TaxTMI 
TaxTMI 
2022 (8) TMI 1497
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....ing revenue earned by the appellant from supply of software as "royalty" under Article 13 of the Double Taxation Avoidance Agreement ("DTAA") between India and United Kingdom. 3. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and in taxing revenue earned by the appellant from 'maintenance services' as "royalty and fee for technical services" under 9(1)(vi)/(vii) of the Income- tax Act, 1961. 4. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and in taxing revenue earned by the appellant from 'maintenance services' as "royalty and fee for technical services" under Article 13 of the DTAA between India and United Kingdom. 5. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer with respect to levy of interest under section 234B of the Income-tax Act, 1961. " 3. After hearing both the parties, we find that the issue to be adjudicated by us is "whether payment received by the assessee ....
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....opyright and other intellectual property rights. (b) Copy of software supplied by the Appellant did not amount to sale but it is license to use the software. (c) The distinction between "copyright right" and "program copy" recommended by the OECD has been dissented by several member states and India is not even a member of OECD. (d) Indian laws and India's DTAA recognize only two types of transactions in respect of computer software i.e. sale and licenses. No further dissection of licensing is permitted under the Indian Copyright Act, Income-tax Act and Indian DTAA's. 10. Aggrieved the assessee filed appeal before us. The ld. AR argued that terms of the agreements with the customers in India reveal that there is no transfer of any copyright right but only license to use a copyrighted product. It was argued that customer is granted only a non-exclusive, personal and nontransferable right to use the licensed product solely and exclusively for its own internal use unless otherwise allowed by a specific clause to sub-license, the software as agreed on terms with the supplier as in the case of sub-license to BSNL. It was argued that the assessee is the owner and licensor of t....
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.... the arguments in writing are reproduced hereunder: "The assessment order and the order of the CIT(A) are emphatically relied upon. This submission is restricted only to specific aspects. On balance aspects, above orders and oral submissions are relied upon. Taxation of "Software Royalty"- The transaction involves a transfer of copyright rather than mere transfer of a copyrighted material on account of the following facts 1. Agreement with TATA dt.15/12/03, Motorola dt.2nd Apr. 2002. Title- Software License and Services Agreement Need- To merge the earlier agreements, increase the subscriber capacity and allow for the sublicense of the Licensed Products i. e. Convergent Instance - Hyderabad ISL Instance - Mumbai Mobile Instance - Hyderabad A. Cl-2 All Instances shall be licensed to TTL and sublicensed to the Sub licensees. B. Cl-3 Grant of License- CSG grants to TTL a non-exclusive, non- transferable (except for the right to sublicense as set out below), personal license to use and operate the Materials. .. . (p.301, PB-II, 2004-05 &p. 25, PB-II, 2006-07) C. Cl-3a/Cl-10 Right to Sublicense D. Definitions - (p.314, PB-II, 2004-05) "Materials"....
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....s' and shall on an annual basis audit and provide to CSG the updated number of subscribers per instance.(p.302, PB-II, 2004- 05) iii. Cl-14 Customer shall keep and maintain complete records of customer's level or number of subscribers in enough detail to ascertain payments due under this agreement, (p. 311, PB-II, 2004- 05) iv. Additional Maintenance Fee shall be charged upon TTL achieving 10 million subscribers, (p.304, PB-II, 2004-05) H. Compulsory Upgradation-CI-8. a (p.305, PB-II, 2004-05) Failure to upgrade to and be producing bills on the latest version of the standard license product as the latest instance shall result in an additional charge of US$ 75, 000 per annum per instance. I. Termination- Termination as per General Terms (p.300, PB-II, 2004-05) Cl-12 of General Terms a. Customer Termination & b. CSG Termination- If customer fails to observe any material terms of the agreement. If customer does not pay a valid invoice within stipulated time. Effects-Cl-12. c (p. 311, PB-II, 2004-05) & Cl-3. a. viii (p.302-303, PBII, 2004-05) i. Customer to stop using the 'Material s' ii. Customer and Sub-licensees to RETURN or destroy all &....
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....t the said transaction constituted a sale. (v) Additionally, there is also a clause to delete and destroy the software program copy after expiry/termination of the contract. So if once sale is executed by the assessee, how it can continue to have the right to delete/ amend the software? The assessee should not reserve any right in this regard whatsoever. (vi) Further, it would not be out of place to mention that one of the contracts was also sub-licenced to BSNL. If it was a sale of software in place, there wa s no question of sub-licensing. In view of above, it can be emphatically stated and inferred that the said transaction was not a sale of computer program by CSG to MIL & EIL, on the contrary it was transfer of licensing/sublicensing right and payment received was for transfer of that right. The assessee by engaging in the verbal jugglery cannot amend the nature of transaction or characterization of income. 4. In respect of the reliance placed by the assessee on the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02. 03. 2021, it is submitted that it is unacceptable as it is wrong and misplaced becaus....
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....ormously popular word processing application with features, functionality and customization options that organizations of all sizes and scopes can use. * Easy access for purchasing or down loading: Off-the-shelf software can be prepackaged and purchased in a store, but it's often downloadable from manufacturers' websites or available as a cloud subscription. * Wide availability: You can find an off-the-shelf software package for any platform your business uses, including Windows PCs, Macs and Linuxes. * Customizability : Popular commercial packages, such as Microsoft Office applications, have a degree of customizability to make the software work better for your team. Despite the variety of off-the-shelf software available, some organizations require specific capabilities that general software can't provide. If this is the case, they may turn to customized software development. Here's what custom software has to offer: * Uniquely tailored features and functions: When a developer creates a custom software product, that application is tailoredfically for the commissioning organization's use. For example, if a developer created an application for JPMorgan Chase, only the....
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..... (ii) The Billing and customer care software used is a specialized one having usage to manage and automate the billing process specific to the telecom industry. It can clearly be not applied to any other industry or organization. (iii) At work order 001 (Exihibit B) [Page No 65 of Paper Book 1] provisions for staffs with the skills of software testing, software development etc are mentioned. It states as under: " CSG will staff this project with the appropriate compliment of management, business and technical professionals......One or more staff with the following skills sets may be involved in the project: Project Manager, Program Manager, Projectlead, Software Tester, Technical Consul tant, Software Developer and Trainer. " Had it been an off the shelf/shrink wrap software it would not have necessitated deployment of skilled staff/team/ manager/trainer etc for handling the software. (iv) At work order 001 (Exihibit B) [Page No 71 of Paper Book 1] (v) "The Hardware must be ordered, delivered and installed prior to installation of the CSG products. Defined requirements are required prior to any customization/configuration."(emphasis supplied) The above s....
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....software sale by Non-resident Software manufacturer to Indian Distributer/End user is dealt with. In the last hearing before Hon'ble Authority, the Ld AR was trying to establish Ericson & Motorola [Limited licensor of CSG] as an Indian Distributors and trying to cover the matter with the case of Engineering Analysis. (ii) The same may not be accepted due to following reasons: - That the Para 01 of the software license contracts between CSG and Ericson dated 25. 03. 2002 read as under, "...acting as Prime Contractor, may acquire from CSG software products as specified in this agreement in connection with certain related activities in the east zone in India ("India East") in India for Bharat Sanchar Nigam Limited......" - Similar contract was executed with Motorola also. - It is seen from the above that both above were granted with a limited license rights to use CSG software products and also granted with sub license rights (Sub contracting license) with exclusive specified customer i. e. BSNL. Nowhere, in the contract or else where it was mentioned that the Ericson and Motorola are acting as independent Indian Distributors of CSG, nor are they indulging into sales of CS....
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....ht Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software." Thus SC has held that if the license transfers an interest in all or any of the rights contained in section 14(b) read with section 14(a), of the Copyright Act, it would amount to use of right in copyright and hence royalty. 11. In this regard, your kind attention is also drawn to the para 5 of assessment order of AY 2003-04 at page No. 5-6, wherein the case of CSG was categories in Article 14 (b) of Indian Copyright Act, 1957 and reproduced below: "The assessee also seems to have overlooked the provision of India copyright Act, 1957 which clearly bring out the fact that M/s CSG UK Is earning 'royalty' by virtue of granting of a copyright. Article 14(b)(2) of the Indian Copyright Act, 1957 defines the scope of 'copyright' in the case of a computer program: 14. Meaning of copyright - For the 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, name....
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.... unchanged. Following the decision in case of Siemens AG (310 ITR 320) (Bombay), it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as "royalty" despite the retrospective amendments to the Act. 16. The Hon'ble Apex Court dealt with four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. (iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or endusers. (iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident supplier....
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.... such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, in as much as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the a foresaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right 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 characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the l....