TMI Blog2012 (5) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... ator is regarded as a payment by way of royalty u/s Section 9(1)(vi) it can never be regarded as royalty within the meaning of the said term in article 13 para 3 of the DTAA Article 13(3) - that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods thus no part of the payment therefore can be classified as payment towards royalty - where two views are available on an issue one favorable to the assessee and does not support levy of tax on the assessee should be preferred, should be applied to non-resident assessee in this case – in favour of assessee. - IT Appeal No.1569 (PUNE) of 2008 - - - Dated:- 14-3-2012 - I.C. Sudhir, G.S. Pannu, JJ. Rajan Vora and Rajendra Agiwal for the Appellant. Hareshwar Sharma for the Respondent. ORDER G.S. Pannu, Accountant Member This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-I, Pune dated 01.09.2008 which, in turn, has arisen from order passed by the Asstt. Director of Income-tax (International Taxation)-I, Pune under section 143( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, based on Global Insurance Operating Solution (in short GIOS software ) which in turn has been developed by CGI Group (Europe) Ltd (in short CGI ). GIOS is a software which is used by the insurance companies across the world and its copyright is owned by CGI. The AllianzSE Group which constitutes of the assessee also, acquired the user rights of GIOS software from CGI and in pursuance to such user rights, Allianz SE Group extended the functionality of certain modules of GOIS to suit the business requirements of its Group and the same is referred to as Opus Software . In other words, it is to be understood that the GOIS Software together with the additional functionalities developed by the Allianz SE is being referred to as 'Opus Software'. Notably, the 'Opus Software' cannot be used independent of the GIOS software platform. In terms of the agreement with CGI, the Allianz SE is to act as a nodal company and be responsible at all times for the compliance of the terms of the agreement. In consequence of such arrangement, the assessee entered into license agreement with its Indian affiliates, namely, BA Life and BA General, whereby the Indian affiliates have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out that the payments have been made by BA Life and BA General to the appellant for the use of the Opus software, which is a copyrighted article and is not for awarding of any copyright therein. It was therefore vehemently brought out that consideration for use of a copyright article cannot be regarded as a royalty for the purposes of the Act and the aforesaid proposition is sought to be justified on the basis of the following decisions: ( i ) Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB) ( ii ) Samsung Electronics Co. Ltd. v. ITO [2005] 94 ITD 91 (Bang.) ( iii ) Dy. CIT v. Metapath Software International Ltd. [2006] 9 SOT 305 (Delhi) 7. It is further pointed out that the above proposition propounded by the Special Bench of the Tribunal in the case of Motorola Inc . ( supra ) has since been also approved by the Hon'ble Delhi High Court in ITA No 504/2007, etc. dated 23.12.2011, a copy of which has also been placed on record. 8. Per contra, the Assessing Officer has made out a case that the instant fact-situation is covered by the expression royalty as per Clause (v) of Explanation 2 to section 9(1)(vi) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and not for the use of copyright itself. Therefore, the case of the assessee is that such license charges are liable to be treated as profits falling in Article 7 of the India-Germany DTAA and as such license charges are not attributable to a Permanent Establishment (PE) in India, same are not taxable in India. In so far as the plea of the assessee that it has granted only user right to BA Life and BA General in terms of the license agreement, the same is not disputed by the Assessing Officer. The following discussion by the Assessing Officer would show that there is no dispute to the assessee's assertion that it is only right to use of a copyrighted article which has been granted and not for the use of a copyright:- Thus the rights were received by Allianz AG to use the software. These rights were transferred by Allianz to BA Life and BA General to use the software in Indian Territories. Thus, the licensee in first case (between Certis and Allianz) becomes sub-licensor (between Allianz and BA Life/BA general.) As submitted by the assessee the copyright of OPUS vests with the CGI Group. Now CGI Group has assigned the right to use the software to Allianz AG in the Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' within the meaning of section 9(1)(vi) of the Act and the relevant clauses of the Double Taxation Avoidance Agreement (DTAA) with the country of assessee's residence. As per the Special Bench, if the payment was for copyright, the same was liable to be classified as 'royalty' under the Act as well as under the DTAA so as to be taxable in the hands of the assessee. On the contrary, if the payment is found to be for a copyrighted article, then it takes the character of purchase price of the article and would not constitute royalty under the Act or under the relevant clauses of the DTAA. The Special Bench after considering the meaning of the expression 'royalty' under the Act and that of a 'copyright' under the Copyright Act, 1957 held that what was sold by the non-resident was the copyrighted article and the payment was not for a copyright. The aforesaid proposition has since been examined and affirmed by the Hon'ble Delhi High Court in its order dated 23.12.2011 (supra), the relevant portion reads as under: Whether the Income from the Supply Contract can be treated as 'Royalty' Under section 9(1)(vi) of the Act: 50. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract is goods and therefore no royalty can be said to be paid for it. 53. Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Supply Contract uses the term 'licence' and the same term is used in the context of software throughout the three Agreements indicating that it is not an outright sale of goods, or a full transfer rights from the assessee to the Indian company. He also submitted that the software is a computer programme, which is treated differently from a book, not only in the Copyright Act, 1957 but also the Income tax Act' itself. His submission was that Section 52(1) (aa) of the Copyright Act only deems that certain acts will not to amount to infringement in the light of various concerns, where otherwise such acts would amount to infringement under Section 51 of the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifically Article 13, para 3 of the DTAA (Article 12, para 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- In our view, the term goods as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. ( supra ). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become goods . We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as a payment by way of royalty. 57. It is also to be borne in mind that the supply contract cannot be separated into two viz . hardware and software. We would like to refer the judgment of Supreme Court in CIT v. Sundwiger EMFG Co. , 266 ITR 110 wherein it was held: A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical services rendered by a non-resident company, it must be deemed that there was a business conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 2 below Section 9(1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13 para 3 of the DTAA. This is so because he definition in the DTAA is narrower than the definition in the Act, Article 13(3) Brings Within the Ambit of the Definition of Royalty A Payment Made for the use of or the Right to Use A Copyright of A Literary Work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. 61. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. In our view, the aforesaid judicial pronouncement clearly supports the proposition advanced by the assessee in the present case. In fact, in so far as the factual aspect is concerned, the Assessing Officer has clearly stated that the copyright of software vests only with the CGI Group and therefore, even from that standpoint, there ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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