TMI Blog2011 (9) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... opyright in the software and taxable as royalty under the DTAA and the Act The definition of royalty contained in this Treaty in Article 12.3 shows that it is a payment of any kind received as consideration for the use of or the right to any copyright - In the present case, not merely the use is licensed but the licensee is given the right to copy it and use it wherever it is needed by it for its business - Held that:the right given to ICEL to copy the software for its purposes, is a right to use the copyright. In any event, the use of a copyright has been given to ICEL for consideration and that would be royalty in terms of the DTAA - Ruling is given - A.A.R. No.835 of 2009 - - - Dated:- 28-9-2011 - Mr. Justice P.K. Balasubramanyan, Mr. V.K. Shridhar, JJ. Present for the Applicant Mr. Hitesh Joshi, PCS Mr. Rohit Aggarwal, Advocate Present for the Department Mr. Girish Dave, Advocate Mr. D.K. Mahajan, Addl.DIT (I.T.) Mr. Sanjay Agrawal, RULING (By Mr. V.K. Shridhar) The applicant has entered into a Software License and Maintenance Agreement (SLMA) with Indian Commodity and Exchange Limited (ICEL) on 27.3.2009. Under the agreement the applicant has allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICEL. Use of source code and reverse engineering of the Licensed Programme is strictly prohibited. ix) The tenure of the license granted to ICEL is initially for 4 years. Thereafter, the renewal of the license is at the discretion of ICEL. x) The payment prior to License Maintenance Fees on 1.1.2010 is towards goods. Thereafter, it is a business income taxable in India, if PE continues. 4. The applicant submits that the Implementation fee and Licence and Maintenance fee are not chargeable to tax as per Income-tax Act, 1961(Act) or under DTAA with Sri Lanka. The providing of maintenance service to ICEL would not create a Permanent Establishment (PE) in India. As the payments are not liable to tax in India, ICEL is not required to withhold any tax under section 195 of the Act and would not be obliged to file a tax return in India. To support the above proposition, the applicant has placed reliance on the following judgements Tata Consultancy Services [2004] 141 Taxman 132(SC), Dassault Systems K. K, AAR/821/2009, Infrasoft Ltd. [2009] 28 SOT 179, Sonata Information Technology 103 ITD 324. 5. Following questions were raised for a ruling by this Authority: 1. Whether, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA, one has to go by its general meaning and not by the definition given under Explanation 2 to section 9(1)(vi). According to the learned ITAT, a term of legal protection has no conclusive impact in determining whether payment is royalty or not, nor the nature and mode of payment whether lump sum, single, or periodic. The payment for use of a property whether the property is protected under statute or not, is royalty . The ownership of the property remains with the developer and only a limited right is given to the user. It is then submitted that the updating of software, removal of programme errors and maintaining performance standards under the maintenance services amount to supply of software. The onsite training to employees and maintenance service to ICEL could be treated as PE of the applicant in India, if the conditions under Article 5 of the DTAA are satisfied. In any case, the payments to the applicant are taxable in India and ICEL is required to withhold tax under section 195 of the Act. The applicant is liable to file a return of its income in India. For these propositions, reference has been made to the decisions in the cases of Tata Consultancy Services,[2004] 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the number of days. 9. As regards the applicant s submission that as per DTAA it can have a PE only if the stay of the employees is for a period exceeding 183 days in any 12 months period, we may refer to the most favoured nation clause in the Treaty whereby the period gets relaxed to any period of longer duration in any of the DTAAs entered into by India. Since in the Treaty between India and Yugoslavia the period is 275 days, we read the period in Article 5 as 275 days in any 12 months. Even if the contention of the revenue is accepted that the number of days is more than 183 days if the days are counted from 12.1.2009 to 20.8.2009, it would still be less than 275 days. Accordingly, the existence of PE as per Article 5 of the DTAA with Sri Lanka is not satisfied. 10. The term royalty as used under Article 12.3 of the DTAA is as follows The term royalties used under this article means payment of any kind received as a consideration for the use of or the right to any copyright of literary, artistic or scientific work . Hence the issue that has arisen for our consideration is: Whether the payment made by ICEL under SLMA is consideration for the use of or the right to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright protection to both the source code and the object code of the computer programme. 13. As is well understood, the term software is used to describe all of the different types of computer programmes. Computer programme are basically divided into application programme and operating system programme . Application programme are designed to do specific tasks to be executed through the computer and the operating system programmes are used to manage the internal functions of the computer to facilitate use of application programme. These two types of programmes can be written in three levels of computer language high level, low level and lowest level. High-level language consists of English words and symbols and are easy to learn. Lower-level language is assembly language which consists of alphanumeric labels. This language is also easily understandable by the programmer. Statements of these two languages are referred to as written in source code. The third, lowest-level language, is the machine language. This is a binary language using two symbols '0' and '1' called bits . This is the only language which can be followed by the machine but very difficult for the programmer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(ffc) and is a copyrightable subject matter. 16. We must now examine whether the license granted under the SLMA is use of or the right to use the copyright in the Computer Programme. A license is described in Stroud s Judicial Dictionary, 5th Edition, as an authority to do something which would otherwise be wrongful or illegal or inoperative (per Latham C.J., in Federal Commissioner of Taxation v. United Aircraft Corporation 68 C.L.R. 525). It further describes License as A dispensation or license, properly, passeth no interest, nor alters or transfers property in anything, but only makes an action lawful, which, without it, had been unlawful. It describes Licensee as a person who had permission to do an act which without such permission would be unlawful. In a similar manner, Ramanath Aiyar, in Law Lexicon, has described license as an authority to do something which would otherwise be inoperative, wrongful or illegal. It is a permission or authority to do a particular thing. Hence, it is clear that the license to use computer Program means right to use the intellectual property that is the copyright in the computer program in a particular way. 17. The term Licensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose for which it was supplied. Once there is no infringement, it is not possible to hold that there is transfer or licensing of copyright as defined in the Copyright Act and as understood in common law. 21. We find it difficult to agree with this conclusion. A careful reading of Section 52 (aa) will reveal that the clause uses the term lawful possessor . It thus, carves out an exception for lawful possessors of a computer programme as far as copies or adaptation for personal use is concerned. However, the question before us is: if the customer had used the computer programme without paying for it, will not the assessee have the right to sue the customer for copyright infringement? It does not appear to be relevant to the discussion before us to determine what rights the customer will enjoy after having paid for the computer programme. 22. It was held in Gracemac Corporation vs. ADIT and Microsoft Corporation vs. ADIT (ITAT Delhi) that: The expression "exclusive right" used in Section 14(a) or Section 14(b) of the Copyright Act refers to the rights of author/creator and not the "exclusive right" to be given by him to some party to reproduce the copyrighted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acter of Software. The World Trade Organization has itself recognised goods (GATT), Services (GATS) and intellectual property rights (TRIPS) as distinct and different classes. The purchase of software from reseller is payment for use of intellectual property and not for the purchase of goods, unless the payment falls under the exception provided by the second proviso to section 9(1)(vi) of the Act. 25. The scope of SLMA extends beyond installation and implementation of the Licensed Program. The maintenance service in respect of the Licensed Program is an integral part of SLMA. As per Schedule-F of SLMA, trading transactions are to be processed using the Licensed Program. After paying the implementation and customization fee, the actual use of the Licensed Program is to begin from 1.1.2010 and will last till 31.12.2014. The payment for each quarter for this period is to be determined on the basis of average trades per day in a quarter. In bifurcating the payments before and after installation and implementation, the nature of the payments remain royalty for the use of the Licensed Program and would not change its character from royalty to business income. If it was to be in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stall the same at the designated premises as is reasonably required for the own use and back-up of ICEL. ICEL is not allowed to modify the licensed programme. The applicant seeks a ruling whether the income derived by it from this transaction with ICEL will be taxable in India under the Income-tax Act or whether it will be taxable under the Double Taxation Avoidance Agreement between India and Sri Lanka of which it is the tax resident. The applicant submits that it does not have any permanent establishment in India. According to the Revenue, what is payable by ICEL in terms of the agreement which enables it to use the computer programme over which the applicant has proprietorship and copyright, is royalty in terms of section 9(1)(vi) of the Income-tax Act and is taxable in India under the Income-tax Act and also under Article 12 of the DTAA relied on by the applicant. It is the case of the applicant that what is involved is merely a sale of goods to ICEL and the payment is not royalty in terms of the Income-tax Act. Alternatively, it is contended that what is given is only the right to use the licensed programme and not the copyright in the licensed programme and hence it is not ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person without a license granted by the owner of the Copyright, does anything the exclusive right to do which is by the Act conferred upon the owner of the Copyright, it is an infringement. 5. The applicant has no case that it is not the owner of the Copyright. There is no dispute that a use of the programme over which the applicant has a Copyright, by ICEL without permission, would amount to an infringement of the Copyright. What the applicant has granted to ICEL, is a license to use the computer programme developed by it and owned by it and over which it has a Copyright. This is done for a consideration. But for the license granted, the user by ICEL of the programme would be an infringement of the Copyright of the applicant. 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 a 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 the literary work. In terms of the Income-tax Act, royalty means consideration for the transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied by a non-resident manufacturer in two identified situations also indicates that the granting of a license by a non-resident in respect of a computer software for consideration would generate income by way of royalty in other instances or cases. It is, therefore, not possible to accept the argument that what is involved is the mere permitting of the right to use a copyrighted article and the payment involved is not royalty. Indian law does not distinguish between copyrighted article and the copyright. What is needed to attract liability is the farming out of the right to use or of the right itself for consideration. 7. The consideration received is for permitting another to do something which, but for the permission is actionable. If that be so, the grant of the right to use the Copyright for a consideration can only be royalty as understood and cannot be understood as sale price because there is no parting of the right or title by the owner of the Copyright in favour of the grantee. 8. The DTAA involved herein is the one between India and Sri Lanka. The definition of royalty contained in this Treaty in Article 12.3 shows that it is a payment of any kind received as con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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