TaxTMI 
TaxTMI 
2022 (5) TMI 855
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....ts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to tax receipt of INR 26,02,184 towards software license fees as 'Royalty' as per the provisions of the Income Tax Act, 1961 read with the provisions of the India-Netherlands Double Taxation Avoidance Agreement. It is thus prayed that the addition proposed by the Ld. AO and confirmed by the Hon'ble DRP be deleted. Ground No.2: 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 INR 29,05,513 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 thus prayed that the addition proposed by the Ld. AO and confirmed by the 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 tax the receipt of INR 3,78,346 towards consulting service fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxat....
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....-tax Act, 1961. It is prayed that the additions made by the Ld. AO merely represent a difference in opinion and the Company has not furnished any inaccurate particulars of income and thus, the subject penalty proceedings be overturned. The above grounds are without prejudice to each other." 5. Briefly, the facts of the case are as under : The appellant TIBCO Software B.V. is a non-resident company incorporated in Netherlands. The company is engaged in sale of Software licences and provision of Software maintenance, Consulting and Training services in India. The return of income for the assessment year 2011-12 was not filed by assessee-company. Thereafter, on receipt of information that the appellant had received income of Rs.33,96,623/- on which TDS had been deducted, the Assessing Officer formed an opinion that income had escaped assessment to tax, then issued notice u/s 148 on 29.03.2018 after recording reasons u/s 147. In response to notice u/s 148, the appellant had filed return of income on 26.04.2018. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax (International Taxation), Circle-2, Pune ('th....
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.... Ltd. (ITA No.11 to 15/2008 & 17/2008) dated 03-08-2010. c) Millennium IT Software Ltd. (AAR No.835 of 2009) dt. 28-09- 2011. d) Citrix Systems Asia Pacific Pty Ltd. (AAR No.822 of 2009) dt.06-02-2012. e) Acclerys K.L. Japan (AAR No.989 of 2010) dt. 27-02-2012 f) ING Vysya Bank Ltd. (ITA No.160/2010, dt. 05-08-2011 (A.Y.2008-09)- Bangalore-Tribunal g) Mac Corporation (ITA No.1331 to 1336/2008) (A.Y. 1999- 2000 to 2004-05)-Delhi Tribunal. Rejecting the contentions of the appellant that such payment cannot be characterized as Royalty as the payment is made for purchase of standard software, not for use of 'copyright itself'. The appellant placed reliance on the OECD commentary as well as the decisions of Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. (2013) 39 taxmann.com 88 (Del), the decision of Pune Tribunal in the case of Allianz SE Vs. ADIT (TS-204-ITAT-2012 (Pun) and the decision of Mumbai Tribunal in the case of DDIT Vs. Solid Works Corporation (ITA No.3219/Mum/2010. 8. On receipt of above draft assessment order, the appellant filed objections before the DRP. The DRP considering the decisions relied upon by the....
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....D commentary on Article 12 of the DTAA recognized the distinction between "copyrighted article" and "copyright right" in the programme and software which incorporates a copy of the copyrighted programme. Any payment made for acquisition of copy of the software is held not to be Royalty. Even the Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. 39 taxmann.com 88 held to the same effect. Whereas the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd.345 ITR 494 and CIT Vs. Synopsis International Old Ltd. 212 taxmann 454 held to the contrary. The reasoning given by the Hon'ble Karnataka High Court has been disapproved by the Hon'ble Supreme Court in the case of Engineering Analysis Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). The operative paras of the judgment are reproduced below : "105. The reasoning of the High Court of Karnataka in Synopsis International Old Ltd. (supra) does not commend itself to us. First and foremost, as held in Swastik Tobacco Factory (supra), the expression "in respect of", when used in a taxation statute, is only synonymous with the words "on" or "attributable to". Such mean....
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.... that now lies before us. In DIT v. Ericsson A.B. [2011] 16 taxmann.com 371/[2012] 204 Taxman 192/343 ITR 470 (Delhi) ["Ericsson A.B."], which happens to be impugned in C.A. Nos. 6386- 6387/2016 before us, the assessee was a company incorporated in Sweden which entered into an agreement with Indian cellular operators, pursuant to which the assessee supplied various equipment (hardware) embedded with software to the said cellular operators. The High Court in this case, found: "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 s....
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.... transferred, delivered, stored, possessed etc. The software programmes have all these attributes." In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good", but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available ....
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....upon user of the copyright and not a lump sum payment as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty."(pages 501-502) 111. This judgment was followed in DIT v. Nokia Networks OY [2012] 25 taxmann.com 225/[2013] 212 Taxman 68/358 ITR 259 (Delhi) ["Nokia Networks OY"],^41 with the High Court of Delhi, adverting, this time, to the further expanded definition of "royalty" that is contained in the retrospective amendment that inserted Explanation 4 to section 9(1)(vi) of the Income-tax Act. In this case, the High Court was concerned with the Agreement between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,^42 ["India-Finland DTAA"]. After setting out the rationale for the clarificatory amendment made vide the Finance Act 2012, the High Court held : "He, thus submitted that ....
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....e Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the Assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue. 156. We must look into the meaning of the word "copyright" as given in the Copyright Act, 1957. Section 14 of this Act defines "Copyright" as "the exclusive right subject to the 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 [ ... ] 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 f....
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....perators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the public domain is totally prohibited, which is evident from the use of the words in Article 20.1 of the agreement, "restricted" and "not otherwise". Thus JTM has a very limited right so far as the use of software is concerned. It needs no repetition to clarify that JTM has not been given any of the seven rights mentioned in clause (a) of Section 14 or the additional right mentioned in Sub-clause (ii) of clause (b) of the section which relates to a computer programme and, therefore, what JTM or any other cellular operator has acquired under the agreement is not a copyright but is only a copyrighted article."" (pages 362-364) 113. Further, the Court noted that the same argument that found favour with the AAR in Citrix Systems Asia Pacifice Pty. Ltd. (supra) was pressed into service by the learned senior counsel who appeared for the Revenue in the case of Motorola Inc. (supra), and this was correctly turne....
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....e 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 it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do 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 be....
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....rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the [Karnataka] 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 work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing 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. Nokia Networks OY (supra) as not amounting to acquiring a ....
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....re, the copyright owner's rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods-significantly enough, Section 14(1) talks of sale or rental of a "copy". The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign it, divesting itself of the title implying that it has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as "copyright". In the present case, the facts are closely similar to Ericsson. The supplies made (of the software) enabled the use of the hardwa....
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....ce issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the "licensed" computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. (v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. (vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in State Bank of India (supra) ....
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....ADIT 385 ITR 408 (Delhi) Aspect Software Inc. Vs. ADIT (2015) 61 taxmann.com 36 (Delhi) DDIT Vs. Scientific Atlanta Inv. (2009) 33 SOT 220 (Mumbai) Renaissance Services BV Vs. DDIT 94 taxmann.com 465 (Mumbai) 16. In order to decide the issue on hand, it is appropriate to extract Article 12 of the India and Netherland treaty which reads as under : "ARTICLE 12 - Royalties and Fees for Technical Services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.] 2 [2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.] 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 1 4. The term "royalties" as used in this Article mean....
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....as the case may be, shall apply. 8. Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, has in one of the States a permanent establishment or a fixed base in connection with which the contract under which the royalties or fees for technical services are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 9. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services, having regard to the royalties fees for technical services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in....