TaxTMI 
TaxTMI 
2018 (1) TMI 1648
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....d the demand be quashed. 2. The learned CIT(A) has erred in law and in facts by upholding the order of the learned AO by holding that the Appellant was under an obligation to deduct tax at source under Section 195 of the Act, on the payments made by the Appellant to Shell International Exploration and Production BV ("SIEP BV"), Shell International BV ("SIBV") and Shell Global Solutions International BV ("SCSI BV"), collectively known as Shell Overseas entities for acquiring access/user rights of software. 3. Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and in facts, by upholding the order of the learned AO, and hence, erred on the following counts: 3.1 Holding that that the grant of user rights amounts to transfer of right in respect of a copyright. 3.2 Not appreciating the distinction between a transaction involving the 'transfer of copyrighted article' and 'transfer of rights in a copyright'. 3.3 Holding that when a person has the exclusive right to do or authorise the doing of the acts specified in the section 14 of the Copyright Act, 1957 in the case of a literary work in which....
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....sessee is an Indian Company and the payees are foreign companies incorporated in Netherlands. 4. The assessing officer was of the opinion that assessee should have deducted tax at source from these payments which in his opinion were royalty payments. In response, the assessee submitted as under: 1. That it has been granted only right to access a particular software application and has not obtained any right to commercially exploit the software and make multiple copies of the same. According to the assessee for the purpose of categorizing income from a transaction as amounting to royalty what is to be seen is whether the transferee has the right of commercial exploitation of the intellectual property contained therein. In the instant cases, as it is not permitted to exploit the copyright commercially, the assessee does not have this rights associated with a copyright in terms of Sec. 14 of the Copyright Act. Therefore in such case, what it acquired cannot be considered as a copyright right; 2. That it has obtained only a user right in the copyrighted article in the form of software applications and not the right of use of copyright. Whereas use of copyright enco....
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....e Tax Act, 1961, casts an obligation on the person making payment of the sums chargeable to tax to a foreign company to deduct tax at the time of making such payment, or at the time of crediting the amount, whichever is earlier. But no tax had been deducted by the assessee thereon either at the time of crediting or subsequently. As the assessee has failed to discharge its obligation to deduct tax at source as stipulated u/s. 195 of the Income Tax Act, 1961, as per the provisions of sec. 201(1) of the Income Tax Act, 1961, for the asst. years 2009-10 and 2010-11. I am holding the assessee as assessee in default in respect of tax not deducted at source in respect of royalty payable to the Suppliers listed above. 6. Against the above order, the assessee appealed before the ld. Commissioner of Income Tax (Appeals). 7. The ld. Commissioner of Income Tax (Appeals) agreed with the finding of the Assessing Officer. He noted the submission of the assessee and reliance by the assessee upon the Hon'ble Delhi High Court decision in the case of DCIT vs. Ericsson A.B., New Delhi (in ITA 504/2007 and others vide order dated 23.12.2011). However, he proceeded to place reliance upon the decis....
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....isdictional High Court decision, the ratio from the Hon'ble Apex Court decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) has been followed by the ITAT Mumbai and following the Hon'ble Delhi High Court decision, the issue has been decided in favour of the assessee. 10. Per Contra, the ld. Departmental Representative submitted that the ld. Commissioner of Income Tax (Appeals) in this case has followed the Hon'ble Karnataka High Court decision which was the jurisdictional High Court for the ld. Commissioner of Income Tax (Appeals). Hence, the ld. Departmental Representative submitted that no-fault can be found in the order of the ld. Commissioner of Income Tax (Appeals) who has followed his jurisdictional High Court decision as per the mandate of law. 11. In rejoinder, the learned counsel of the assessee submitted that the taxpayer entity in this case has got merged with the concern whose jurisdiction lies with assessing officer and the ITAT at Mumbai. Hence, he pleaded that the jurisdictional High Court in this present appeal before the ITAT is not Hon'ble Karnataka High Court. The ld. Counsel of the assessee has made the following submissions: ....
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....ered by the transferee i.e. the Appellant as stated aforesaid. The Appellant at the date of passing of the order by the AO was assessed to tax in Mumbai and the AO as well as the CIT(A) has passed the order in the name of the Appellant. Thus, the date on which the transactions were undertaken as well as the dates on which the orders were passed, the jurisdiction of the Appellant was at Mumbai. We also wish to bring to your Honors notice, Instruction No. 8/2011 dated 11 August 2011 (attached as Annexure 6) relating to Instructions on process of filing appeals to ITAT. Para 7 of the said Instruction specifies the procedure to be followed on the transfer of jurisdiction outside of CIT's charge during the pendency of appeal. It provides that in a case of transfer of jurisdiction over a case involving two different Benches of ITAT during the pendency of appeal, necessary steps shall betaken by the transferor CIT to request the ITAT Bench where the case impending to transfer the same to the Bench of ITAT having jurisdiction over the cases of transferee AO. 12. The ld. Counsel of the assessee submitted that jurisdiction of court is determined by situs of transferee assessi....
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....provide access to the software to anyone, other than appellant's employees, contractors or consultants under a written contract by which all of them would be bound by the terms and conditions as are applicable to the appellant on purchase of software. (iv) The appellant cannot sell license, distribute, pledge, lease, rent or commercially share (including timeshare) the above software or any rights therein. (v) The appellant cannot modify, translate, reverse engineer, decrypt, decompile, disassemble, create directive works based on, or otherwise attempt to discover the above mentioned software source code or underlying ideas or algorithms. There is no acquisition of copyright which remains the property with the supplier. Generally there are two types of softwares namely, "Unbranded software" which is specialised and exclusively custom made to cater to the needs of individual clients, and "Branded software" or "off-the-shelf software" which is standardised and marketed as such. When off-the-shelf software is sold there is no doubt that the essence of such transaction is an outright sale. The said software purchased by the appellant company is "off the s....
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....a or process or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such rights or properly which are contingent on the productivity, or use or disposition thereof, and (b) Payments of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in Para 1 or article 8 (Shipping and Air Transport) from activities described in Para 2(c) or 3 article 8." This definition is much narrower and restricted than the definition of "Royalty" under the Income-tax Act. In the case of Samsung Electronic Co. Ltd. (supra) the Bench has considered this issue and had given a finding, that under the Indo-US DT AA, payment made for a copyrighted article is not "Royalty" and that only Article '7' is attracted. The OECD Commentary clarifies the distinction between the right to use copyright and transfer of a copyrighted article. According to OECD, only a transfer that enables a transferee to commercially exploit software copyright will give rise to royalty income. But where the ....
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....nal Old Ltd., 212 Taxman 0454 (Kar.HC), dated:03-08-2010, CIT V Samsung Electronics Co. Ltd. & Others, (2011) 345 ITR 0494, Kar HC, dated:15.10.2011, CIT V. Wipro Ltd. (2011), 355 ITR 0284(Kar)/ 203 Taxman 621 (Kar.) HC, dated: 15.10.2011 and CIT Vs. CGI information Systems and Management consultants (P) Ltd., (2014) 48 Taxmann.com 264 (KAR), dated: 9-6-2014. That the High court of Karnataka has decided the issue of software Royalty, both before the insertion of Explanations 4, 5 and 6 in Section 9(1)(vi) of the LT. Act by the Finance Act, 2012 and even after their insertion. That the insertion of these Explanations has not altered the views of Hon'ble High Court of Karnataka and on the contrary the views of the Hon'ble High court have been reaffirmed. 10. Ld. DR further submitted that it's that explanation 4 inserted section 9(1)(vi), has to be given retrospective effect, in as much as it is clarificatory in nature. In this regard he submitted that whether amendment/explanations inserted in the Income Tax Act can be read into the DTAA or not has to be considered on the anvil of ambulatory approach to interpretation of treaty, as against static approach adopted by ....
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....for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explana....
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....roadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and(v). Explanation 3.-For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, pr....
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....sessee is entitled to use the software for its internal business operations only (Clause 1 of the agreement). He submitted that the clause 2(b) of the agreement curtails the rights of the assessee and reads as under: "2(b) Licensee may not (i) (other than accessing the Software as contemplated by this Agreement) attempt to circumvent any security device or licensing restriction contained in the software; (ii) assign, loan, rent, lease, sublease, license, sublicense, encumber, mortgage, translate, modify, alter, adapt, decompile, or disassemble the software or create derivate works based on the software or otherwise reverse engineer the software; (iii) make copies of Licensor Documentation except for one internal archival copy for each Licensed User or (iv) remove alter, cover or obfuscate any copyright notice or other proprietary rights notice placed in or on or displayed by the Software and the Documentation, whether in machine language or human readable form..." The Ld A.R submitted that the ownership, title and interest in the IPR of the software vested with the US company and the assessee has no right in respect of the same except the license to use the ....
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.... resident of Netherland has sought benefit under Indo Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the treaty provisions. Briefly recapitulating the relevant facts for the purpose of our adjudication emanating from the impugned order is that, Assessee Company is engaged in the business of development and sale of computer software and also provides "other general services" in relation to the software. For both the activities, it has entered into a "distribution agreement" with its Indian subsidiary INFOR India which mainly functions as a distributor of computer software. So far as payments received from "other general services" of Rs. 4,79,36,944/-, same has been offered to tax in India as 'fee for technical services' on which there is no dispute. The dispute is with regard to the payment of Rs. 3,75,25,291/received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold "off shelf" which is mainly used by the Indian customer in their business for financial accounting, inventory management, HR management etc. INFOR India carries out mar....
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.... 'right to use' any copyright.......... The key phrases "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 Article 12(4). The computer software does not fall under most of the term used in the Article barring "use of process" or "use of or right to use of copyrights" Here first of all, the sale of software cannot be held to be covered under the word "use of process", because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definit....
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....opy 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 make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation". Thus, the definition of 'copyright' in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within t....
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....d any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty." Identical view has been expressed in the following cases also:- (a) M/s Quaolcomm India P Ltd Vs. ADIT (ITA Nos. 1664 to 1667/Hyd/2011) (b) Reliance Industries Ltd & Ors (47 CCH 94)(Mum-Trib) (c) Capgemini Business Services (India) Ltd (46 CCH 253) (Mum-Trib) We notice that the above said decisions have been rendered in favour of the assessee by following the decision rendered by Hon'ble Delhi High Court in the case of Infrasoft ltd (supra) and other decisions rendered by Hon'ble Delhi High Court. Accordingly, by following the decisions rendered by the coordinate benches of the Tribunal, we uphold the orders passed by Ld CIT(A) in both the years under consideration." 15. In this regard we may also refer to Hon'ble Delhi High Court exposition on this subject in the case of DIT vs Ericsson AB 343 ITR 470 as under: "That in order to qualify as royalty payment, within the meaning of section 9(1)(vi) and particularly clause (v) of Explanation 2 there to, it is necessary to establish that there is transfer of ....
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....the use of the copyrights and not a lump sum as was in the present case. That once the payment in question was not royalty which would, within the mischief of clause (vi) the explanation to section 9 (1) would have no application. 17. In this regard we have noted that Hon'ble Karnataka High Court has taken a contrary view as under in the case of CIT vs. Samsung Electronics Co Ltd (Supra). (Head notes only) "The assessee imported "shrink-wrapped"/ "off-the-shelf" software from suppliers in foreign countries and made payment for the same without deducting tax at source u/s 195. The AO & CIT (A) held that the payments were assessable to tax as "royalty" u/s 9(1)(vi)/ Article 12 and that the assessee was liable to pay the tax u/s 201. On appeal, the Tribunal relied on the judgement of the Supreme Court in Tata Consultancy Services vs. State of AP 271 ITR 401 (SC) and held that the assessee had acquired a "copyrighted article" but not the "copyright" itself and so the amount paid was not assessable as "royalty". On appeal by the department, HELD reversing the Tribunal: (i) U/s 9(1)(vi) of the Act & Article 12 of the DTAA, "payments of any kind in consideration for the ....