TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 178
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.... of the Assessee's SAP system (the said Agreement). As per the said Agreement, the Assessee was to charge CPI for the use of the SAP system. CPI was required to make payments towards consideration for the use of the system, consideration towards rendering services comprising of costs of maintenance, up-gradation of the system to keep it functional and fees for training personnel for using the SAP system. For the Financial Year 1998- 99 (A. Y. 1999-2000), as per the said Agreement, CPI paid to the Assessee a sum of USD 11,80,500/- for the use of the SAP system and a further sum of USD 3,85,000/- towards rendering services as mentioned above. 3. The Assessee filed its Return of Income for Assessment Year 1999-2000, on 29th December, 1999, declaring 'Nil' income. During the course of assessment proceedings, the Assessing Officer (AO), on verifying the Return of Income and financial statements, found that the Assessee had received an amount of USD 3,85,000/- on account of rendering services to CPI and further a sum of USD 11,80,500/- on account of use of the SAP system. The AO observed that the payments received on account of the use of the SAP system were covered under the definition....
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....ed by the assessee is not "Royalty" by making an illusory distinction between copyright and copyrighted articles as when a copyright article is permitted or licensed to be used for a fee it involves not only the physical or electronic manifestation of a programme but also the use of or the right to use the copyright and moreover the Copyright Act or the IT Act or the DTAA does not use the expression 'copyright article' which could have been used if the intention was as claimed, a view upheld by AAR, New Delhi in the cases of Citrix & in EY Global Services Ltd., UK? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT erred in not upholding the order of Ld. CIT(A) and stating that the payment received from CPI is not equipment royalty, when the AO as well as the Ld CIT(A) has used the word "System" as entailing the process specifically customized for Colgate and its affiliates-as is in the agreement between CPM & CPI - and not mere physical equipment as argued by Hon'ble ITAT? (c) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT erred in granting India-Malaysia treaty benefits to Assessee when in its o....
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....with a new one and Finance Act 2001 inserted Clause (iv a) to Explanation 2 to Section 9(1)(vi). He submitted that these amendments have widened the meaning of royalty. He submitted that Explanations 4, 5 and 6 to Section 9(1)(vi) were brought into the statute to clarify the meaning of royalty. He further submitted that the definition of royalty under the DTAA is more or less in pari materia with the definition provided in the Act. For these reasons, he submitted that the payment made by CPI to the Assessee would amount to equipment royalty and therefore was liable to be taxed under the Act. 11. In response, Mr. Pardiwalla submitted that the definition of royalty in Explanation 2 to Section 9(1)(vi) of the Act, as applicable during the Assessment Year 1999-2000, did not contain the equipment royalty clause. He submitted that Clause (iv a) of Explanation 2 to Section 9(1)(vi) was inserted by the Finance Act 2001 with effect from the Assessment Year 2002-2003. Therefore, there was no question of applying the equipment royalty clause under the Act in the present case. He further submitted that, in the light of the provisions of Section 90 (2) of the Act, the Assessee was entitled to ....
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....e (iv a) was inserted into the said Section by the Finance Act 2001 only with effect from 1st April 2002, the Assessee was entitled to opt for taxation under the provisions of the Act. It is undisputed that the provisions of the Act, as far as they are applicable to Assessment Year 1999-2000, did not provide for equipment royalty. In these circumstances, in our view, the ITAT was correct in holding that the said payment of USD 11,80,500/- made by CPI to the Assessee could not have been brought to tax under the Act as equipment royalty. Further, in our view, for the aforesaid reasons, the submissions made by Mr. Suresh Kumar in the context of equipment royalty are totally devoid of merit. On Clauses (i), (ii) and (iii) of Explanation 2 to Section 9(1)(vi) and Explanation 6 to Section 9(1)(vi) 14. The next reason given by the ITAT is that the payment made by CPI to the Assessee was not process royalty under Clause (iii) to Explanation 2 to Section 9(1)(vi). 15. Mr. Suresh Kumar challenged the said finding of the ITAT by submitting that CPI had paid the amount to the Assessee for the transfer of certain rights in respect of a process and for the use of a process. He submitted that....
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....ories of items as mentioned therein. The ITAT held that, in the present case, there was nothing to suggest that CPI had obtained the right to use any of the things as mentioned in Clause (iii) for which it had made payment to the Assessee. On the contrary, it was evident that the payment made by CPI was for the purpose of accessing the SAP system hosted by the Assessee at its facilities for exchange of information/data. 19. The ITAT has also considered what is the SAP system. It recorded that SAP is an Enterprise Resource Planning (ERP) system developed by SAP A. G., Germany. The expression SAP stands for "Systems Applications and Products" in data processing. It provides end to end solutions for financial, logistics, distributions, inventories etc. All business processes are executed in one SAP system and sharing common information with everyone. 20. The ITAT further recorded that Colgate Palmolive, USA, on 28th March 1994, entered into an End User Software License Agreement with SAP America Inc., which was owning the rights over the software in USA, and was competent to grant licenses of such software. Under the Agreement, SAP America Inc. granted license to Colgate Palmolive, ....
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....gly, the ITAT concluded, on facts, that the payment received by the Assessee from CPI towards the use of the SAP system could not be treated as process royalty under the provisions of the Act. 24. Clause (i) of Explanation 2 to Section 9(1)(vi) provides that royalty means consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property. Therefore, for the payment by CPI to the Assessee to amount to royalty it would be necessary that there should be transfer of any right in respect of a process or in any of the other things mentioned in clause (i). In the present case, as set out hereinabove, and as recorded by the ITAT, the Assessee only provided access to the SAP system to CPI. There is no transfer of any right in any process or in any of the other things mentioned in Clause (i) by the Assessee to CPI. Therefore, the present case does not fall within the said Clause (i). 25 As far as Clause (ii) of Explanation 2 to Section (9)(1)(vi) is concerned, the same would apply if there is imparting of any information concerning the working of, or the use o....
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....d that, as the said amount was not taxable under the Act, there was no need to examine the position under the DTAA. 32. Explanation 5 reads as under : "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, property or information is used directly by the payer, (c) the location of such right, property or information is in India". 33. The ITAT has concluded, on the basis of the facts on record, that, since CPI had been granted a limited access to the SAP system by establishing a communication line at its own cost for use of data available in the SAP system, the payment made by CPI to the Assessee was not consideration in respect of any right, property or information. 34. In our view, the amount paid by CPI to the Assessee cannot be considered as royalty under Explanation 5. In the present case, as correctly held by the ITAT, the facts on record show that CPI had been granted a limited access to the SAP system by establishing a....
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.... (v) to Explanation 2 to apply there has to be a transfer of all or any rights in relation to a copyright. That is a sine qua non for Explanation 2 to become applicable. The Hon'ble Supreme Court held that there must be transfer by way of license or otherwise of all or any of the rights mentioned in Section 14(b), read with Section 14 (a), of the Copyright Act, 1957. He submitted that, applying the ratio of the said judgment to the facts of the present case, there was no transfer of any right in respect of any copyright by the Assessee to CPI, and therefore clause (v) to Explanation 2 was not applicable. 39. Whilst considering the challenge on this ground, the ITAT first noted that this was a completely new facet introduced by the Revenue before it and therefore the ITAT could not adjudicate this issue as it required examination of fresh facts. However, since the Revenue had raised the issue before the ITAT, for the sake of completeness, the ITAT dealt with the same. 40. The ITAT held that the Assessee had merely given access of the SAP system to CPI for a certain specific purpose. By allowing such access, the Assessee had not transferred any right or license in respect of any co....
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....yright Act, for Explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of "royalties" in the DTAAs and the definition of "royalty" in explanation 2(v) of Section 9(1)(vi) of the Income Tax Act. 84. Even if we were to consider the ambit of "royalty" only under the Income Tax Act on the footing that none of the DTAAs apply to the facts of these cases, the definition of "royalty" that is contained in Explanation 2 to Section 9(1) (vi) of the Income Tax Act would make it clear that there has to be a transfer of "all or any rights'' which includes the grant of a licence in respect of any copyright in a literary work. The expression "including the granting of a licence" in clause (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act, would necessarily mean a licence in which transfer is made of an interest in rights "in respect of" copyright, namely, that there is a parting with an interest in any of the rights mentioned in Section 14(b) read with Section 14(a) of the Copyright Act. To this extent, there will be no difference between the position under the DTAA and Explanation 2 to Section 9(1)(vi) of the Income T....