TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2853
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.... as "not pressed". 3. In ground no. 2, the assessee has challenged the decision of the Departmental Authorities in treating receipt from sale of software products amounting to Rs. 62,93,417, as royalty and subjecting it to tax. 4. Briefly stated the facts are, the assessee an American Company is engaged in the business of providing information solution. As stated by the Assessing Officer through this solution, the assessee can deliver resources over a network in a more secured manner. He has further observed that the assessee operates globally through subsidiaries including India. For the assessment year under consideration, the assessee filed its return of income on 14th December 2006, declaring total income of Rs. 1,70,69,360/ During the assessment proceedings, the Assessing Officer noticed that the assessee has entered into agreement with Indian subsidiary which acts as a distributor for the company in respect of certain software products which are sold to the customers in India. He found that for the purpose of sales made by the Indian Company on account of replicated software, the assessee receives royalty as per the distribution agreement. However, as far as sale of softwar....
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....ly from sale of software and should not be treated as royalty u/s.9(1)(vi) of the Act. * It should be treated as business income. * Software licenses is not in the nature of patents, inventions, models, designs, secret formula or process or trademark or similar property or scientific work. * The amount received by the appellant is from sale of software which is the end product and not for the source code or instruction processes / formula that went into the development of the software. * After the sale of software, N]PL was not allowed to develop / modify or tamper the software by itself. * The income should be treated as business income under Article 7 of the Tax treaty. * Custom Department has treated "intellectual value" as import of goods and levied duty accordingly. * The use of nomenclature "intellectual value" doe not signify anything else but it is a sale of packaged / off the shelf software and should not be held to be Royalty for use of software, the use of nomenclature "intellectual value" is only as per internal instruction and does not depict the true nature of transaction. 6. The DRP, after considering the submissions of the assessee, however, confirmed....
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.... on the reasoning that as the assessee is not having a P.E. in India such income being in the nature of business income is not taxable under the provisions of India USA DTAA. On a perusal of the material on record, it is seen that identical dispute came up for consideration before the co-ordinate bench of the Tribunal in assessee's own case for the assessment year 2007-08. The Tribunal, after considering the terms of both the agreements as well as other relevant facts came to conclude that the receipts from sale of computer software products is not royalty but business income. For better clarity, it is necessary to reproduce the observations of co-ordinate bench of the Tribunal in its entirety as under:- "11. When we view agreement A in conjunction with agreement B, the distinction between the two becomes quite apparent and glaring. Whereas under agreement A, the assessee has granted a license to NIPL to duplicate, distribute and market the duplicated products in the definite area, under agreement B, the product as such has been acquired by NIPL from the assessee which is further sold without any modification or alteration. Thus under agreement A, the assessee does not supply its....
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....y manner. It is a clear cut case of consideration received for the transfer of copyrighted products and not for the transfer of copyrights in the computer software programme. The distinction between the transfer of a copyright and the transfer of a copyrighted product is prominent. Where the creator of an intellectual property allows another to exploit it commercially by taking copies and selling it, but retaining the dominion over such property with himself, the same is a case of transfer of copyright. If however, the creator himself exploits his work by converting it into end products ready for use and transfers the right to use such end products to another but not the further right to copy the same, it would be a case of transfer of a copyrighted product. The consideration in the former case would be royalty, but that in the latter would be business profit. 13. Coming back to the facts of the instant case it is noticed that the assessee received Rs. 58.29 lakh from NIPL towards the sale of its software products. Neither NIPL nor its end users were permitted to copy the same and exploit such products for commercial purposes. The customers were bound to use such software only fo....
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....signated site to train the employees of ICEL. The applicant was required to provide at its own cost, maintenance and support services. For installation and implementation of the licensed programme, the applicant was to be paid Rs. 4 crore. The licence to use the licensed programme was for four years and thereafter its renewal was left to the discretion of ICEL. It was under these facts that that question before the Hon'ble Authority for Advance Rulings was whether the fees paid by ICEL to the applicant would be taxable as royalty or business profits. The Hon'ble Authority held such payment as royalty and not as business profit by noting that the ICEL has also been granted the right to take copies of the licensed programme. It has further been accentuated in para 40 that : When a software developed over which a copyright is acquired, is permitted to be used by another for a consideration or another is given a right to use it including the taking of copies for the purpose of its business, for consideration, it appears to me to be a case of receiving royalty for enabling that person to exercise the right to use the programme or literary work.' Thus it is abundantly manifest from the f....
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....ial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or article 8." 16. It can be seen from the above Article 12(3) that clause (b) is not attracted in the present case. Clause (a) is relevant for our purpose as per which payments of any kind received as consideration for the use of or the right to use any copyright of a literary work etc. is royalty. Incorporation of the words "any copyright of a ..........." after the expression "for the use, or the right to use" fairly brings out that when the payment is for the use of any copyright, it is a royalty and not otherwise. From here it follows that unless payment is for using or acquiring the right to use the copyright of a work, it cannot be characterized as royalty. Here it is pertinent to note that the requirement is the use of 'copyright' of work and not that of the product derived from such copyright. So in order to be covered under this clause, it is imperative that the payment must be made 'to use' the 'copyright' or the 'right to copy' the work. The distinction between '....
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....rsa. When we slip back to the facts of the instant case, we find that the true nature of payment is sale of copyrighted articles and not the transfer of copyright. As such, it would partake of the character of business profits and not royalties regardless of the fact that the assessee chose to describe its product as 'Intellectual value' in its invoices. 19. It is interesting to examine the issue under consideration from another angle also. NIPL filed its return declaring payments to the assessee as royalty on the sale of duplicate software at Rs. 1.76 crore and purchase of software at Rs. 58.29 lakh. These transactions were duly reflected in Form no. 3CEB. Appendix B to the report contains particulars in respect of transactions in tangible property from assessee. Description of transactions has been given as "Purchase of software" and the amount is declared at Rs. 58.29 lakh. In Annexure-C description has been given as "Royalty on sale of duplicated software" to the assessee with a consideration of Rs. 1.76 crore. When the case of NIPL came up for scrutiny assessment before the A.O., he referred the matter to the TPO, who vide his order dated 27.04.2010 accepted the ALP decl....
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.... transaction of purchase from the assessee, it cannot now turn around to hold that the very same payment is royalty in the hands of payee. We jettison the viewpoint of the Revenue on this score as well. 20. In view of the foregoing reasons we are satisfied that the learned CIT(A) was not justified in holding that the amount collected by the assessee towards the "intellectual property" be assessed as royalty. The impugned order on this issue is, therefore, overturned and it is held that the entire amount of Rs. 58.29 lakh be considered as business profits. The learned CIT(A) has recorded a categorical finding that the assessee does not have a permanent establishment in India and thus its business profit cannot be taxed in India. No appeal has been preferred by the Revenue to challenge this finding given by the learned CIT(A). Ex consequenti the business profits amounting to Rs. 58.29 lakh cannot be charged to tax in India in view of the assessee not having any PE in India. 21. In the result, the appeal is allowed. On a careful reading of the aforesaid order of the co-ordinate bench, it is very much relevant to observe that in the assessment year 2007-08 also, the Departmental Aut....