....definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work such as to reproduce the work, to issue copies, to make translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. A combined reading of clause-3 and clause-8 of the Agreement dated 15.12.2008 between the appellant and NPL, clearly shows that the Appellant had only a right to use the computer software and did not have right to use copyright in the computer software. In other words none of the rights as is envisaged under Sec.14(a) or (b) of the Copyright Act, 1957 was conveyed by the agreement dated 15.12.2008. Therefore the payment in question made by the Assessee to NPL cannot be regarded as "Royalty". As we have already observed the Act does not specifically include "computer software" in the term "literary work" and under such circumstances, if we apply the provisions of Act to define the scope o....
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.... seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument affected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. As held by the Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373, these treaties are creations of a different process subject to negotiations by sovereign nations. Therefore insertion of Explanation 4 in the definition of "Royalty" in Sec. 9(1)(vi) of the Act by the Finance Act, 2012, w.e.f. 1-6- 1976, has no effect whatsoever and the issue has to be decided in the light of the definition of "Royalty" as contained in the DTAA read with the relevant provisions of the Copyright Act, 1957. 23. The learned counsel for the Assessee also addressed arguments to the effect that the right to use the software in the present case is akin to sale of copyrighted article rather than....
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....the view expressed by the Hon'ble Delhi High Court in the case of Ericsson AB (supra), which is favourable to the Assessee, it should be held that the consideration received by the NPL was not royalty. The receipts would constitute income from business in the hands of NPL and since NPL did not admittedly have a permanent establishment in India its' income from business cannot be taxed in India in the absence of a permanent establishment. 24. We are of the view that the view expressed by the Hon'ble Delhi High Court in the case of Ericsson AB (supra), which is favourable to the Assessee, should be followed and therefore we hold that the consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a permanent establishment. 25. The learned DR submitted that the Appellant, whose obligation is to deduct tax at source u/s.195 of the Act, cannot place reliance on the DTAA as NPL could do in defence of non taxability in India of income deemed ....
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.... would override the provisions of the Act (even if the DTAA contains provisions which are inconsistent with the provisions of the Act) to the extent they are beneficial to the assessee. We note that the assessee is covered by the beneficial provisions of the India-Ireland DTAA as per section 90(2) of the Income Tax Act, 1961 ('Act'). As per Article 12(3)(a) of the DTAA, 'royalties' 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 film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience. We note that terms of the definition of 'royalty' provided in Article 12, ordinarily the receipt for sale of software shall be treated as 'royalty' only if it is for the use of a 'copyright'. Given the meaning of the term 'copyright' as has been discussed above in the C....