TaxTMI 
TaxTMI 
2022 (8) TMI 1497
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....ng the order of the learned Assessing officer and taxing 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 iss....
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....sideration for transfer of all or any right (including granting of license) in respect of copyright 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 ....
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....d that owing to the nature and customization, the software dealt by the assessee cannot be said to be a shrink-wrapped software. For the sake of completeness, 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 subl....
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.... ii. Agents iii. Contractors and iv. Sub-licensees G. Basis of Payment, Controls & Safeguardsi. Cl-4 Payment of "License Fee" on the basis of "Licensed Capacity" of "Number of Subscribers". In case of increase in subscriber base, Licensee has to purchase "Additional License Capacity". (p. 303, PB-II, 2004-05) ii. Cl-3. a TTL will provide CSG, written information of each licensed product sublicensed with the site location and 'number of subscribers' 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....
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....and EIL, it is found that, there was no t a sale of computer products by CSG, rather limited license to use CSG products were provided. (ii) Further, the language of the terms of agreement of the contract is unambiguously clear as it mentions the term license and not sale. (iii) Also, a dedicated Staff team comprising Software Developer, software tester, Program Manager etc. were also provided by CSG in India for further customization/upgradation of the software according to the need of the customer. (iv) Further, the assessee has not produced any evidence like copy of invoices/ bills etc for the software to prove that 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 ....
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....at off-theshelf software can't address, it commissions developers to create custom applications. It is a solution that can handle one's business's unique requirements. Customized software resources are costly and require substantial in-house tech input and support. Further an article on the difference between the two software is reproduced below: Custom software vs. off-the-shelf software Packaged software applications are available for nearly every computing, business, productivity and communications task imaginable. These packages generally offer the following features. * Ease of use : Off-the-shelf applications serve large audiences with fundamentally similar needs. For example, Microsoft Word is an enormously 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....
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.... one-time fees. However, designing customized software requires significant financial resources. The commissioning business must cover all costs associated with the development process. Some custom solutions can reach five figures or more.(emphasis supplied) (source- https://www.businessnewsdaily.com/5175-customsoftware-development. html) 7. The various clauses of the contracts which establish unambiguously that the software is a customized software. Some of them are reproduced below: (i) At point 4 of Page no. 19 of paper book-1 states clearly that CSG UK rendered professional services/training to its customers in India during the subject year and the professional services rendered by CSG UK entails analysis, configuration, customization, integration, implementation and deployment of billing solutions of CSG UK. (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 skil....
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....ssessee's case falls? In para 4 of the decision in case of Engineering Analysis, the Hon'ble Court gives the four categories of cases to which this decision is applicable. The category of cases are explained with examples in para 44(i) to 44(iv) of the said judgment. None of these four models allow sub-licensing of software. An analysis on these models and the category of cases covered in the decision is further given in paras 45 to 47 of the Hon'ble Apex court's decision. The findings of the Hon'ble Supreme Court in paras 168 to 169 are with respect to the categories of cases mentioned above. (i) The assessee has not specified clearly as to under which category out of the four categories cited in the Hon'ble SC order its case is covered. Ld. AR during the course of hearing however stated that the in which the case of the assessee may fall would possibly be Category two, which wherein is sue related to 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 cov....
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....t the licensee to copy, modify, reverse engineer, decompile, disassemble or otherwise attempt to discover the source code or algorithm of the software. They only allow taking back up copy which is necessary for running the program. These facts are also recorded in paragraphs 45 and 46 of the judgment and based on these facts it has been held in para 47 as under: "47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act *speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright 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 transfe....
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....ight in copyright and would then amount to royalty. 13. In view of the detailed discussion at above, it can be subsumed that assessee is engaged in providing customized software products not a Shrink Wrap one and as his case falls under section 14(b) of Copyright Act and not covered by any of the categories of cases as defined by the Hon'ble SC in Engineering Analysis Case, the consideration so received is liable to treated as Royalty income." 14. We have gone through the issue in detail. Perused the material on record. 15. The issue of royalty or not on software has been examined by the Hon'ble High Court in case of Nokia Networks OY. Where in it was held that supply of software is not 'royalty' despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as "royalty", the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG (310 ITR 320) (Bombay), it was held that amendments cannot be read into the treaty. On....
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....e product at all. 46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. 47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright 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. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of ....