TMI Blog2011 (9) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.7.2010 pertaining to Assessment Years 2002-03 and 2006-07 respectively. Since the issues involved in all these appeals and cross objections are same and pertain to same assessee, we are disposing them off by this consolidated order for the sake of brevity and convenience. 2. The Revenue has raised three grounds in all. However, the only issue arising out of these appeals is that the ld. CIT(A) erred in deleting the disallowance u/s 40(a)(i) of the Income-tax Act, 1961 [in short, the Act] on the amounts paid to M/s Abaqus Inc. without deduction of tax. 3. Briefly stated, the facts as narrated by the ld. CIT(A) in his order are that the, Assessing Officer called for a copy of the Regional Support Agreement (RSA) which was entered into by the appellant with its parent company for the distribution of software products in India. After perusing the RSA, the AD found that i) the appellant company was appointed a distributor by its parent company for the sale of software products in India; ii) the software products are general products developed by the parent company, a licensed copy of which can be sold to the end-users; iii) what is sold to the end-user is only a copy of the softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or Documentation created in the course of the translation) shall be the exclusive property of ABAQUS. ABAQUS reserves the right to require that any translation of any of the Programs into the language of the Territory be made by ABAQUS or under the supervision of ABA QUS. 8(a) Distributor agrees to reproduce, affix, or have affixed copyrights or other proprietary notices to any copies in the form specified by ABAQUS 8 (b) During the term of this Agreement, Distributor shall have the right to use ABA QUS(s trademarks and Program names in any advertising, marketing, technical or other material produced or distributed by the Distributor in connection with the Programs. However, Distributor must first obtain ABAQUS approval: (i) to use materials that were not provided to Distributor by ABAQUS or (ii) to use ABA QUS (s trademark and Program names outside the Territory. 4. On the basis of the above clauses, reproduced in his directions u/s 144A, the Addl. CIT arrived at the following conclusions: i) The appellant was given the right to use ABAQUS trademarks and programs in its business for marketing; ii) appellant has been given the right to reproduce, affix or have affixed copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The license agreement is entered into between the customer and Abaqus Inc and a Letter of Assurance signed by the customer is sent to Aba qus Inc. Having signed the license agreement, the appellant requests Abaqus Inc for providing the software download links. Thereafter, license key gets generated (based on the hostid given by the customer) at Aba qus s end and subsequently it is provided to the appellant, which in turn sends it to the customer, to ensure that the appellant can monitor the transaction. The license keys are only a security device, as referred to under the software license agreement (para 4 of clause 4 of the license agreement). The license key and the links are sent to the customer. The customer downloads the software directly from the US server (via the links) and installs the software using the license key. The process of generation of license key does not require any engineering knowledge, and can be undertaken by anyone who understands the basic use of computers. The generation of keys is similar to the password for running the software in customer s system and at any rate it cannot be compared to replication or duplication of the software, as it only facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn are contrary to the facts. With regard to clause 3(d) of the RSA referred to by the Addl. CIT, the Id. AR submitted that the appellant was allowed to generate the licence key only for the purpose of monitoring the transaction. It was further submitted that far from being a right, the generation of license keys was a responsibility 8thrust upon the assessee to generate the keys when required in any customer Gs case. With regard to clause 4 (i) of the RSA, he submitted that this was only an option which was not actually exercised and hence not relevant to the question of determining whether the payment in this case is a royalty. With regard to clause 5(b) of the RSA, he submitted that this clause cannot be read in isolation, but wholly and along with clause 5(a) of the RSA. The relevant portions were reproduced as below: Clause 5(a) Abaqus encourages distributor to perform consulting and other services outside the scope of Section 4 that promote the use of the programs and to receive compensation for such additional services from customers and prospective customers. Distributor shall not represent or imply that such services are being performed by or on behalf of Abaqus. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduce- affix- or has affixed copyrights or other proprietary notices to any copies in the form specified by ABA QUS. Distributor agrees that a copyright notice is not enough to treat a Program as a Published work. Without ABA QUS s consent, Distributor shall not register, discontinue any registration or enter into any agreement affecting any trademark or any copyright covering material used or to be used in connection with the Programs. 9. Based on the above, the Id. AR submitted that it is a duty cast upon the appellant, far from being a right, to merely reproduce and affix copyright notices or other proprietary notices to the copies of the products as specified by Abaqus Inc. He stated that this is merely a clerical routine to be carried out by the assessee to safeguard the interests of Abaqus Inc. With regard to clause 8(b) of the RSA, the appellant submitted that the whole clause 8(b) had to be read, which is reproduced as follows: During the term of this Agreement, Distributor shall have the right to use ABA QUS s trademarks and Program names in any advertising, marketing, technical or other material produced or distributed by the Distributor in connection with the Progra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Special Bench of the Delhi Tribunal in case of Motorola Inc. vs DCIT (95 ITD 269) has elaborately discussed and held that if the payment is towards purchase of a copyrighted article and not the copyright itself then the payment cannot be termed as royalty under the Act. The Id. AR further submitted that the AAR in a recent ruling in the case of its own group company, namely, Dassault Systems KK, Japan v. DIT (AAR No 821/2009) has held that payments by distributors in India to Dassault Systems KK for purchase of software cannot be treated as royalty under section 9(1 )(vi) of the Act. The AAR held that no rights in relation to copyright were transferred nor any right of using the copyright as such was conferred on the licensee. The Id. AR accordingly submitted that the facts of the case are identical to the appellant Gs case and involves the product life-cycle management software solutions, which are similar to the products distributed by the appellant. The Id. AR also submitted that the payment does not fit within the meaning of royalty under section 14 of the Copyright Act, 1957 and hence cannot be treated as royalty under section 9(1) (vi) of the Act. This was upheld by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware product and that the end user gets only a license to use the software product for a particular period. Hence, it is not in dispute that there was no transfer of a copyright, but only a sale of a copyrighted product. The AO has subsequently referred to the directions issued by the Addl. CIT under section 144A, while passing the assessment order. He has also enclosed copy of the direction with the assessment order. The direction of the Addl. CIT has referred to various clauses of the RSA, based on which the Addl. ACIT concluded that the appellant had the right to reproduce, affix or have affixed copyrights, generate license keys etc. However, on a perusal of the terms of the agreement, I find that the relevant clauses have not been considered in their totality and context. This aspect has been explained in detail by the Id. AR in the earlier part of this order with which I am in agreement. For instance, the conclusion as to reproduction of copyrights has been taken out of the context from the RSA, whereas the relevant clause merely referred to a duty on the appellant, and not its right, to ensure that labels are affixed etc. Further, the generation of license keys was more a dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a copyrighted product and not the copyright itself cannot be treated as royalty payment. The Hon ble ITAT, Bangalore in its recent decision in the case of MIs Velankani Mauritus Ltd v. DCIT (IT), Bangalore [2010- TII-64-ITAT GBANGGINTL] dealt with a similar issue. The question was whether the income can be treated as royalty either under IT Act or the DTAAs. The assessee had supplied off-the-shelf shrink wrapped software to Infosys Technologies Ltd. The Hon ble ITAT distinguished the case of CIT Ors v. Samsung Electronics Co. Ltd. 320 ITR 209 (Karn) and followed the cases of Motorala Inc v. DCIT 95 ITD 269 (Del)(SB), Airports Authority of India f2010GT10L- 19GAARGITJ and Tata Consultancy Services v. State of AP, 271 ITR 401 (SC) and held the sale of software cannot be treated as income from royalty either under the IT Act or under the terms of DTAAI. Further, the Special Bench of ITAT, Chennai in the case of Prasad Productions Ltd (supra) after considering various decisions including that of Frontier Offshore Exploration (India) Ltd, ITA No.2037/Mds/2006, Transmission Corporation of AP Ltd v. CIT 239 ITR 587 (SC), CIT v. Eli Lilly Co (India) (P) Ltd 178 Taxman 505 (SC), CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rala Inc. Vs. DCIT 95 ITD 269. We find that following the above decision of the Mumbai E Bench of the Tribunal in the case of ADIT Vs. TII Team Telecom International ITA Nos. 3939/Mum/2010 order dated 26.8.2011 has held as under: 17. It is not even revenue s case that any of these rights have been transferred by the assessee, on the facts of this case, and, for this reason, the payment for software cannot be treated as payment for use of copyright in the software. As we hold so, we may mention that in the case of Gracemac (supra), a contrary view has been taken but that conclusion is arrived at in the light of the provisions of clause (v) in Explanation 2 to Section 9(1)(vi) which also covers consideration for transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work a provision which is clearly larger in scope than the provision of Article 12(3) of the Indo Israel tax treaty. The word of between copyright and literary, artistic or scientific work is also missing in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate bench of this Tribunal did take the view that when an assessee pays for transponder hire, he actually pays for the a process inasmuch as transponder amplifies and shifts the frequency of each signal, and, therefore, payment for use of transponder is infact a payment for process liable to be treated as royalty within meanings of that expression under Explanation 2 to Section 9 (l) (vi) of the Income Tax Act. However, when this decision came up for scrutiny of Hon ble Delhi High Court, in the case reported as Asia Satellite Telecommunications Co Ltd Vs DIT (332 ITR 340), Their Lordships, after a very erudite and detailed discussion, concluded that we are unable to subscribe to the view taken by the Tribunal in the impugned judgment on the interpretation of Section 9(1) (vi) of the Act . It cannot, therefore, be open to us to approve the stand of the revenue to the effect that the payment for software is de facto a payment for process. That is a hyper technical approach totally divorced from the ground business realities. It is also important to bear in mind the fact that the expression process appears immediately after, and in the company of, expressions any patent, tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee against the validity of reopening of the assessment by stating that it is academic in nature. 2. the ld. CIT (A) has erred in not considering that the Assessing Officer could not have had reason to believe that the income of the assessee escaped assessment when there were binding precedents in favour of the assessee. 18. In the cross objections for Assessment Year 2006-07 the following ground of cross objection has been taken: The ld. CIT (A) has erred in not upholding the plea of the assessee that the directions issued by the Additional Commissioner of Income-tax were beyond the scope of his powers u/s 144A of the Act as the Addl. CIT had concluded the issue, whereas he was empowered only to provide mere guidance. 18. As the only addition made in the reassessment was found to be unsustainable, no grievance remains to the assessee. The ld. A.R. of the assessee conceded that if the issue is decided in favour of the assessee, the grounds taken in cross objections would become infructuous and only academic in nature and would require no separate adjudication. Therefore, the cross objections are dismissed. 19. In the result, the appeals of the Revenue as well as the cro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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