TaxTMI 
TaxTMI 
2021 (7) TMI 1077
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....onward sale of shrink wrapped software to the end users/ customers in India as per the distribution / license agreement. As per the said agreement QlikTech India Private Ltd., will promote and resell assessee's products to the end users within the prescribed territory in accordance with the terms and conditions set forth in the agreement. A copy of the distributor agreement dated 16.11.2011 and End users Licence Agreement (EULA) which forms Appendix 1 to the Distribution Agreement are at pages 106 to 112 of the assessee's paper book. The following features in the said agreement are material for a decision in deciding the 1st issue in this appeal and the same are that (i) the distributor gets only a non-exclusive and non-transferable license to resell computer software. (ii) No copyright in the computer program is transferred to either the distributor or to the ultimate end-user. (iii) The end-user can use the computer program itself, but there is no further right to sub-license or transfer or reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user; (iv) The distributor pays the computer program's price as goods, in a medium that eit....
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....r services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : ........ Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not includin....
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....kTech India"), against the sale of off-the-shelf software are in the nature of transfer of "copyright" and therefore taxable as "royalty" both under the provisions of section 9(1)(vi) of the Act and under the India-Sweden Double Taxation Avoidance Agreement ("DTAA" or "Tax Treaty"). 2.2. The learned CIT(A) has erred in law in not following the decision of the Hon'ble Delhi Income-tax Appellate Tribunal ("ITAT") in the Appellant's own case for the past years (AY 2012-13, AY 2013-14 and AY 2014-15), wherein the ITAT has decided the issue in favour of the Appellant and held that receipts from sale of software products are not liable to tax as 'royalty' in India. 2.3. The learned CIT(A) erred in not appreciating the fact that sale of software by the Appellant under the buy-sell model are in the nature of sale of "copyrighted article" and not in nature of transfer of "copyright" and further failed to appreciate that fact that a mere transfer of a copyrighted article, without transferring the right in the copyright, shall not be held as payment towards "royalty" and consequently, cannot be taxed in the hands of the Appellant. 2.4. The learned CI....
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....ssessment Year 2012-13 and 2013-14 had held that what is being provided by Qlik India to end users is neither the copyright in the software nor the use of the copyright in the software but right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. It has held that the right that is being 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. He submitted that the QlikTech Software product in question in the current year and also in the preceding assessment year is the same, He further submitted that the sale of software in the instant case cannot be held to be "use of process" or "information concerning Industrial, commercial or scientific experience" because the end users do not have any access to the source code and what is available merely for their use is software product as such and not the process embedded in it and all intellectual property rights and other rights relating to the QlikTech products at all times is the exclusive property of the assessee. He submitted that assessee in the instant case has merely transfe....
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....g software assessee has transferred the rights to use to software. Ld. CIT(A) in those two years have held that receipts of the assessee from sale of software are not taxable as royalty even when explanation 4 to section 9(1)(vi) of the Act clearly states that consideration in respect of transfer of all or any rights for use or right to use a computer software irrespective of the medium through which such right is taxable as royalty. We find the Tribunal after considering various decisions including the decision of Hon'ble Delhi High Court in the case of DCIT Vs Infrasoft Ltd. 264 CTR 329 and in the case of DIT Vs M/s Nokia Networks (358 ITR 259) has decided the issue as under :- "6. In this background the points to be adjudicated would be a) Whether the receipts from sale of software be treated as royalty or not. b) Whether the effect of amendment in Section 9(1)(vi) brought about by the Finance Act, 2012 can be read into the treaty or not. 7. We have heard the arguments of both the parties and perused the material on record. 8. We find from the judgment of the Jurisdictional High Court, in the case of DCIT Vs Infrasoft Ltd. 264 CTR....
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....ce 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 ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT 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 within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse- engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software i....
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....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 nonexclusive 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 conferment of the right of using the copyright. The transfer of rights in or over copyright....
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....ectual 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 the same is not in ....
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....e." 9. Since, the matter stands settled by the order of the Hon'ble High Court, we hereby uphold the ld. CIT (A) observation that the right to use granted through licensing of a software does riot fall within the meaning of "Royalty" as provided for in the domestic law or the DTAA. Any consideration for the same is not taxable as Royally under section 9(1)(vi) or the relevant DTAA. Thus what has been transferred by the appellant is neither the copyright in the software ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT 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. 10. Regarding the applicability of amendment in Section 9(1)(vi) brought out by Finance Act, 2012, we find that this issue of applicability has been examined in the case of DIT Vs New Skies Satellite BV by the Hon'ble Delhi High Court in ITA 473/2012. The Hon'....
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.... India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilaterall legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs." 11. From the above judgment, it can be concluded that the amendment in the DTAA unilaterally cannot be enforced, hence, the provision....
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....g of certain acts in respect of a work, including literary work. The Hon'ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts: 1. The seven acts enumerated in sub-clause (a); and 2. The eighth act of selling or giving of commercial rental or offering for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any medium electronically; 2. To issue copies of the work to the public, provided they are not copies already in circulation; 3. To perform the work in public, or communicate it to the public; 4. To make any cinematographic film or sound recording in respect of the work; 5. To make any translation of the work; 6. To make any adaptation of the work; and ....
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....e the definition of 'royalties' will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term 'copyright' has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for "the use of, or the right to use, any copyright "of a literary work includes a computer program or software. It was held that regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. 11. In the light of the aforesaid discussion, the grounds raised by the assessee with regard to taxing receipts on sale of off-the-sh....
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....usiness year after year, thereby satisfying the 'make available' condition. On the contrary, the learned CIT(A) has failed to appreciate that the year on year rendition of services by the Appellant to the Indian entity proves that technical knowledge is not transferred or made available to the Indian entity for independently function without the aid of the Appellant. 3.6. On facts and circumstances of the case, the learned CIT(A) has erred in following the decision of the AAR in the case of Areva T&D India Limited [2012] 18 Taxmann.com 171 (AAR - New Delhi) to hold that the services rendered by the Appellant amounts to fees for technical services under the provisions of the Income Tax Act as well as the DTAA. 3.7. Without prejudice to any other grounds taken herein, the learned CIT(A) has erred in law and on facts by not following the principle laid out by various judicial precedents relied upon by the Appellant, including the decision of the Jurisdictional Karnataka High Court. 3.8. Without prejudice to the above grounds, the CIT(A) has erred in law and on facts in not adjudicating the alternate argument that, by virtue of the MFN clause as conta....
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....(FTS). The assessee brought to the attention of the AO the provisions of section 9(1)(vii) which defines the terms of FTS to mean any consideration for rendering any managerial, technical or consultancy services. The plea of the assessee was that back office services rendered by the assessee were neither managerial, technical or consultancy services. The assessee, therefore, submitted that the receipt in question cannot be brought to tax as FTS. 15. Without prejudice to the above submission, the assessee submitted that in terms of Article 12(3) (b) The term 'fees for technical services' means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provisions of services by technical or other personnel. The definition under the Act and DTAA is therefore one and the same as far as FTS is concerned. In terms of Article 12(2) of the DTAA, it is taxable in the State in which it arises, i.e., India. The assessee submitted that under article 12 of the India-Sweden DTAA, FTS cannot be brought to tax in India because under the protocol to the India-Sweden DTAA if under any Convention, Agreement or Protocol between ....
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....n or technical design which enables the person acquiring the services to apply the technology contained therein "Fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consulting services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge,* experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The assessee pointed out that the definition of FIS/ FTS as per the India-Portuguese DTAA has a more restricted scope compared to the provisions of the Act since, as per the India-Portuguese DTAA, the services shall be considered as fees for included/technical services only when there is transfer of technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. which enables the person acquiring the s....
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.... make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The assessee submitted that as per the memorandum to India-USA DTAA services will be regarded as made available only when: "Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc are made available to the person purchasing the service. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available." Therefore, under paragraph 4 of Article 12 of the DTAA, technical and consultancy services are considered included services only to the extent they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The assessee pointed out that by providing the back office services referred in the earlier paragraph, nothing ....
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.... the services rendered by it were eligible for the beneficiary clause under India-Portugal treaty, the DRP declined to interfere with the order passed by the Assessing Officer. On further appeal, the Pune ITAT, held that as per the protocol, on the principle of the most favoured nation (MFN) clauses received by the assessee company from its Indian subsidies. If under any Convention. Agreement between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this convention on said items of income, same rate or scope as provided said items of income shall also apply under this Convention. On the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portugal. The Tribunal noted that India entered into DTAA with the Sweden which was notified vide notification no. GR 705/E dated 17.12.1997. Article 12 of the India-Sweden DTAA provides the mode of tax....
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....the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the 'rendering services' is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 25. Going by the nature of services enumerated in the present case, we are of the view that the services were purely in the nature of back office services and nothing can be regarded as having been made available to the recipient of services. As per the terms of the Service Agreement, it is clear that the assessee only provides corporate back office services t....