TaxTMI 
TaxTMI 
2019 (12) TMI 1029
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....08) 1. The learned Asstt. Director of Income-tax, Circle 1(1), New Delhi (AO) erred in 2. law and on facts in holding that the amount of Rs. 2,01,51,292/- received by the assessee company from its customers is in the nature of ROYALTY u/s 9(l)(vi) of the IT A, 1961 and also as per Article 12(3) of the Indo-USA DTAA. The AO ought to have appreciated that the said amount is normal Business Income of the appellant arising on account of sale of copyrighted products (licenses) and not taxable in India in the absence of Permanent Establishment (PE) in India. 3. The Honorable DRP has erred in law and on facts in rejecting the objections of the appellant to the additions proposed by the learned AO in treating the amount of Rs. 2,01,51,292/- received by the assessee company as ROYALTY u/s 9(l)vi) of the ITA, 1961 and as per Article 12(3) of the Indo-USA DTAA; instead of treating the same as consideration for sale of software licenses. 4. The assessee company craves leave to add / modify / delete / amend all / any of the Grounds of Objection. ITA No. 2415/Del/2013 ( A. Y. 2009-10) 1. The learned Asstt. Director of Income-tax, Circle 1(1),....
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....e by taking extreme conservative position of the law. 5. The assessee company craves leave to add / modify / delete / amend all / any of the Grounds of Objection. ITA No.987/Del/2015 ( A. Y. 2011-12) 1. The Hon'ble DRP-IV Delhi has erred in law and on facts, in upholding learned AO's order treating the amount of Rs. 1,40,48,530/- being received by the assessee company for sales of licenses as a taxable ROYALTY u/s 9(l)(vi) of the ITA, 1961 and as per Article 12 the India - USA DTAA; instead of treating the same as consideration for sale of copyrighted software licenses. 2. The DRP / AO ought to have appreciated that the said amount, received from assessee's Indian customers, is normal Business Income of the appellant arising on account of sale of copyrighted licensed software products and not taxable in India in the absence of Permanent Establishment (PE) in India. 3. The learned AO has also erred in law and on facts in granting short TDS credit of Rs. 10,03,459/- (Rs. 14,90,981 - Rs. 4,87,522) which was deducted by the various Indian customers of the assessee by taking extreme conservative position of the law. 4. Alternatively ....
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.... of sale of copy righted software licenses as royalty. He submitted that the company was of the belief that the said sale of software license is not a royalty but a normal business receipt not liable for TDS. Since the company does not have any PE in India, the company claimed the TDS refund of Rs. 25,35,599/- by filing return of income for A.Y.2007-08 on 29.03.2008. Similarly, the return for A.Y.2009-10 was filed on 16.03.2011 claiming refund of Rs. 339583/-. The returns were subjected to scrutiny proceedings for both the assessment year and draft assessment order was passed by the AO on 31.12.2009 for A.Y. 2007-08 and on 23.12.2011 for A.Y.2009-10. The objection of the assessee was rejected by the DRP and the AO passed the final order on 31.12.2009 for A.Y.2007-08 and on 26.10.2012 for A.Y.2009-10. The assessee company filed appeal before the Tribunal against the order of the AO for A.Y.2007-08 which was set aside by the Tribunal vide order dated 09.02.2011 to the file of the DRP for passing a fresh order for A.Y.2007-08. The DRP vide order dated 23.12.2011 passed the order dismissing the objections of the assessee company and consequently the final order was passed by the AO on ....
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....f the facts of the case we are of the considered opinion that there was a reasonable cause for delay in filing of the appeals. The Hon'ble Apex Court in Collector, land acquisition Vs. MST Katiji & Others reported in 167 ITR 471 has held that when substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right injustice being done because of a non-deliberate delay. There is no presumption that delay is occasioned deliberately or on account of culpable negligence or on account of malafides. The litigant does not stand to benefit by resorting to delay, in fact he runs a serious risk. 8. The Hon'ble Supreme Court in the case of Vedabai Alias Vaijayanta Bai Baburao Patil Vs. Shantaram Baburao Patil reported in 122 taxmann 114 has held that the Court should adopt pragmatic approach. The distinction must be made between a case where there is inordinate delay and a case where the delay is of a few days. In the former case, the consideration of prejudice to the other party will be a relevant factor so the case calls for more cautious approach but in the later cas....
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....the fundamental principle is that the courts are required to weigh the scale of balance of justice in respect of both parties and the said principle cannot be given a total go by in the name of liberal approach. (x) If the explanation offered is concocted or the grounds urged in the application are fanciful, the courts should be vigilant not to expose the other side unnecessarily to face such litigation. (xi) It is to be borne in mind that no one gets away with fraud, misrepresentation or interpolation by taking recourse to the technicalities of law of limitation. (xii) The entire gamut of facts are to be carefully scrutinized and the approach should be based on the paradigm of judicial discretion which is founded on objective reasoning and not on individual perception. (xiii) The State or a public body or an entity representing a collective cause should be given some acceptable latitude." 10. Respectfully following the ratio laid by the Hon'ble Apex Court in the decisions cited (supra) we condone the delay in filing of the appeal for assessee's A. Y. 2007-08 and 2009-10 and these appeals are admitted for adjudication. 11. Now, we take up t....
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....r maintenance of the software, if required. Service fees will not be charged for the first twelve months from the completion of contract and thereafter maintenance fees will be charged as per the terms and conditions given in the agreement. It was submitted that the services are required to be rendered for customization of the said software for the use and facilitation of any customer. As the softwares are Standard forms, the customization is necessary considering the diverse situations. Also, a regular backup of trouble shooting is necessary if there are any unintended bugs / problems. The assessee company aims at trouble shooting from the USA establishment. For this purpose, it has a ready support services on a 24 X 7 basis. The problems of the clients are aimed at being sorted out on an offline basis. However, in case of necessity, the executives are required to visit the clients establishments and fix the problems. For all these jobs, separate service charges are levied. 13. Some of the details regarding the software and solutions provided by the assessee were obtained by the AO from the website. He noted that the software is delivered at the site of the end customer. There ....
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....on of acceptance / rejection in case of a standard software. The software is run in the premises of the customer, for the customer to see whether it meets its criterions. e) Customer can even go for certain enhancements as desired. f) The supplier is required to keep the software, for which license is given, updated & maintained to be able to keep on carrying out the processes as desired by the customer. g) It is recognized that the training is needed to support the basic sales, implementation and support of software. h) Not only license but license, documentation, services, training, updates are provided. The configuration is also to be done. i) The software license provided by the assessee are upgradable and as claimed 'future ready'. Unlike sale, the software is not stand alone and the assessee keeps in continuous touch with its customer. j) The software are heavily priced vis-a-vis a normal computer / system. The software are feature rich and are capable of carrying out various activities-. These can carry out the activities which many person together will not be able to do. Moreover the speed of carrying out the processes i....
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....r royalties under the DTAA is 15%. He accordingly determined the total income at Rs. 2,01,51,292, which is taxable @ 10% + surcharge + education cess as per section 115A of the Act as the agreement is entered after 01.06.2005. 17. The assessee approached the DRP who passed the direction on 30.08.2010 u/s. 144 C of the IT Act. Against the order of the DRP the assessee filed appeal before the Tribunal who vide order dated 09.02.2011 set aside the case of the assessee and remitted it to the file of the DRP to consider the same once again. Subsequently the DRP vide order dated 23.12.2011 passed certain directions wherein they upheld the action of the AO in holding that the payment made by M/s. Infosys and HCL to the assessee is covered within the definition of royalty u/s. 9 (1) (vi) of the IT Act and/ or Article 12 of the Indo US DTAA. While holding so they relied on the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Company Limited and the decision of AAR in the case of Millennium IT Software Limited. 18. The AO thereafter passed the order u/s. 143 (3)/ 144 C on 27.12.2011 treating the software consideration of Rs. 2,01,51,292/-as royalty which ....
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....as prepared a comparative chart of various key clauses of the Agreements with customers. The same is given at Page No. 453 to 454. It is the submission of the appellant that the moment, restrictions are put regarding copying / duplicating / reproducing, etc., a copyright gets converted into a copyrighted product. From the said chart, it will reveal that the Appellant does not part with any copyright to the customers. On the contrary, appellant merely extends a copyrighted product to the customers. 2.5. Meaning of "Copyright" as per Indian Copyright Act. 1957 Section 14 of the Indian Copyright Act, 1957 defines the term "Copyright". The same is defined as the exclusive right to do or authorise doing the following acts in respect of a work-following acts in respect of a work- Right Section 14(a) Section 14(b) Section 14(c) Section 14(d) Section 14(e) Literary, dramatic or musical work Computer programme Artistic work Cinematograph film Sound recording To reproduce y y y X X To issue copies y y y y X To perform work in public/ To communicate to public y y y y y To make film ....
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....landmark decision in this regard was that of DIT V. Infrasoft Limited - 264 CTR 329. A copy of the said decision is submitted in Paper-Book-ll on 12th May 2015. Appellant has prepared a quick summary of the rights granted and restrictions imposed in the Agreement involved in the said Infrasoft (supra) decision and compared the same with Appellants agreement. The said comparison is as under :- Reasons of DRP-I Explanation Page-6 (Para-2) That the right to use the software licence falls within ambit of section 9(l)(vi) Key proposition is, DTAA does not cover the right to use software in the meaning of Royalty Page-6 (Para-2) That the nature of rights is far from shrink-wrapped ...... since the supplier (^required to update fix the bugs, etc. Totally irrelevant contention since, issue involved is, what is the fate of a copyrighted product (i.e. a licence having restrictions of copying / duplicating, etc.) Issue of update / fixing bugs, etc. are typical warranties which come with every product. Moreover, the same is besides the present issue. Page-6 (Para-3) Concept of copyrighted product does not find mention in the ITA / DTAA / Copyright Act Copyri....
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....iven at page no. 535. Recent jurisprudence tilts clearly in favour of the Appellant. 2.8 - Various other reasons of learned AO While framing the draft order dated 31st December 2009, the learned AO has taken various alternate positions. Learned AO states that, the PMS software is not only a copyright, but also a patent / process / equipment, etc. As such, provisions of section 9(l)(vi) apply to the facts in either one of the situation. Appellant has been submitting that, the software license is not a patented technology. There is no any grave and material process involved in the same. In fact, the PMS software's of the Appellant are simply, Business Intelligent tools or MIS data tools for increasing efficiency. Further, these software licences are certainly not any equipment. The DRP-I has also focused on the issue of copyright V. copyrighted article and left the other analogies of the learned AO at that. Appellant submits, at the same time, the PMS software license cannot be a copyright + patent + process + equipment. Analogy of the learned AO is incorrect. 2.9 - Summary on point of covered issue As per the data available, it transpires, there are th....
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.... 93 taxmann.com 80 (Delhi ITAT) 21. Ciena India P. Ltd. Vs. ITO (Intl Tax.) 96 taxmann.com 17 (Delhi ITAT) 22. Engineering Analysis Centre of Excellence P. Ltd. Civil Appeal No.8733-8734/2018 (SC). 23. DIT Vs. Infrasolt Ltd. (220 Taxman 273) 24. Halliburton Export Inc. Vs. ADIT (2014) 43 taxmann.com 223 Delhi ITAT 22. The Ld. DR on the other hand relied on the order of the AO / DRP and filed the following written synopsis :- "D. Taxation of Software Royalty - The assessee claims the nature of its transactions with Infosys and other clients as one of 'sale simplicitor' involving the sale/transfer of a 'copyrighted material/product' rather than a transfer of copyright. Heavy reliance has been placed by the assessee on the decision of Hon'ble Delhi High Court in the case of Infrasoft Ltd. [2013-TII-50-HC-DEL-INTL], However, nowhere it has been established that the facts of the case of the assessee are identical to that of Infrasoft. Moreover, the Hon'ble Delhi High Court in the case of Infrasoft had also observed - "69. The Tribunal has held and rightly so that the question whether there was a transfer of a copyright ri....
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.... claimed by the assessee but one of developing, customizing & integrating the software of the assessee with that of the client for the ultimate use by the end-users. This is one of the most significant differences between the facts in the case of Infrasoft & that of the assessee. ii. Significance of Source & Object Code & creation of Derivative works - Another important point of departure from the facts in the case of Infrasoft is the provision of "Source Code" & "Object Code" of the supplied software to the client. After becoming a party to the Agreement on Trade-Related Aspects of IP Rights (TRIPs), India has significantly amended its IP laws to comply with various requirements set out in TRIPs. Article 27(1) of TRIPs states that patent protection for new, inventive and industrially applicable inventions must be available without discrimination based on the technical field of an invention. In respect of software, Article 10(1) of TRIPs mandates the protection of computer programs, whether in source code or object code, as literary works under the Berne Convention, to which India has also acceded. It is in this context that the importance of the provisions of the agreemen....
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....ellectual Property Rights therein. Similarly, cl.11.3 [p.282] provides that in the event of termination of the agreement, Infosys shall be entitled to retain and withhold and use without any restrictions the software, software core derivatives and software derivatives. Moreover, the agreement provides that the assessee 'shall refrain from providing such software and software core derivatives to any third party' and in the event of any breach to this, the assessee is liable to pay liquidated damages to Infosys. iv. Commercial Exploitation - It has already been discussed earlier that the agreement permits and the access to the source code allows Infosys to embed and incorporate whole or part of the software into Infosy's own products and developing new products based on the software, [cl.2.1 (ii), p.271] It has also been highlighted that the assessee will receive a 'Bonus' on the basis of "End User" satisfaction of the products where the software has been incorporated. It was also highlighted that Infosys will own all worldwide right, title and interest in and to all such integration code and the assessee will assign to Infosys all of its right, title and interest in and to ....
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....the licensee to operate the program or something more than it. [para-88] , - Purpose Test - Whether the purpose of the license or the transaction is only to restrict use of the copyrighted product for internal business purpose [para-89] or the licensee was permitted to use and exploit the same commercially i.e. loan/rent/sale/sub-license or transfer the copy of software to any third party without the consent of the licensor, [para- 92] The case of the assessee when examined from the above perspective clearly establishes that the transfer is that of a 'copyright' and not a 'copyrighted' material. The following facts are the clear indicators of this conclusion - ■ Nature of transaction - It has already been discussed earlier that the agreement between the assessee and Infosys & other customers is more in the nature of a "Software Development agreement" than in the nature of 'sale simplicitor' and the as contention of the assessee that the product transferred is in the nature of 'goods' is not tenable. As has been observed by the Hon'ble Special Bench of this Tribunal in the case of Motorola Inc. [2005-TII-10-ITAT-DEL-SB-INTL1, the appellant has transferred "so....
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....sed in MLA, the licensee cannot lease, lend or rent the software to the third parties, in reality, the provisions of MLA itself permit the licensee to allow third party user of the software either independently or through embedded form along with the licensee's products. The licensee, thus, can allow any number of users to use the product either (i) by engaging/getting involved such user in the business of the licensee i.e. subsidiaries, employees and contractors and (ii) by any other person by supplying/using licensee's own products embedded with the software. In fact, integration of the software supplied by the assessee with Infosy's own software and embedding of the assessee's software in the products of Infosys and other customers for the third party users/customers clearly establish the commercial use and exploitation of the software by the licensee. In fact, the agreement explicitly provides for and encourages such joint commercial exploitation of the software. Such commercial use of the software, and for that matter, the purpose of the license, in no stretch of imagination, can be viewed or treated as a restricted use of the product for internal business purpose of the licen....
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....e details of Project Management Software have been described above." 24. He submitted that it is not a sale simplicator. In addition to copy right services, service has been provided. Whether the services are to be taxed as business receipts or royalty has been discussed by the AO thoroughly and he held that the consideration received by the assessee falls in the category of royalty both under the Act as per section 9(1) (vi) Clause (i), (iii), (iva) and (v) of explanation 2 and Article 12 (3) (a) and 12 (3) (b) of Indo US DTAA. He submitted that the agreement in the instant case provides for auditing and documentation. Had it been a sale simplicitor no question of auditing arises. He submitted that the supply of the software in the instant case gives full freedom to customers to commercially exploit the same. Further payment of bonus is not possible in case of a simple sale. Relying on the following decisions, he submitted that the order of DRP/ AO be upheld. 1. Elektrobit Automotive GMBH Vs. DDIT 2018-TII-166- ITAT-Del. 2. Pine Labs (P.) Ltd. Vs. Gemalto Terminals India (P) Ltd. & Ors. FAO (OS) 635 of 2009 order dated 03.08.2011 25. We have considered the ....
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....ee that the moment restrictions are put regarding copying/duplicating/reproducing etc a copy right gets converted into a copy righted product. However, in the instant case, the assessee does not part with any copy right to the customers but merely extends a copy righted product to the customers. It is also his submission that unless and until a right protected under the copy right Act is not extended / shared with a party, and unless consideration is received for such a right, there is no case of any royalty for IT purpose. According to the Ld. AR the limb for sale / commercially rent as so made applicable for software, infact, ascribes copyright protection even in making of such use purpose copies. According to him the enhanced kitty of copyright protections for software, elevates the software family and makes the same highly protected from infringements. It is also his submission that the assessee has not transferred any rights for copying the softwares for commercial exploitation. 26. We find some force in the arguments of the Ld. Counsel for the assessee. The terms royalties as used in article 12 (3) (a) and 12 (3) (b) reads as under :- 3. The term "royalties" as us....
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....it would not be legally correct to state that the copyright itself or right t r 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 conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional ....
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....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 is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted mat....
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....ered as a royalty. The relevant observation of the Hon'ble High Court from para 10 onwards reads as under :- 10. The Assessee had entered into a "VAR Agreement" with THPL. Paragraph 1.1 of the said agreement expressly indicates that THPL had appointed the Assessee (described as VAR) to "market and sell the products" in the Territory. Article 2 of the said Agreement provides for "VAR's Obligations". Clause (a) of paragraph 2.1 of Article 2 expressly provides that the Assessee "Shall promote, market and sell the Products in accordance with a business plan which shall be submitted to Trak within three (3) months of the effective date of the Agreement". Paragraph 4.2 entitles the Assessee to, inter alia, use the software and source codes for a limited purposes to sell and promote the software for use by third parties; demonstrate the software to third parties; and to customise the software for the purposes of End Users. The said agreement further contains a number of covenants to ensure that the Intellectual Property Rights in respect of the software, related material and source codes remains with THPL. A plain reading of the aforesaid agreement indicates that the Assessee has....
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....ransferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income. 14. Insofar as the reliance placed by the Revenue on the decision of the Karnataka High Court in Samsung Electronics Co. Ltd. {supra) is concerned, a Coordinate Bench of this Court in lnfrasoft Ltd. {surpa) has unequivocally expressed its view that it was not in agreement with that decision. Thus, the said decision is of no assistance to the Revenue in this case. 15. In another case, Dynamic Vertical Software India (P.) Ltd. {supra), this Court had reiterated the view that payment made by a reseller for the purchase of software for sale in the Indian market could by no stretch be considered as royalty. 16. In the aforesaid view, the question framed must be answered in the affirmative, that is, in favour of the Assessee and against the Revenue. 17. The Appeal is accordingly dismissed. In the circumstances the parties are left to bear their own costs. 29. We find the Hon'ble Madras High Court in the case of CIT Vs. Vinzas Solutions India Private Limited reported in 77 taxman.com 279 ha....
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....uld not sub-license or modify same, could not be considered as royalty within meaning of article 12(4) of DTAA. 31. We find the Coordinate Bench of the Tribunal in the case of ACIT Vs. Landmarks Graphics Corporation reported in 87 taxman.com 311 has held that where assessee, a US based company, did not have PE in India and its activities were not covered by deeming fiction of article 5(2) of India - USA DTAA, income earned by it from sale of software to Indian companies which was 'off the shelf software, was not taxable In India. 32. We find the coordinate Bench of the Tribunal in the case of Black Duck Software Inc Vs. DCIT reported in 86 taxman.com 62 has held that where assessee, a US based company, granted a non-exclusive, non-transferable software license to Indian customer for a specific time period, since copyright in said software programme was retained by assessee, payment received by it was not liable to tax in India as royalty. 33. We find the Delhi Bench of the Tribunal in the case of Aspect Software Inc Vs. ADIT reported in 61 taxmann.com 36 has held that consideration received by assessee for supply of 'contact solutions' used for better managemen....