TaxTMI 
TaxTMI 
2023 (10) TMI 28
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....herland is in the business of selling networking equipments and providing maintenance service (AMS). The networking equipments are sold through the third party distributors or value added resellers (collectively referred to as channel partners. The assessee is a licensed resale distributor for Juniper Networks equipments in 130 countries in Europe, the Middle East, African Region, Asia Pacific and Japan Region. The assessee is also engaged in providing Juniper Services with respect to Juniper Network equipments. The assessee enters into contract with Juniper Network third party contract, manufacturers based in Mexico, Malysia, Taiwan, China and USA for manufacturing of Juniper Network equipments which are distributed across various regions. The assessee renders Juniper Services in relation to the Juniper Network equipments sold to support service specialists (SSS) in Africa and Asia Pacific Region under the Support Service Specialists Agreement (SSSA). Juniper Services are provided to the SSS as per the terms and conditions mentioned in the Juniper Service Contract. Under the SSSA, SSS procures Juniper Services from the Assessee and provides Service Offerings to its customers (i.e.....
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....lands DTAA and thus, the clause with respective services being ancillary and subsidiary to the application or enjoyment of the right, property or information which is in the nature of royalty is applicable in the current case and accordingly, the same is taxable in India. The Assessing Officer also contended that the nature of services rendered by the assessee are covered by the definition of 'royalty' under section 9(1)(vii) of the Income-tax Act ('the Act') and liable to be taxed as per the provisions of the Act. The Assessing Officer further analysed the nature of services in the light of taxability under India Netherlands DTAA and held that - - There is no material difference between the provisions of the Act and the India- Netherlands DTAA with respect to definition of the term 'Royalty'. - The retrospective amendment made in the Act vide Finance Act 2012 are required to be considered while interpreting the meaning of the term 'Royalty' as per the provisions of the India-Netherlands DTAA. - The Assessee has given SSS (i) access and user rights in the software embedded in the Juniper Networks equipments for performing the Juniper Services; and (ii) access ....
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....o the above example. Considering the above, I am of the opinion that payment received by the assessee from SSS is neither Royalty nor FTS as per the DTAA provisions between India and Netherland. This ground of appeal is allowed." 7. Aggrieved, the Revenue is in appeal before the Tribunal. The Ld.DR submitted that it is the channel partners, who render the services to the end-users based on the knowledge made available to them by assessee. The Ld.DR drew our attention to para 5.2 of AOs order in which the AO has given a detailed finding by analyzing the various clauses of the agreement entered into by the assessee with SSS. The Ld.DR submitted that the solutions to the problems that may arise in the Juniper Network Equipments are available to SSS through customer Service Centre (CSC) and the payments are made towards the use of this software programmes and, therefore, should be treated as royalty or FTS payments. These software applications that is, operating manuals / technical literature which is made available to SSS helps the SSS to solve the issues that may arise while using the Juniper Network equipments. The Ld.DR submitted that this knowledge bank made available exclusi....
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....ers would periodically update the status of resolution to SSS. The Ld.AR submitted that as per the agreement, it is the Juniper Engineers, who ultimately resolve the issue and the SSS co-ordinates the problem solving process between the end-user and the Juniper Engineers. The Ld.AR submitted that the AMC is taken by SSS year on year basis, which goes to prove the fact that no technical knowledge is made available to SSS and that such reason why the maintenance contracts are renewed year after year. 9. The Ld.AR also drew our attention to the finding of the CIT(A) where it is held that the amount received by the assessee for access to the on-line support for trouble shooting cannot be regarded as consideration for the transfer of any copyright. The Ld.AR further submitted that what SSS received is only the right to use the copyrighted process which does not fall within the definition of 'Royalty' as per DTAA. The Ld.AR also drew our attention to the decision of the co-ordinate bench in assessee's own case for A.Y. 2014-15 where the department has initiated revisionary proceedings under section 263 of the Act for the reason that the income received is in the nature of Royalty / FTS ....
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....equipment and also the access to troubleshooting software to the SSS which assists the SSS in resolving problems faced by the end users related to Juniper Networks equipments. According to the Assessing Officer, software program is a "literary work" or alternatively software "is a property similar to', 'patent', 'invention',, design', 'process', 'trademark', 'secret formula'. While holding so the Assessing Officer stated that there is no material difference between the Act and DTAA when it comes to the definition of the term "Royalty" and accordingly the service fees received by the assessee is taxable in India as Royalty. 12 The CIT(A) held that the services rendered by the assessee are covered by the definition of "Royalty" under section 9(1)(vi) of the Act, and accordingly is liable to be taxed in India as per the provisions of the Act. However, the CIT(A) held that payments made for the services rendered does not fall within the definition of "Royalty" as per the provisions of DTAA between India and Netherlands and accordingly gave relief to the assessee. 13. Therefore before proceeding further we will look at the definition of ....
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....the SSSA, SSS procures Juniper Services from the Assessee and provides Service Offerings to its customers (i.e. the end users of Juniper Networks equipments) in India. Under the SSS, the Assessee may also provide software update releases. The software update is governed by the End User License Agreement (EULA'). As per the EULA, there is no sale or transfer or conveyance of any right, title, or interest in the software to the SSS. The key Juniper Services provided by the assessee to the SSS under the SSSA include the following; - Juniper Networks Technical Assistance Centre ('JTAC') - Online support [i.e. through Customer Services Centre ('CSC')] Juniper Networks Technical Assistance Centre ('JTAC') JTAC is the focal point of contact for post sales technical and network-related questions with respect to Juniper Networks' equipments. JTAC provides support to the SSS to enable them to reserve critical/priority/time sensitive issues raised by the end users by providing access to JTAC engineers (through phone and online). Where the query is time sensitive in nature or a query which cannot be solved through Online support (i.e. through the CSC), the SSS a....
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....s allowed to be used is governed by the End User License Agreement (EULA) and during the course of hearing the ld AR drew our attention to the relevant clauses in EULA wherein it has been stated that nothing in the agreement constitutes a sale or transfer or conveyance of any right, title or interest in the software. "2. License Grant. a. Subject to the terms and conditions of this Agreement, including, without limitation, this EULA, Juniper grants You a non-exclusive and non-transferable license, with no right to grant any sublicense. to use, solely during the License Term, (i) the Software, and (ii) each Update made available as part of Maintenance Service contracted for such Software license or Juniper Platform (for Embedded Software Licenses and its associated Feature Set Licenses), for up to the Licensed Units. Each Update, if any, shall be subject to the same terms and conditions as the Software to which such Update pertains, ..... 4. License Restrictions. .... d. You may not sublicense, transfer, or assign, whether voluntarily or by operation of law, any right or license in or to the Software to any other person or legal entity, including an Affiliate, even if Yo....
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....utes a sale or other transfer or conveyance of any right, title, or interest in the Software. For the sake of clarity, the Software is licensed pursuant to the terms and conditions of this Agreement, including, without limitation, this EULA, and not sold. 18. From the perusal of the above it is clear that the assessee retains exclusive ownership of all right, title, and interest of all intellectual property and all other legal rights in the software and that nothing in EULA constitutes a sale or other transfer or conveyance of any right, title, or interest in the software. Therefore we see merit in the contention that except the right to use the Software embedded on the hardware, there is no other rights being transferred to the SSS. 19. Next we will look at the issue of whether the payment for troubleshooting software would be "royalty". We notice that SSS is provided access to Online support (i.e. through the CSC) wherein access is provided to product specifications, FAQs, status of service requests raised on JTAC, operating manuals, software updates, blogs, discussion forums, troubleshoot tools for resolving general error messages, etc. The ld AR in this regard submitted that ....
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.... stated that nothing in the agreement constitutes a sale or transfer or conveyance of any right, title or interest in the software. This would mean that there is no transfer of legal title in the copyrighted article and that all rights, title and interest in the online support (i.e. through the CSC) for troubleshooting / licensed software, are the exclusive property of the assessee. Further SSS does not have the authority to reproduce the software in any material form, to make any translation in the software or to make any adaptation in the software. In this regard we notice that the Hon'ble Delhi High Court in the case of DIT v Infrasoft Ltd [2013] 264 CTR 329 has considered a similar issue of payment towards use of software being treated as "royalty". The Hon'ble High Court observed the distinction between the use of copyright and the use of copyrighted article / literary work by holding that - "87. In order to qualify as Royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licens....
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....opyright 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 (hat the transferee/licensee should acquire rights either in entirety or partially coextensive with the owner/transferor who divests himself of the rights lot possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer and storing it in the computer or his awn use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph becaus....
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....4 vests in the owner of the work such as to reproduce the work, to issue copies, to make translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. 37. to 40.***** 41. It is also pertinent to mention here that the Income Tax Act does not specifically include the 'computer software' in the term 'literary work' and under such circumstances, if we apply the provisions of Income Tax to define the scope of 'Literary Work', then perhaps the 'computer software' will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the 'computer software' will have to be included in the term 'literary work' but to constitute 'royalty' under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the 'literary work' and not the 'literary work' itself. 23 The computer software has been recognized as a separate item not only in second proviso to clause (vi) of section 9 of the....
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....e SSS under the SSSA which enables them to solve the problem on their own account. 27. The CIT(A) in the order has given a specific finding that the Juniper Services would fall within the definition of FTS under the Act and the ld DR during the course of hearing before us presented arguments stating that the nature of services are technical where the knowledge is made available by the assessee to SSS. Therefore we will not go into analysing whether the nature of services rendered are consultancy or technical since it is not the fact in dispute here. 28. Article 12(5) of the India-Netherlands DTAA has defined FTS to mean as under : " For purposes of this Article, "fees for technical services" means payments of any kind to 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 of 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 de....
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....ervices. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skills, etc. 93. In the present case, as Mr. Dastur pertinently pointed out, after the services of the managers (Merrill Lynch and other co-managers) came to an end, the assessee-company is left with no technical knowledge, experience, skill etc. and still continues to manufacture cement, suitings etc. 94. The Memorandum of Understanding appended to the DTA with USA and the Singapore DTA can he looked into as aids to the construction of the UK DTA. They deal with the same subject (fees for technical services, referred to in the US agreement as "fees for included services"). As noted earlier, it cannot be said that different meanings should be assiened to the US and UK agreements merely because of the MOU despite the fact that the subject matter dealt with is the satne and both have been entered into by the same country on one side, f India). The MoU supports the contention of the assesses regarding the interpretation of the words "make available". The portions of the MoU explaining para 4(b) of the relevant article, whi....
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.... gets imparted to SSS. However we notice that the Online support provides access to product specifications, FAQs, status of service requests raised oh JTAC, operating manuals, software updates, blogs, discussion forums, troubleshoot tools for resolving general error messages, etc., but does not in anyway enable SSS to independently apply any knowledge without assessee's support or resolve or diagnose the issues / errors / bugs / problems on their own in future. The SSS engineers continue to approach JTAC in case of critical / priority / time sensitive issues which are eventually resolved by Juniper engineers on the phone or through release of software updates. From these facts it is clear that the Juniper Services provided by the assessee does not result in any enduring benefit to the SSS as the SSSA between the SSS and the assessee is renewed upon the expiry of its tenure similar to any maintenance contract. In view of this discussion in our considered view the services rendered by the assessee to SSS does not make available any technical knowledge that would enable to SSS to resolve the technical issues independently in future and therefore does not fall within the definition....