TaxTMI 
TaxTMI 
2010 (1) TMI 47
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....nt states that as per the business model, the Product is sold to VAR for a consideration based on the standard list price less discount. The VAR in turn will sell such product to the end-users at a price independently determined by VAR. The end-user will enter into End User License Agreement ("EULA") with the applicant and VAR for the product supplied. The reseller (VAR) gets the order from end-user and places a back-to-back order on the applicant. On acceptance of the order by the applicant, it will provide a license key via e-mail so that the customer will directly download the product through the web link. 2. The modus operandi of the transactions has been set out in brief as follows: - The process starts with the VAR discussing with the end customer details regarding the technical solution i.e. the software and the budget of such end-customer; - The VAR makes a proposal to end-customer. This proposal includes a copy of the standard tripartite End User License Agreement (EULA). In a few cases the VAR forwards a Special Bid Offer (SBO) to applicant, typically to decrease their purchasing price. Applicant does not know the price that VAR intends to pr....
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.... processor. 2.2. The applicant submits that the said transaction between (a) the applicant and VAR, (b) VAR and the End-user is on principal to principal basis and that it has no presence in India whether through any employees or in the form of an office or place of business. 3. The following question is framed by the applicant in order to seek advance ruling from this Authority: Whether on the facts and circumstances of the case and in law the payment received by Dassault Systems K.K. (hereinafter referred to as the "the applicant") from sale of software products to independent third party resellers will be taxable as business profits under Article 7 of the India-Japan Double Taxation Avoidance Agreement ("India-Japan DTAA" or "Treaty") and will not constitute 'royalties and fee for technical services' as defined in Article 12 of India-Japan DTAA? 4. Broadly, the applicant's contention is that the payment made by VAR to the applicant is not in the nature of royalty within the meaning of Article 12.3 of the DTAA (Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion) (or 'Treaty') between India and Japan notified by the Ce....
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.... of DTAA enjoins that 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 contracting state. However, this general rule is qualified by para 2 which enables the contracting State in which they arise to tax the same according to the laws of that State subject to the limitation that the beneficial owner of royalties or f.t.s shall not be subjected to tax at a rate more than 10% of the gross amount. 7. Under the Income-Tax Act, the income arising from royalty is deemed to accrue or arise in India and the non-resident is liable to be taxed under Section 9(1)(vi) of the Act. Explanation 2 thereto defines 'royalty' The relevant part of the definition contained in clause (v) is :"royalty" means consideration for the transfer of all or any rights (including the grant of a licence) in respect of any copy-right, literary, artistic or scientific work, patent, invention, model, design, secret formula or process, trade mark or similar property. 8. The first and foremost question is whether the payments received by the applicant from the VARs represent consideration for the use of,....
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.... entitled to enforce all the exclusive rights of copying, publication, adaptation, sale, rental and so on conferred on him by copyright law. The purchaser does not acquire by his purchase any right, either by way of assignment or licence, to exercise any of those exclusive rights. (p.217)" Referring to the position of a licensee and an exclusive licensee, the legal position was stated as follows at p.310: "A mere licence from the copyright owner confers no proprietary interest on the licensee enabling him, for example, to bring proceedings in his own name, unless coupled with the grant of some other interest, for example, the right to take property away. Statute apart, even an exclusive licence, which is merely the leave to do a thing coupled with a promise not to do, or give anyone else permission to do that thing, gives the licensee no right to sue in his own name for infringement nor any other proprietary interest. In copyright law this general rule is altered by statute in the case of exclusive licences which comply with prescribed formalities. The 1988 Act confers on such a licensee a procedural status which enables him to bring proceedings but otherwise the ....
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.... purposes of this Act, "copyright" means 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, namely:- (a) in the case of a literary, dramatic or musical work, not being a computer programme- (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) In the case of 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 programme: ....
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....Registrar of Copyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act- (i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or (ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware that had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or (b) when any person- (i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or (ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or (iii) by way of trade exhibits in public, or (iv) imports into India, any infringing copies of the work: Provided that nothing in sub-clause(iv) shall apply to the import of one copy of any work for the private and domestic use of the importer. ....
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....ns a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result." 11.1. There is no doubt that the computer programme forming part of the software falls within the description of literary or scientific work. A copyright in or over the computer software produced by the applicant is in the nature of an intangible, incorporeal right belonging to the category of intellectual property rights. All intellectual property rights in the licensed programs exclusively belong to the applicant or its licensor and they are retained by the applicant, as per the explicit declaration in the Agreement. The copyright in the software product vests with the applicant who has exclusive rights over the same. In order to see whether the applicant has transferred any rights related to copyright or conferred on the licensee/end-user the rights over the use of copyright, it is necessary to ascertain the true meaning of copyright and the incidents attached to it. 12. In the case of FactSet Research Systems Inc.[(2009) 317 ITR 169 (AAR)], this Authority took the ....
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....AR or end-user. It is contended that no consideration is paid for the use of copyrights in the computer programme. All that is transferred is a limited right to use a copyrighted product. The rights associated with the copyright are those which enables the recipient to commercially exploit the product and that is absent here. The permitted use, it is pointed out, is only for licensee's internal use. It is argued that a non-exclusive licence to the end-user to have access to the licensed programmes though the machines of the end-user, that too for licensee's internal use only, does not amount to the use of copyright or the right to use the same. Apart from copyright, the Revenue cannot bring the income in question within any of the other limbs of the definition of royalty in Art.12.3, it is contended. The consideration received by the applicant from VAR with reference to the transactions entered into with end-users is not a consideration for the use of any of the copy-rights in the software. The applicant finally submits that the income representing the payments received from the VARs can be treated as business profits by the applicant, but in view of the fact that the appli....
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....laced for the reason that the Indian Government has not agreed to the viewpoint expressed in the commentary. Alternatively, it is contended the applicant has granted the rights for the use of process/equipment and, therefore, the payment falls within the definition of 'royalty'. Then, it is submitted that in reality, the VAR is acting on behalf of the applicant for securing the customers to whom the products and services of the applicant are to be licensed. The consideration flows from the end-user to the applicant through the channel of VAR. VAR is in reality a dependent agent of the applicant as the applicant controls the operations of the VAR. The discretion given to VAR to independently fix the price payable to it by the end-user is practically a dead letter because the standard price details would be available to the public and the said price will not be exceeded. It is VAR alone, in actual practice, which has authority to conclude the standard form contracts. It is, therefore, submitted that the applicant has an agency PE in India. 14. A reference to the Agreement (GVA) between the applicant and the VAR reveal the following: 14.1. The applicant appoints VAR to a....
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....making the product available to the end-user within the territory for his internal use. The reseller gets the order from end-user and places back to back order. Reseller does not hold any inventory of software in India. VAR is free to negotiate the price with the customer but VAR pays to the applicant the standard price in force less the agreed discount. Of course, the price is not the same as the reseller gets from the customer. VAR is the primary point of contact for any end-user. The applicant may accept or reject any order at its discretion and VAR is not granted any authority to enter into written or oral contracts on behalf of the applicant. VAR cannot assign or delegate any of its rights or obligations to any third party without prior consent of the applicant. GVA imposes restrictions on the VAR in relation to the rights to develop any product or derivative work from the software provided to the end-user. Various other restrictions adverted to supra are also imposed on the VAR consistent with his position as non-exclusive distributor. The applicant will invoice VAR and VAR is required to make payment within 30 days irrespective of recoverability of the product price by the V....
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.... licensed programme for any such purposes, the licensee has to enter into a separate agreement with a DS Group Company. Licensee may make the necessary number copies of the licensed program for installation and one copy for back-up per machine in support of licensee's authorized use. The mode of delivery through electronic means is detailed in the Agreement. Subject to the payment of applicable charges, the applicant or VAR or any other designated third party will provide 'support services' for licensed programmes. The Price and licensee's payment obligations are specified in cl.4. The pricing structure contains two or three elements (i) primary license charge (PLC) coupled with annual licence charge (ALC) PLC is a one time non-refundable charge for the grant of perpetual license to use the 'release' of licensed programme made available by company on the effective date of the license. The annual license charge (ALC) is a yearly charge, payable in advance i.e., for the first year of each license or renewed license. Payment of ALC for licensed programme entitles the licensee to support services for the licensed program for one year and a license to use the ....
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....ey are not customized or tailor-made. 17. Looking at the broad pattern of transactions between the applicant, the VAR and the end-user, it is clear that on the acceptance of the order by the applicant, the VAR makes one time payment to the applicant which is known as 'distributor price' which is arrived at by deducting the discount from the brand price list. It may be clarified that the PLC/ALC fixed by the applicant forms the basis for working out the 'distributor price'. Obviously, this payment is made in consideration of the applicant "providing the licensed programmes" of the brand ordered by the end-user and authorizing the end-user to make use of the same for its internal purposes. It is seen from EULA that the Company grants the licensee (end-user) a non-exclusive, non-transferable licence to use the licensed programmes on the computer equipment belonging to the licensee or under its control. Licensed programme is made available to the licensee directly through electronic delivery the details of which have already been set out. The licensee/end-user does not make any payment to the applicant. The license charges (PLC/ALC) are collected by the VAR on its ow....
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....thout giving any scope for dealing with them any further. 17.1. Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger 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 a copyright. Where the purpose of the licence or the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property rights inherent in and attached to the software product in favour of the licencee/customer is what is contemplated by the definition clause in the Act as well as the Treaty. As observed earlier, those rights are inco....
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....which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software. Payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyright rights) will represent a royalty where the consideration is for granting of rights to use the programme in a manner that would, without such license, constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted programme, or to modify and publicly display the programme. In these circumstances, the payments are for the right to use the copyright in the programme (i.e. to exploit the rights that would otherwise be....
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....ding the storing of it in any medium by electronic means (vide Section 14(a)(i) of the C.R Act) must be deemed to have been conveyed to the end-user. It is pointed out that a CD without right of reproduction on the hard disc is of no value to the end-user and such a right should necessarily be transferred to make it workable. It appears to us that the contention is based on a mis-understanding of the scope of right in sub-clause (i) of Section14(a). As stated in Copinger's treatise on Copyright, "the exclusive right to prevent copying or reproduction of a work is the most fundamental and historically oldest right of a copyright owner". We do not think that such a right has been passed on to the end-user by permitting him to download the computer programme and storing it in the computer for his own use. The copying/reproduction or storage is only incidental to the facility extended to the customer to make use of the copyrighted product for his internal business purpose. As admitted by the Revenue's representative, that 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 provisio....
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....ection 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one's own use. Even without such licence, the buyer of product cannot be said to have infringed the owner's copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer/licensee of product has acquired a copyright therein. The following observations of the Constitution Bench of the Supreme Court in Tata Consultancy Services vs. the State of Andhra Pradesh (271 ITR 401 34) case are quite apposite, though made in a different context: "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." Viewed from any angle, we have no hesitation in rejecting the contention of the Revenue referred to in para 18 supra. 19. Next, it has been argued on behalf of the Revenue that the right to sell or offer for sale the applicant'....
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....eld to be not royalty in terms of Explanation 2 to Section 9(1)(vi) as well as Art.12(3) of the Indo-US Tax Treaty. The features of the transaction in the above case were brought out in the following sentences: "21. The applicant's database is a source of information on various commercial and financial matters of companies and similar entities. What the appellant does is to collect and collate the said information/data which is available in public domain and put them all in one place in a proper format so that the customer (licensee) can have easy and quick access to this publicly available information. The applicant has to bestow its effort, experience and expertise to present the information/data in a focused manner so as to facilitate easy and convenient reference to the user. For this purpose, the applicant is called upon to do collation, analysis, indexing and noting wherever necessary. These value additions are the product of the applicant's efforts and skills and they are outside the public domain. In that sense, the database is the intellectual property of the applicant and copyright attaches to it; but, the question is whether in making this centralized da....
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....case, the assessee-Companies were suppliers of telecommunication equipments comprising both hardware and software. The software was for the specific use of the customer and was not available off-the-shelf. The assessing officer held that the assessee had licensed the software and the customers had the right to use the software and therefore the payment received by the assessee was in the nature of royalty under the DTAA between India and Sweden. This finding was challenged in appeal. The crux of the issue before it, as stated by the Tribunal, was whether the payment was for a copyright or for a copyrighted article. After referring to the definition of 'copyright' under Section 14 of the Copyright Act, the Tribunal observed thus: "What is to be noted is 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 u....
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....cquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein." The contention of the Revenue's counsel that if a person acquires a copyrighted article, he automatically gets a right over the copyright also has been negatived. Then, after referring to OECD Commentary etc. the conclusion was reached that the payment made by the cellular operator was not for any copyright in the software but was only for the software as such, as a copyrighted article. Hence, it was held to be not royalty either under the Act or the DTAA. 20.3. In the case of Samsung Electronics Ltd. [(2005) 94 ITD 91], a case decided by Bangalore Bench of the Tribunal, the appellant therein imported off-the-shelf software from different suppliers abroad. It was pointed out that what the appellant had acquired was only a copy of the copyrighted article i.e., software and the incorporeal right to software remained with the owner. The right to the use of copyright is different from the right to use the pr....
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....t the right of using the process involved in the software has been conveyed to the end-user in the instant case. Usage of process contained in the software or acquisition of rights in that process is not the real nature and substance of the transaction. The 'process' contemplated by the definition clause is broadly referable to know-how. The scope of preceding expression 'formula' too belongs to the same genus. By making use of or having access to the computer programs embedded in the software, it cannot be said that the customer is using the process that has gone into the end-product or that he acquired any rights in relation to the process as such. Nor can it be said that following the series of instructions so as to be able to effectively make use of the programs contained in the software amounts to the use of process or acquisition of any rights in relation thereto. The Revenue's contention on this score therefore fails. We refrain to go into the other controversial question whether the adjective 'secret' governs both formula and process. However, we would like to observe that much can be said against the view taken by the Tribunal in the case of ....
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....ndent status, provided that such persons are acting in the ordinary course of their business". 24.1. On a reading of the said provisions, it is clear that the existence of an agent of independent status covered by paragraph 8 does not give rise to a PE. However, if the person employed by the applicant for the purpose of business operations in India is not of an independent status, the PE is triggered if such an agent engages himself in the activities specified in clauses (a), (b) & (c) of Article 5.7. 24.2. It is the contention of the Revenue that VAR is in reality a dependent agent of the applicant as the applicant controls the operations of VAR and VAR acts exclusively for the applicant or its group. In this regard, the Revenue relies on clause 4.17 of the Agreement (GVA) under which VAR undertakes not to develop, license, market, distribute or maintain competing products or become the agent of any competitor within or outside of the territory. Another provision relied upon is clause 6.11 which says that in the event of the failure of VAR to invoice and collect license fees when due by end-users, the applicant shall have the right after consulting with VAR, to request VAR t....
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....is free to determine the final price to be charged from the end-user does not alter the dependent status of the agent because it would be difficult for VAR to collect anything over and above the standard price for the given product as notified by the applicant from time to time. In regard to the authority to conclude contracts, it is pointed out that "in case of mass contracts (EULA) made out on standard form, it cannot be said that authority lies with the applicant". 24.4. The applicant repudiates these contentions by contending that each VAR is a non-exclusive distributor of the applicant transacting with the applicant on principal-to-principal basis. It is disputed that the VAR is an agent of the applicant and it is submitted that placing of restrictions upon and requiring the VAR to furnish certain reports does not alter the status of distributorship to that of agency. In any case, it is submitted that VAR cannot be considered to be dependent agent at all as the criteria laid down in article 5(7) have not been satisfied. On the point of legal dependency, it is submitted that VAR is a distinct legal entity which is unrelated to applicant. The management of VAR and the applica....