TaxTMI 
TaxTMI 
2022 (4) TMI 1061
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.... in taw, the Hon"ble DRP erred in directing the Ld. AO to tax the receipt of Rs. 8,74,84,583 towards software maintenance fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.3 : On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to ax the receipt of Rs. 1,27,56,877 towards consulting service fees as Fees for Technical Services within the meaning of Article 12(5)(a) India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.4: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld.AO to tax the receipt of Rs. 1,48,45,943 towards training fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the....
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....he software is imported via electronic medium or physical medium. - The title to, ownership and all rights in patents, copyrights, trade secrets and other intellectual rights in the software do not transfer to the customer and continue to vest with the TIBCO Group. - The customer is granted a limited, non-transferable, non-exclusive license to use the number of units set forth in the order form solely for customer"s internal business use. - The customer cannot make any modifications or enhancements to the software, create any derivative works of software or merge or separate any component. All rights with respect to this remain with TIBCO BV. - The customer cannot reverse compile, dissemble or otherwise reverse engineer the software. If the customer requires modification to the software to make it further useful to him, the same would have to be made by TIBCO BV. 1.1 The Company has been asked to show cause why the receipts on account of software license fees amounting to INR 94,538,285 (as referred in Sr.No.1 of the above table) should not be taxed in India as "Royalty" as per the provisions the Act and Article 12 of the India- Netherla....
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....s, training fees and other service fees chargeable to tax in India as "Fees for technical services" as per 5(a) of Article 12 of Indian Netherland Treaty. On the receipt of the DRP direction, the A.O has passed the final assessment order vide order dated 6-12-2017 by bringing into tax the above items in conformity with the direction of DRP as Rs. 9,45,38,285/- as Royalty income and software maintenance fees Rs. 8,74,84,583/-, consulting Service fees Rs. 1,27,56,877/-, Training fees Rs. 1,48,45,943/-, other service fees Rs. 1,72,800/- as "fees of Technical Services". Being aggrieved, the appellant is in appeal before us in the present appeal. 9. It is submitted before us that the ground of appeal No. 1 challenging the action of lower authorities in bringing to tax the software licence fees at Rs. 9,45,38,285/- as Royalty within the meaning of article 12 of the India and Netherland DTAA. It is submitted before us that in the immediate preceding assessment year 2013-14 the co-ordinate Bench of this Tribunal had decided this issue in favour of the appellant and finally submitted that the reasoning of the lower authorities in treating the software licence fee as royalty was not appro....
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....ngly been held by the High Court of Karnataka. 106. Secondly, section 16 of the Copyright Act, which states that "no person shall be entitled to copyright...otherwise than under and in accordance with the provisions of this Act or of any other law for the time being in force" has been completely missed, thus making it clear that the expression "copyright" has to be understood only as is stated in section 14 of the Copyright Act and not otherwise. 107. Thirdly, when it comes to computer programmes, the High Court in Synopsis International Old Ltd. (supra) was wholly incorrect in stating that the storage of a computer programme per se would constitute infringement of copyright. This, again, would directly be contrary to the terms of section 52(1)(aa) of the Copyright Act. 108. Fourthly, the High Court is not correct in referring to section 9(1)(vi) of the Income-tax Act after considering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Tax....
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....ctioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes,....
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....sessee 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. \ (pages 499-500) "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-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) 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 presence 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. Dis....
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....yright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. v. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighted article" as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no. 1 & 2 in favour of the assessee and against the Revenue."(page 281) The High Court then followed its own judgment in Ericsson A.B. (supra), deciding the case in favour of the assessee. 112. In DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88/[2014] 220 Taxman 273 (Delh....
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.... 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 in the above provisions with reference to the software supplied by the Assessee. 157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title "License", says that JTM is granted a non-exclusive restricted license to use the software and documentation but only fo....
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....copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar's Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point: "(h) Copyright is distinct from the material object, copyrighted: It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public" (underline is ours)." The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objectio....
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....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 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/....
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....rlier judgments, held as follows: "The misconception that the revenue harbors stems from its flawed appreciation of a copyright license. True, "copyright" is not defined; yet what works are capable of copyright protection is spelt out in the Copyright Act. Sections 13 and 14 of the Copyright Act flesh out the essential ingredients that make copyright a property right." (page 93) "Thus, Section 14 categorically provides that copyright "means the exclusive right to do or authorizing the doing of any of the acts mentioned in section 14 (a) to (e) or any "substantial part thereof". The content of copyright in respect of computer programmes is spelt out in section 14 (b). A joint reading of the controlling provisions of the earlier part of section 14 with clause (b) implies that in the case of computer programs, copyright would mean the doing or authorizing the doing-in respect of work (i.e. the programme) or any substantial part thereof - (b) In the case of a computer programme,- (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer prog....
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....determinate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee's customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities; moreover, even in Ericsson (supra), a similar provision existed in the DTAA between India and Sweden." (pages 95-96) 117. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: (i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. (ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, ....
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.... judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft Ltd. (supra), ZTE Corporation (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India's DTAAs are based." 12. In the light of the judgment of Hon'ble Supreme Court and respectfully following the decision of the Tribunal for the immediately preceding assessment year, we hold that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of consideration for grant of software license is not Royalty under the provisions of Income Tax Act, 1961, the question of considering under the provisions as per DTAA between India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed. 13. Grounds No. 2, 3, 4 and 5 challenge the direction of the DRP directing the A.O to bring to tax software maintenances Rs. 8,74,84,583/- consulting service fees Rs. 1,27,56,877/-., Training fees Rs. 1,48,45,943/-, other services Rs. 1,72,800/- within the mea....
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....oyalties" as used in this Article means 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.] 5. For purposes of this Article, "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy 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 4 of this Article 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. 6. Notwithstanding paragraph 5, "fees for technical services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricab....
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....he payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable, according to the laws of each State, due regard being had to the other provisions of this Convention.]" 15. Clause 5 of Article 12 defines "fees for technical services" to mean the payment of any kind to any person in consideration of rendering any technical or consultancy services that are ancillary and subsidiary to application of enjoyment of the right, any copyright information described in clause 4 which deals with the payment made towards Royalties. The DRP gave a finding that the software maintenance, consultation charges and training fees are in connection with the receipt of consultation towards software license fee. This finding of the DRP is not under challenge before us. Therefore, the software maintenance fees, consulting charges and training fees which are incidental to software license fee, assumes same character as that of software license fee. In relation to ground of appeal No.1 in the preceding paragraphs, we have held that the consideration ....