TaxTMI 
TaxTMI 
2017 (11) TMI 1870
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....national Business Machines ('IBM'), WIPRO and Logica for providing network access to use copyright software in the nature of royalty even though the same is governed by Double Taxation Avoidance Agreement ('DTAA') of India-Netherlands. For this assessee has raised following grounds: - "Payments received from key application services ('KAS') for network access etc held to be royalty. 2. erred in construing the payments received from KAS providers i.e. IBM, WIPRO and Logica for providing network access to use copyrighted software to be in nature of royalty, on the alleged ground that payment received by the appellant is consideration for grant right to use various softwares to KAS. 3. Failed to appreciate that the payment received by the appellant company for software access fee is payment for use of copyrighted software and not for any copyright over such software and hence does not constitute royalty under the India - Netherlands Double Taxation Avoidance Agreement ('DTAAA') and the Act." 3. At the outset the learned Counsel for the assessee stated that this issue is squarely covered by Tribunals decision in assessee's own case for AY 2006-07 in ITA No....
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....to be able to provide MSA Services, IT Service Provider has requested and SITI has agreed to provide certain Services (as defined below). Article 1. Definitions: "GI Services "shall mean the services as specified in Exhibit A. section I "Intellectual Property Rights" of a Party means patents, copyrights, designs, trade or service marks (whether or not registered), rights in inventions and confidential information, semiconductor topography rights, database rights or other similar rights in any country and any applications for registration of any of the foregoing, to the extent the Party in question is entitled to grant licenses there under. ... "MSA "shall mean the Master Service Arrangement (as may be amended from to time) for the provision of offshore IT services as entered into between srn and IBM Netherland B. V., with contract number LDMO4/00005. ... "MSA Services" shall mean the IT services provided under MSA by the IT Service Provider either directly or as a sub-contractor of affiliate of IT Service Provider, as further described in a Statement of Work entered into by the IT Service Provider (or an IT Service Provide....
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....SOFTWARE. Access to and use the GI software and the Optional Software is subject to the terms and conditions set out in this Agreement, including the specific. terms and conditions of access and/or use as may be set out in Exhibit A, section III (as may be amended from time to time), if any. Optional Software. In addition to access to and/or use of the GI software, the IT Service Provider may, in order to provide the MS'A Services agreed in certain Statements of Work, need to access and/or use certain Optional Software. In such case the IT Service Provider 01 Focal Point shall request SI11 the right to access and/or use the Optional Software in question in accordance with the Optional Software Ordering Procedures. SITI in its sole discretion may (but is under no circumstances obligated to) grant the IT Service Provider the right to access and/or use the Optional Software in question. The IT Service Provider GI Focal Point shall only request SITI for access to and/or use of Optional Software, if the IT Service Provider requires such access and/or use in order to provide the MSA Services agreed in certain Statements of Work. The IT Service Provide....
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....ved from the IT Service Provider equipment by SITI), the IT Service Provider shall ensure that all Service Personnel immediately stop accessing and using such Optional Software and upon request of SITI, the IT Service Provider shall as soon as reasonably possible return to SITI such Optional Software together with any associated documentation, including (but not limited to) manuals relating to the Optional Software in question as well as license certificates etcetera which may be in the IT Service Provider's' and/or Service Personnel's possession. Upon request by SITI, the IT Service Provider shall inform SITI of the numbers and identities of the Service Personnel accessing and/or using the GI software and/or Optional Software. Subject to applicable Law, SITI shall have the right to log into and monitor the IT Service Provider's and Service Personnel's access to and use of any of the GI software and Optional Software at any time without notice. The IT Service Provider shall permit SITI or its authorized representative's at all reasonable times, to audit the IT Service Provider's and Service Personnel's access to and use of the GI software and Option....
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....question to make it no infringing; or 5. in the case that the IT Service Provider's and/or the Service Personnel's access to or use of a GI software and/or Optional Software is likely to be held to be Infringing, remove the GI software and/or Optional Software from the list included in Exhibit in which case the IT Service Provider shall ensure that all Service Personnel immediately stop using and/or accessing such GI software and/or Optional Software and upon request of SITI the IT Service Provider shall, unless the GI software or Optional Software in question has already been remotely removed by SITI, as soon as reasonably possible return to SITI such GI software together with any associated documentation, including (but not limited to) manuals relating to the GI software, license certificates etcetera which are in the IT Service Provider's and/or Service Personnel's possession. The foregoing slates SITI's entire liability to the IT Service Provider in respect of the infringement of the Intellectual Property Rights of any Third Party. ARTICLE 6. OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS. The Intellectual Property Rights in the GI soft....
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....imited to) manuals relating to the GI software, or Optional Software, license certificates etcetera, which may, he in the IT Service Provider's possession. ARTICLE 9. EQUIPMENT NO LONGER USED TO PROVIDE MSA SERVICES. In the event that the IT Service Provider, in order to provide MSA Services, has installed the GI software and/or Optional software on certain equipment (such as, but not limited to PC's), and such equipment is no longer used by the IT Service Provider in order to provide MSA Services, the IT Service Provider shall, unless expressly otherwise agreed in writing by SITI, ensure that all the GI software and/or Optional Software on such equipment is removed as soon as such equipment is no longer used for provision of the MSA Services. ARTICLE 17. NETWORK ACCESS In order for SITI to provide the Services and for the IT Service Provider and Service Personnel 10 make use of the Services, the Service Personnel shall be allowed to access certain parts of the IT network of Shell Companies. IT Service Personnel shall ensure that the Service Personnel only access and use the IT network of Shell Companies in so, far as required in ....
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....noted that right granted to WIPRO/IBM shall not be passed on/transferred to any other person and only WIPRO/IBM are legally permissible to exercise those rights. Article 4 merely grants right to access/use the GI/operational software. This right is subject to the terms and conditions set out in that article and provides following restrictions on to the rights so granted: 1) Only service personnel with a strict need to use and/or access the GI software in order to provide MS services shall use and/or access the GI software and/or Optional software; and 2) Such Service personnel shall only access and/or use the GI software and optional software in a normal operational manner and only in so far as strictly necessary to provide MSA Services; and 3) Unless otherwise agreed with SITI, the GI Software and operational software shall only be accessed from and used in the MSA Service Area. He pointed out Article 17 stipulates that in order to provide services to Shell Entities, WIPRO/IBM shall be allowed to access certain parts of the IT network of the Shell Companies. Such right is not unfettered but again is limited to use for the own business purpose an....
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....ri) * Galatea Ltd. v. DCIT [2016]67 taxmann.com 190 (Mum- Tri) * Capgemini Business Services (India) Ltd. vs. ACIT [2016] 68 taxmann.com 36 (Mum-Tri) * DDIT v. Reliance Industries Limited [2016] 69 taxmann.com 311 (Mum- Tri) * Aspect Software Inc. v. ADIT [2015] 61 taxmann.com 36 (Del-Tri) * Allianz SE v. ADIT [2012] 21 taxmann.com 62 (Pune-Tri) * Tata Consultancy Services v. State of AP[2004] 141 Taxman 132 (SC). 11. On the other hand, the learned CIT-DR after referring to various observations of the AO, submitted that the amendment brought in the section 9(1)(vi) by insertion of Explanation 4 to Finance Act 2012 with retrospective effect, covers such kind of payments for use or right to use of a computer software under the ambit of royalty. Such an amendment has to be read into the Treaty, because the scope of definition and meaning of 'royalty' under the Act and DTAA are by and large same. In support, he strongly relied upon the decision of CIT vs. Siemens Aktiongesellschaft, 310 ITR 320; and Vaicom 18 Media Private Ltd. vs. ADIT (2014) 162 TTJ 336. He gave a small writeup on this aspect, which for the sake of ready ....
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.... to S.9 inserted by the Finance Act 1976 w.e.f. 01-06-1976 could be imported into the old DTAA (1960) when at the relevant point of time of application of treaty, " Royalty" was not defined both under the then DTAA and the I.T. Act and what was the character of payment under the DTAA. ix) It is not disputed by the Revenue that the provisions of DTAA, if beneficial to the assessee shall prevail over the provisions of the I.T. Act. 2.In my respectful submissions, a perusal of Bombay HC decision in the case of Siemens AG, supra would reveal that: i) In the operational part (paras 27 to 31) of the judgment in the case of Siemens AG, supra, nowhere it is mentioned that amendments in the I.T. Act cannot be read into DTAA. ii) The nature of services rendered in the said case was found to be not Royalty under the DTAA though found to be Royalty under the Act (post 01-06-1976). Those services were found to fall under the expression "commercial or industrial profits" as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. Thus, the provisions of DTAA being more beneficial to the assessee were preferred over the provisions of ....
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...., plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. From the plain reading of the article it can be inferred that, it refers to 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, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as "royalty", it is sine qua non that the said payment must fall within the ambit and scope of Para4 of Article 12. The main emphasis on the payment constituting 'royalty' in Para4 is for a consideration for the 'use of' or the 'right to use' any copyright.......... The key phrases are "for the use" or "the right to use any copyright of"; "any patent......., "or process", "or for information.........,"; "or scientific experience", etc., are important parameter for treating a transaction in the nature of "royalty". If the payment doesn't fit within these parameters then it doesn't fall within terms of "royalty" under Artic....
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....h commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental." (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv) (d) In the case of cinematograph film, - (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) In the case of sound recording, - (i) to mak....
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....amsung Electronics Co. Ltd. [2013]345 ITR 494 and some other decisions of the Tribunal. We find that the Hon'ble Delhi High Court has taken note of this fact and also analysed the payment of software within the ambit of royalty as defined under Article 12 of the India US Treaty. The relevant observation and finding of the Hon'ble High Court is as under: "87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in i....
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....ent 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 and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA. ....
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....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 material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO. LTD (SUPRA) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright wo....
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....ent in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any of the copyrights referred to in Section 14 (b) of the Copyright Act, 1957. 55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income -Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not b....
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....hes the issues in favour of the assessee. 16. So far as the reading of amended definition of 'royalty' as given in section 9(1)(vi) into treaty as contended and argued by ld. CIT DR, we find that, Hon'ble Delhi High Court in its latest judgment in the case of DIT vs. New Skies Satellite, reported in [2016] 95 CCH 0032,wherein their Lordships shave discussed the issue threadbare and came to the conclusion in the following manner:- "60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, supra note 1, when the definitions were in fact pari material (in the absence of any contouring explanations), will continue to hold the filed for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both partners to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated tha....
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....cisions of Karnataka High court and ruling of AAR as mentioned above were not available for consideration. The decision of jurisdictional ITAT in the case of DDIT (IT) v. Reliance Infocom Ltd. and Others [TS-433-ITAT-2013 (Mum)] was also not available for consideration. The retrospective amendment was also made after the decisions in the case of assessee by the Ld. CIT(A). For this very reason the Ld. CIT(A) while deciding the case of the assessee for AY2008-09 vide order dated 30-11-2011 has held that the income on this account is taxable as royalty. The Relevant para of the order of the CIT(A) is reproduced hereunder: "The present case is also a case of grant of license to use various software's held by the appellant. Such right to use was granted by the appellant to the IT services providers M/s. IBM & M/s. Wipro to exploit the software commercially and provide IT services to the group companies of the appellant. Therefore, considering the judgments of Hon'ble Karnataka High court in the case of Samsung Electronics C. Ltd., Lucent Technologies Hindustan Ltd. & Wipro Ltd., It is held that payment received by the appellant is consideration for grant of right to use variou....
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....5.3 as under: - "5.3 Discussions and directions of DRP 5.3.1 We have considered the draft assessment order, submissions of assessee and material. We hae seen that under the Master Services Agreement, the assessee SITI BV has furnished technical and advisory services to various clients based in India. The delineated services are significantly technical in nature and the resultant fees are liable to be treated as Fees for Technical Services. We are also in agreement with the AO that the Ruling of Hon'ble Authority for Advance Rulings in he case of AREVA T&D India Limited (ATDIL) is applicable in the case of assessee. In this case, the Aar held as below: "We have noted that under the IT Agreement, the French company is to provide support services through a central team in the area of Information Technology to the Applicant and to its other subsidiaries in the world. The provision of support services by the French company would itself make available, the technical knowledge/ experience to the Applicant. In Perfetti Van Melle Holdings B.V1 this Authority held the view that "the expression 'make available' only means that the recipient of the service s....
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....cture services to Shell group companies comprising. Information Technology ('IT') support for solving any IT related problems faced by users i.e. any problem faced by users for accessing any application software. e-mails, Computer repairs and maintenance etc., desktop, laptop and workstation support; Services related to Wide area network ('WAN') and Local area network ('LAN') for connection to the global servers', and Facilitating teleconferencing and video conferencing services. Further, in the event Shell requires IT services from external service providers like WIPRO and IBM, SITI BV is engaged in providing the necessary network access and related services as well. For this purpose, reference can be made to the scope of services to be rendered by SITI BV to WIPRO under the Services Agreement (copy of which is enclosed in the paper book of the assessee) and from the same Article 3 is reproduced below: Article 3 - Provision of Services SITI BV shall provide the IT Service Provider with the service." Further, 'Service' has been defined in Article 1 - Definitions as 'the combined Sub-services provided by SITI BV to she IT Servic....
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....ht' encompasses exploitation of the rights embedded in a copyright but a mere user right is a limited right and consideration paid for such user right cannot be regarded as consideration for use of or right to use a copyright. In view of the above, the learned Counsel for the assessee stated that the issue is fully covered by the decision of Hon'ble Delhi High Court in the case of DIT Vs. Guy Carpenter & Co. Ltd, (2012) 20 taxmann.com 807 (Del-HC), wherein India-UK DTAA was under consideration of Hon'ble Delhi High Court and Hon'ble High Court after considering the Article 13 of the DTAA of India-UK and also the facts of the assessee finally held the concept of 'make available' of technical services that such receipts would not amount to fee for technical services so as to the "concept of make available clause' contained in Article 13(4)(c) of the treaty has not been satisfied. In the given facts and circumstances of the case, Hon'ble Delhi High Court vide Para 8 to 13 held as under: - "8. Before we go on to examine the findings of the Tribunal it would be pertinent to refer to article 13 of the DTAA to the extent it is relevant :- "ARTICLE 13- Royalties and f....
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....f fees for technical services in paragraph 4 of this Article shall not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricable and essentially linked, to the sale of property, other than property described in paragraph 3 (a) of this Article; (b) For services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) For teaching in or by educational institutions; (d) For services for the private use of the individual or individuals making the payment; or (e) To an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention. (6), (7), (8) and (9)** ** **" 9. A plain reading of Article 13(4)(c) of the DTAA indicates that 'fees for technical services' would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which, inter alia, "makes available" technical knowl....
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....ing as an intermediary in the reinsurance process for New India Assurance Co. will be entitled to 10% brokerage. From the role played by the assessee in the reinsurance process as discussed above, it is evident to us that the assessee was rendering only intermediary services while acting as an intermediary/facilitator in getting the reinsurance cover for New India Insurance Co. There exists no material or basis on the basis of which, it would be said that the assessee was rendering any kind of technical/consultancy service within the meaning of Article 13 of Indo-UK treaty. The consideration received by the assessee acting as an intermediary in the reinsurance process cannot, by any stretch of imagination, be qualified as a consideration received for rendering any financial analysis related consultancy services, rating agency advisory services, risk based capital analysis etc. as alleged by the A.O." The Tribunal also noted the process by which the transaction takes place. It has been pointed out that the originating insurer in India would contact J.B. Boda/ M.B. Boda for placing identified risks/ class of risks with international reinsurers. J.B. Boda, in turn, would cont....
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.... Van Melle Holdings B.V. In re [2011] 16 taxmann.com 207 (AAR - New Delhi) was reversed by Hon'ble Delhi High Court and reported in 2014 52 taxmann.com 161 (Delhi), wherein Hon'ble Delhi High Court has considered as under: - "1. This writ petition is directed against the ruling dated 09.12.2011 in AAR No.869/2010 given by the Authority for Advance Rulings. One of the pleas raised by the petitioner was that the said authority had not considered the Double Taxation Avoidance Agreement between India and Portugal which is an OECD country. The learned counsel for the petitioner submitted that any agreement between India and an OECD country could be looked into while construing the Indo-Netherlands Double Taxation Avoidance Convention. The learned counsel for the petitioner had also raised the plea that the memorandum of understanding concerning fees for included services referred in Article 12(4) of the IndoUSA DTAA concerning the expression? make available? was also not considered by the Authority for Advance Rulings. It was submitted that the said Authority refused to look into the Indo-Portugese DTAA or the Indo-USA DTAA and memorandum of understanding between India and USA ....