TaxTMI 
TaxTMI 
2024 (5) TMI 486
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..... AO and in taxing the revenue earned by the Appellant from supply of software as 'royalty' under section 9(1)(vi) of the Income-tax Act, 1961. 3. That the Ld. CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from 'maintenance services' as 'royalty/ fee for technical services' under Article 13 of DTAA between India and United Kingdom. 4. That the Ld.CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from 'maintenance services' as 'royalty/ fee for technical services' under section 9(1)(vi)/(vii) of the Income-tax Act, 1961. 5. That the Ld. CIT(A) has grossly erred, both on facts and in law in dismissing the entire appeal of the Appellant without adjudicating on the following grounds: a) The Ld. AO has grossly erred both on facts and in law in levying interest under section 234B of the Income-tax Act, 1961. b) The Ld. AO has grossly erred both on facts and in law in levying the interest under section 234D of the Income-tax Act, 1961. 6. Without prejudice to gro....
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.... software product to the 'sub-licensee' is given with further restrictions on the extent and manner of the use of software. The sublicensee in such a case is also the ultimate user of the software. The 'sub-licensee' is identified in the license agreement between the Appellant and its customers and the customers cannot sub-license such software product to any other sub-licensee. * License agreements (like with Bharti) that provide the license to the Appellant's customers to use the software product in its own business without any further sub-licensing rights to any third party. The customers in such a case are the ultimate user of the software. It is submitted that the license does not grant the Appellant's Customers/sub licensee any right in the copyright (which remains with the Appellant), but merely a copy of computer program. Accordingly, the transaction qualifies as "sale" of "copyrighted article" and not grants of any "copyright right". Accordingly, same is classifiable as "Business Profits" and since the Appellant does not have Permanent Establishment (PE) in India, such business profits are not taxable in India. In light of these facts, income from licensing....
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....elevant to the F. Y. 2004-05. (vii) The details of any fixed place of business of the assessee or of its associated enterprise in India. (viii) Details of visits of the employees in the following tabular form: Name of employee Designation Duration the stay Purpose Place of work (ix) The details of information and documents kept and maintained as per Section 92D of the IT Act in respect of all the international transactions. The copy of transfer pricing study report, if any, be also submitted. (x) The details of all the deliverables to the customers. The AR has filed its reply vide letter dated 12.11.2007, wherein it has also explained the reasons for not offering the income from software licensing and maintenance fee to tax. The contentions of the assessee are the same, as were raised during the assessment proceedings for A.Y. 2003-04 The payments during the year under consideration are received from the customers on account of licensing of software and rendering of services, the facts and circumstances of the case remains the same and the arguments of the....
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....s is "whether payment received by the assessee for supply of software is taxable as royalty or not". 4. Facts relevant to the ad judication of the case are that the assessee was incorporated under the laws of United Kingdom ('UK') on June 29, 1992 with the primary objective of carrying on the business of specialists, engineers and dealers in computer systems. For AY 2003-04, the Appellant filed its return of income on March 22, 2005 wherein revenue classified as fees for technical services amounting to Rs. 741,538,511 was offered to tax. 5. The Appellant has contracts with Indian customers such as Bharti, Ericsson and Motorola for licensing of software products and is rendering specified services in relation to its billing software. It is submitted that the Appellant has entered into the following two types of agreements with its customers: 6. License agreements with Ericsson and Motorola provide a limited right i.e. a non-exclusive, personal and nontransferable right to the said customers to use the software product solely for the purpose of meeting the latter's obligations to their own customer i.e. BSNL ('sub-licensee'); and a one- time right to sub-li....
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....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 the software and the customers Motorola, Ericsson, Bharti or for that matter BSNL shall not modify, enhance or otherwise change or supplement, disassembling, decompiling, or reverse engineer, alter or remove, any trade secret proprietary or other notices on the software. Further, it was argued that no title in the material is transferred to the customer and there are restricted number of production and non-production copies which are granted to the customer under the license agreement, the use of which is subject to the same restrictions. It was comprehensively argued that the right transferred is a right merely to use a copy of the computer programme which is a copyrighted article. The ld. AR relied on a number of case laws: * DCIT vs. Metapath Software International Ltd (9 SOT 305) (Delhi ITAT) * Halliburton Export Inc. vs. ADIT(international Taxation) (152 ITD 803) (Delhi ITAT) * Alcaltel USA International Marketing Inc. (2009-TIOL-733- ITAT-MUM) (Mumbai ITAT) * Sonata Information Technology Ltd. vs. Addl. CIT (103 ITD....
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....he 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" means i. Licensed Product ii. Documentation iii. Enhancements iv. Revisions v. Updates vi. Upgrades vii. Modifications viii. Derivative works thereto ix. Custom Programming x. All Copyright xi. Patent and xii. Other Intellectual Property Rights therein. "Sub-licensee" shall mean i. VSNL, TTML, TISL, IDEA, Aircel, Dishnet etc. ii. A telecommunication company or utilities company in which Tata Group has equity and operational control. (The Licensee can sublicense to the above group of persons without CSG consent.) iii. Other Indian entities (The Licensee can sub-licensee upon written consent of CSG. However, such consent shall not be unreasonably withheld.) E. Copying and Reproduction Cl-8 "All instances (i. e. Convergent Instance, ISL Instance & Mobile Instanc....
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.... 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 'Materials' and furnish CSG with a return or destruction certificate. iii. Customer to pay 'Discontinuance Fee'- "Customer agrees that, without the certainty of the additional capacity license and maintenance fee revenue set forth in this agreement, CSG would have been unwilling to provide the additional capacity and maintenance services. " Infrasoft Distinguished 13. The ld. DR further submitted her arguments which are as under: "During the course of hearings, the appellant had relied upon the decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited ....
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....ensing. 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 because of the difference in the facts of the instant case with that of the judicial pronouncement relied upon. It is imperative to point out the difference in the facts of the instant case vis-à-vis the cited case. For the applicability of the cited case these conditions emanating from the Hon'ble Supreme Court order are required to be satisfied. (i) That the software should be shrink-wrap/off the shelf software (ii) That the case of the assessee should fall under the four categories as cited in the ....
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....atform 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 bank or one of its specific departments would use the tool. A custom application could analyze the bank's customer database and connect to market data and preset goals in customer accounts to create suggestions for JPMorgan's investment advisors. * A solution only for your business: The developer would design the software to work with the commissioning company's infrastructure, branding and implementation needs, a....
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....are 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, Project lead, 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 statement is an extremely important statement in the work order as it categorically states that the customer should specify if any customization is required. This entails that configuration / customization suiting the needs of the customer was being catered to. The assessee cannot deny that they were not offering a....
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....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 CSG products. Now, any attempt to redefine them as distributors after pronouncement of the SC judgment may not be accepted. Therefore, the assessee has not been able to establish conclusively as to under which category out of the four categories cited in....
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....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, namely :- b) In the case of computer programme- i)............................................................ ii) to sell or give on commercial rental or of fer for sale or for commercia....
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....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 end users. (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 suppliers to resident Indian distributors or end-users. 17. In the instant case, before us, falls under the first two categories. ....
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....t 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 licence." 18. The Hon'ble Apex Court held that a non-exclusive, nontransferable licence, merely ....