TaxTMI 
TaxTMI 
2023 (12) TMI 974
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.... characterizing the total income of Rs. 77.72,01,480 received during the relevant previous year from Volvo Group entities in India towards providing standard facilities or services, access to business application software, e.g. SAP, ERP and other ERP solutions, Probuilder, CATIA V5 (VCE), RFSMART, KABA for SAP HR, etc., (ii) Volvo Corporate Network and (iii) facility for end user services, such as, emails, personal computer environment, etc. holding the same as royalty and therefore, liable to tax @ 10% in India in terms of section 9(1)(vi) of the Income-tax Act. 1961 as well as under the Double Taxation Avoidance Agreement (DTAA). 3. That the assessing officer / DRP erred on facts and in law in holding that consideration received from the Volvo Group entity was (i) towards right to use of the copyright and (ii) for use of processes and therefore, the same is to be characterized as a royalty. 4. That DRP erred on facts and in law in arbitrarily proceeding on the basis as if the aforesaid amount was a payment of royalty and the appellant failed to establish / justify the ALP of the same." 3. Facts, in brief, are that the assessee company filed its return of inco....
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....rt issue involved in this appeal is whether the payment received by the assessee can be characterized as royalty. He took us through the Master Service Agreement executed by the assessee and the relevant provisions of India-Sweden DTAA to buttress the contention that the authorities below have erred in characterizing the payment as royalty. 6. On the other hand, learned CIT(DR) opposed the submissions of the learned counsel for the assessee and supported the orders of lower authorities. He submitted that the learned DRP has elaborately examined the findings of the assessing authority and under the facts of the present case the learned DRP was justified in upholding the finding of the AO. 7. We have heard rival submissions and perused the material available on record. We find that the learned DRP upheld the finding of the AO by observing as under: "2.1.6 Having considered the above arguments, the Pane is of the view that some of the general aspects, which are indicative and by no means exhaustive, for determining the arm's length nature of royalty payment needs to be considered to establish the benefit fest, a key test for royalty payment, such as, i. the....
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....right in any of the software/business application as it merely has access to the information/data processed by the software/application owned and executed by the assessee in its server in Sweden, and the Volvo Indian entities do not have the right of commercial exploitation of the intellectual property contained as well, and therefore there is no relevance of the 'right to use copyright' and such provision of standard facilities cannot be classified as royalty. However, it can be seen that the assessee is receiving separate payments as under: Payment by Volvo India Pvt. Ltd: Rs. 6648,83 563/- Payment by Volvo Buses India Pvt. Ltd: Rs. 2,66,74. 70/- Payment by Volvo Eicher Commercial Vehicles Ltd: Rs. 8.41.67,458/- It is unlikely that any independent enterprise would have agreed to make such a payment of royalty. During the TP audit, the assessee has failed to furnish information as to how the rate of royalty was determined along with the basis thereof and what was the prevailing rate in the market. The assessee has failed to clarify whether the assessee has carried out any cost benefit analysis in respect to the payment of royalty. The assessee di....
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....tified in making the adjustment of ALLP under sec. 92CA of the Income-tax Act 1961." 2.1.7 In the light of the above facts we do not feel inclined to interfere with the order of the AO. The objections of the assessee relating to the order of the AO whereby he has held the above payments as royalty are thus rejected. The objections of the assessee are decided as above. The assessing officer is directed to incorporate the findings of the DRP in respect of various objections suitably in the final order. AO shall also place a copy of the DRP Directions as Annexure to the final order." 7.1 Learned DR during the course of hearing submitted that the point of objection is that the payments have been received from the Indian entities. 7.2. On the other hand, submissions of the assessee is that amount is received by the assessee towards providing facilities to Volvo Indian entities and by such arrangement they (Indian entities) do not use or obtain a right to use the copy right in any of the software/business software/ application owned and executed by the assessee. 7.3 Under this backdrop learned CIT(DR) was asked to point out any terms of agreement or any other material t....
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....ingdom (hereinafter referred to as the „India-UK DTAA‟). 10. On the other hand, the learned counsel for the Revenue submits that the judgment of the Supreme Court in Engineering Analysis Centre (supra) has no application to the facts of the present case. He submits that the said judgment is confined only to the four categories of cases as mentioned in the judgment itself in paragraph 4 thereof. The EYGSL (UK) and the EYGBS (India) do not fall in any of the said four categories. He submits that in the present case, the EYGSL (UK) procures the computer software from different vendors and provides the same to its member firms. The purpose is to obtain a licence from the third-party vendors for all its entities under common control and create a standard facility to be accessed and used by all entities and in lieu of that, it receives consideration based on certain parameters. This is nothing but commercial exploitation of standard facilities created. He submits that the licence fee paid by the EYGSL (UK) for the software is with respect to the number of users. The computer programme is a „literary work‟ under the terms of Article 13(3) of the India-UK D....
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....ession "royalty", when occurring in section 9 of the Income Tax Act, has to be construed with reference to Article 12 of the DTAA. This position is also clarified by CBDT Circular No. 333 dated 02.04.1982, which states as follows: xxxxx 43. Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for "the use of, or the right to use, any copyright" of a literary work, which includes a computer programme or software. xxxxx 45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non- exclusive, non-transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sublicense or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the d....
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....ht to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. xxxxx 72. The transfer of "all or any rights (including the granting of a licence) in respect of any copyright", in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has been held hereinabove, the expression "in respect of" is equivalent to "in" or "attributable to". Thus, explanation 2(v) to section 9 (1)(vi) of the Income Tax Act, when it speaks of "all of any rights...in respect of copyright" is certainly more expansive than the DTAA provision, which speaks of the "use of, or the right to use" any copyright. This has been recognised by the High Court of Delhi in CIT v. DCM Limited, ITA Nos. 87-89/1992 in its judgment dated 10.03.2011, as follows: xxxxx 73. However, when it comes to the expression "use ....
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.... acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in Signature Not Verified Digitally Signed Signing Date:10.12.2021 18:30:13 circulation, and the other acts mentioned in section 14 of the Copyright Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence 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....
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....he software procured by the EYGSL (UK) from third-party vendors. The consideration paid for the use of the same therefore, cannot be termed as „royalty‟ as held by the Supreme Court in Engineering Analysis Signature Not Verified Digitally Signed Signing Date:10.12.2021 18:30:13 Centre (supra). In determining the same, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is the Agreement between the EYGSL (UK) and the EYGBS (India). As the same does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term "royalty" as held by the Supreme Court in Engineering Analysis Centre (supra). 15. We may also note that the learned AAR in its Impugned Order has relied upon its earlier view in Citrix Systems Asia Pacific Pty Ltd., In Re., (2012) 343 ITR 1 (AAR), which has been expressly stated to be bad law in Engineering Analysis Centre (supra). 16. The submission of the learned counsel for the Revenue that the judgment of the Supreme Court in Engineering Analysis Centre (supra) cannot be applied because it confines itself only to the four categorie....
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.... 1.3. That the CIT(A) erred in passing the impugned order on mere conjectures and surmises made on the basis of vague assumptions which are wholly contrary to the facts of of the the case. Re: Merits 2. That on the facts and circumstances of the case and in law, the CTT(A) erred in treating the payments received by the appellant from Volvo India Pvt Ltd, Volvo Buses India Pvt Ltd and VE Commercial Vehicles Ltd ('Volvo Indian Entities") aggregating to a sum of Rs. 119,88,54,215, as royalty both under section 9(1)(vi) of the Act and Article 12(3) of the India Sweden Double tax Avoidance Treaty (Tax Treaty). 2.1. That the CIT(A) erred in holding that the appellant could not justify its claim with documentary evidence without considering the voluminous documents including agreements, emails, invoices, details of request made, etc., submitted during the course of appellate proceedings. 2.2. That the CIT(A) erred in not appreciating that the payment was received from Volvo Group Indian entities for (1) allowing access to Business Application software, (ii) providing end user services and shared infrastructure, (iii) allowing access to Volvo Corp....
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....cial security contribution made by the appellant for employees of VIPL in Sweden and hence the same was not taxable under the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing." 9. Facts, in brief, are that the assessee company filed its return of income on 28.11.2015 declaring NIL income. The case was selected for complete scrutiny under CASS. The AO completed the assessment u/s 143(3)/144C(3) of the Income-tax Act, 1961 (the "Act") vide order dated 14.12.2018 at Rs. 119,88,54,215/-. In doing so, following his order for earlier year i.e. A.Y. 2014-15, the AO treated the entire receipts of INR 119,88,54,215/- from different India Entities, as 'royalty' in terms of section 9(1)(vi) of the Act as well as DTAA taxable @ 10% on gross basis. In appeal, the learned CIT(A), partly allowed the appeal, inter alia, observing as under: "5.33 Accordingly after a holistic and deep evaluation of all related matte and issues, as discussed above. I conclude and hold the payment by Volvo Indi entites to the non-resident appellant, as Royalty, for various reasons as discuss herein above, taxable on ....