TaxTMI 
TaxTMI 
TaxTMI 
2020 (7) TMI 640
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....rder, having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law. 2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in passing the impugned order which is based on surmises and conjectures, and is therefore, bad in law and void-ab-initio. Non-taxability of revenues from sale of hardware equipment 3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that the revenue earned by the Appellant from sale of hardware equipment is in the nature of 'Royalty' as per provisions of both, section 9(1)( vi) of the Act and Article 12(3) of the India-Switzerland Double Taxation Avoidance Agreement (India-Swiss tax treaty'). 4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disregarding that the revenue earned by the Appellant from sale of hardware equipment represents business income, which is not taxable in India in the absence of any Permanent Establishment ('PE') of the Appellant in India, in accordance with the provisions of the Act as well as Article 5 read with Article 7 of the India-Swiss tax treaty. Non-t....
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....r section 271 (1)( c) of the Act. The appellant submits that each of the above grounds are independent and without prejudice to one other. That the Appellant reserves its right to add, alter, amend, substitute or withdraw any ground of appeal either before or at the time of hearing of this appeal. The Appellant prays that appropriate relief be granted on the said grounds of appeal and the facts and circumstances of the Appellant's case." 3. The first issue raised by the assessee vide Ground of appeal Nos. 3 & 4 is against the revenue earned by the assessee from sale of hardware equipment in the nature of 'Royalty' as per provisions of both, section 9(1)(vi) of the Act and Article 12(3) of the India-Switzerland Taxation Avoidance Agreement (India-Swiss Tax Treaty). The case of the assessee is that the revenue earned by the assessee from sale of hardware equipment represents business income, which is not taxable in India in the absence of any Permanent Establishment (in short "PE") of the assessee in India, in accordance with the provisions of the Act as well as Article 5 read with Article 7of the India-Swiss Tax Treaty. 4. Further, the assessee has raised Ground of appeal No....
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....od. Therefore, the Assessing Officer was of the view that these software make available a 'process' to the customers who "use" the process, while carrying out their business. It is, therefore, clear that in addition to software involving a copyright, these specialized software also represent a "process" which can be used in a particular industry specific core activity. After perusing the contract of the assessee with its clients, it was observed by the Assessing Officer that the CAS consists of a set up of hardware and software. The Assessing Officer thus observed that both the hardware and software are integral part of the CAS. A show cause notice dated 13.12.2018 was issued to the assessee citing the reasons why revenue earned from supply of CAS and Middleware Products should not be treated as 'Royalty' income and taxed accordingly. The assessee explained its case in detail and pointed out that it was not a case of 'Royalty', as the purchaser of software does not become the owner of the copyright in the software. Reliance was placed on several decisions in this regard. It was also explained what is copyright? The assessee stressed relying on the decisions of the Jurisdictional H....
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....as decided the issue of copyrighted Article and held the same to be not 'Royalty'. However, in case we come to the definition of Royalty, it talks of process also u/s 9(1)(vi) of the Act. He then placed reliance of the observations of the DRP in para 3.2 and 3.3 at page 4 of the order. The Ld. DR for the Revenue stressed that the Hon'ble Delhi High Court (supra) has not gone into the aspect of the end user, which in the present case is technology driven solution, which changes total use fee structure. He was of the view that dimension has to be seen vis-à-vis customers for whom it is developed; its primary objective is CAS. He placed reliance on the order of the DRP in this regard. 9. The Ld.AR for the assessee pointed out that the Assessing Officer had held it to be in the case of Royalty; even for Satellite and for making signals viewable; for mobile technology, we use technology and process, but we do not use any secret formula. 10. We have heard the rival contentions and perused the record. The Ground of appeal Nos. 1 & 2 raised by the assessee are general and do not require any adjudication. 11. The issue raised vide Ground of appeal No.3 to 6 is interlinked and henc....
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...., these software make available a "process" to the customers who "use" the process while carrying out their business. It is, therefore, clear that in addition to software involving a copyright, these specialized software also represent a "process" which can be used in a particular industry specific core activity. 16. The DRP vide paras 3.4 & 3.5 observed as under:- 3.4. "It is further discussed by the AO that the software programs basically act as a secret process which processes the input commands of the user to desired output by making use of the hardware. The payment made for right to use of such secret process would definitely take form of 'royalty' as the definition of Royalty in DTAA as well as the Income Tax Act encompasses the right to use of a secret process. In view the same, AO considered the receipts of the assessee are taxable as Royalty u/s 9(1)(vi) of the Act. 3.5. From the contract it was observed by the AO that the Conditional Access System consists of a set up of hardware and software and they are integral part of the Conditional Access System. On his query to assessee that why revenue earned from supply of CAS and middleware products should not be treated as....
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....at because of insertion of Explanation 5 to section 9(1)(vi) of the Act with retrospective effect from 01.06.1976, where the meaning of term 'Royalty' has been extended to include use of copyright or copyrighted article is to be applied and on such application, the assessee was held to be taxable. The case of the assessee is that it had not transferred any copyright but had only parted with copyrighted article, in the form of software, then it is not Royalty and was not covered under the provisions of section 9(1)(vi) of the Act. In the alternate, it is submitted by the learned Authorized Representative for the assessee that since the definition of 'Royalty' has not been amended in Tax Treaty and the said provisions being beneficial, then provisions of Article 12(3) of DTAA with Sweden would apply and the assessee's case would fall within non amended provisions of definition of 'Royalty' under Article 12(3) of DTAA. 20. The Hon'ble High Court of Delhi in DIT Vs. Infrasoft Ltd. (supra) have noted that under the license agreement, license was non-exclusive, non-transferrable and the software had to be used in accordance with agreement; the licensee was permitted to make only one c....
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....he provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely: --------- It is clear from the above definition that a computer programme mentioned in Clause (b) of the section has all the rights mentioned in Clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15.1.2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in Sub -clause (ii) of Clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in Clauses (a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned ....
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....is not a copyright but is only a copyrighted article. 159. Clause 20.4 of the supply contract with JTM is as under: 20.4 In pursuance of the foregoing JT MOBI LES shall: (a) not provide or make the Software or Documentation or any portions or aspects thereof (including any methods or concepts utilized or expressed therein) available to any person except to its employees on a "need to know" basis; (b) not make any copies of Software or Documentation or parts thereof, except for archival backup purposes; (c) when making permitted copies as aforesaid transfer to the copy/copies any copyright or other marking on the Software or Documentation. (d) Not use the Software or Documentation for any other purpose than permitted in this Article 20, Licence or sell or in any manner alienate or part with its possession. (e) Not use or transfer the Software and/or the Documentation outside India without the written consent of the Contractor and after having received necessary export or re -export permits from relevant authorities. This clause places stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellular operator c....
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....s counter to Section 14(b)(ii) of the Copyright Act which permits a copyright holder to sell or let out on commercial rental the computer programme. For this reason also it cannot be said that JTM or any cellular operator acquired a copyright in the software. 162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what he has acquired cannot be considered as a copyright. In that case, it can only be said that he has acquired a copyrighted article. A small example may clarify the position. The purchaser of a book on income-tax acquires only a copyrighted article. On the other hand, a recording company which has recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actual....
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.... clause ropes in "transfer of all or any rights" and is not restricted to "use" or "right to use", the copyright. However, he added that since the basic proposition of the Department has been demonstrated to be wrong, Clause (v) of Explanation 2 below Section 9(1) is not an impediment to accepting the assessee's contention. 165. We may also usefully refer to the Commentary on the OECD Model Convention (dated 28.1.2003) which is of persuasive value and which throws considerable light on the character of the transaction and the treatment to be given to the payments for tax purposes. Paragraph 14 of the Commentary, a copy of which was filed in Paper book No. V is relevant: COMMENTARY ON ARTICLE 12 - PAPER BOOK V " 14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for ....
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....he Transfer of a copyrighted article. Paragraph 3 of the Explanatory Note says that if a transfer of a computer programme results in the transferee acquiring any one or more of the listed rights, it is a transfer of a copyright right. 167. Paragraph 4 says that if a person acquires a copy of a computer programme but does not acquire any of the four listed copyright rights, he gets only a copyrighted article but no copyright. 168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are: (a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending. (ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme (iii) The right to make a public performance of the computer programme. (iv) The right to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as inclu....
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.... was held that once it is held that payment in question is not Royalty which would come within the mischief of clause (vi), the Explanation will have no application and that the question of applicability of the Explanation would arise only when payment is to be treated as "Royalty" within the meaning of clause (vi) or "fee for technical services" as provided in clause (vii) of the Act. After referring to different terms of Licensing Software Agreement, the Hon'ble High Court observed as under:- "85. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined wi....
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....no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted 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 pa....
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.... it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software." 25. Further, the Hon'ble High Court of Delhi in Pr.CIT vs M.Tech India Ltd. (P.) [2017] 381 ITR 31 (Del.) held as under:- "12. In the cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v.....
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....rtiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. ........ 59. Be that as it may, in order to qualify as royalty payment, within the meaning of section 9(1)(vi) and particularly clause (v) of Explanation 2 thereto, 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. Section 2(o) of the Copyright Act makes it clear that a computer programme is to be regarded as a "literary work". Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the present case, this has not been established. It is not even the case of the Revenue that any right contemplated under section 14 of the Copyright Act, 1957, stood vested in this cellular operator as a consequence of article 20 of the supply contract. Distinction ....