TMI Blog2019 (5) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, the said sale proceeds cannot be characterized as 'Royalty' as per Article 12 of the India- Ireland DTAA, as the same is towards the use of 'copyrighted article' and not towards the use of 'copyright'. The sale proceeds is also not towards the use of or right to use any industrial, commercial or scientific equipment, as per the provisions of the India-Ireland DTAA. Further, as per the Licensing Agreement entered into between the assessee and its Indian customers, it is apparent that the assessee has not given any right to the customers to use the copyright in the software. The copy of Licensing Agreement is enclosed at pages 16 to 22 of the paper-book vide para 3(b) of the agreement. Payments for any license for simple use of computer software i.e., where the end-user acquires only the right to run the programme, whether on a single computer or on the licensee's computer network, and does not acquire any rights to use the copyright in the programme may not be construed as 'royalties'. Therefore, we note that since assessee`s case is covered by beneficial provisions of the India-Ireland DTAA, hence the retrospective amendment made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and the learned DRP grossly erred in confirming the action of the A.O. 3. That on the facts and in the circumstances of the case the A.O. and the ld. DRP failed to appreciate that sale of software is not royalty within the provisions contained in Article 12 of the India-Ireland DTAA. 4. That on the facts and in the circumstances of the case both the A.O. and the Learned DRP had failed to appreciate the difference between copy righted article and copyright right while holding the software income to be in the nature of Royalty. 5. That the assessee craves leave to add, to amend, modify, rescind, supplement or alter any of the grounds stated hereinabove, either before or at the time of hearing of this appeal. 3. However, in this appeal the assessee has raised a multiple grounds of appeal, but at the time of hearing, the Solitary grievance of the Assessee has been confined to the issue whether the consideration received by a non-resident entity for the licensing of copyrighted article/software, i.e. consideration for use of or for granting the right to use a computer software amounts to royalty under Article 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld DRP is given below: Theassessee sold software licenses to Indian customers. The A.O has observed that the sale of software was not merely licensing of software. As per the sales invoice the assessee transferred right to use the software for ever. Terms of sales as mentioned in the invoice were as under: Notwithstanding anything in the Sale Agreement to the contrary all Software and Professional Services deliverables, are licensed and not sold and the use of terms such as sale and purchase herein in connection with those items will be understood as a reference to the licensing to those items. With the exception of lest scripts and related documentation (collectively TestScripts ), all software is licensed pursuant to the applicable end user license agreement (each a EULA ). For Test Scripts and for all Professional services deliverables that do not constitute Software, Ixia hereby grants to Buyer a limited, non-exclusive, nontransferable, perpetual, worldwide license to copy and use such items only for Buyer's internal business purposes. As between Ixio and Buyer, Ixia is and shall remain the exclusive owner of all intellectual proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is in appeal before us. 7. Before us, the ld. Counsel for the assessee submitted that the amount earned from sale of software aggregating to 9,84,15,776/-, is not taxable as Royalty in India. The assessee company is a tax resident of Ireland, therefore, the beneficial provisions of Double Taxation Agreement entered into between India-Ireland ( Treaty' or 'DTAA') would be applicable. In this regard, the ld counsel drew our attention to Article 12 of the India-Ireland DTAA, an extract of which is reproduced as under: The term 'royalties' as used in this Article mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience . Based on a reading of Article 12 of the India-Ireland DTAA, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view differentiating 'copyrighted article' and 'copyright right' also draws support from the ruling of the Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. reported in 220 Taxman 273, wherein the Court while dealing with the taxability of payments received against granting of licensed software, as royalty, has elaborately discussed the provisions of the Act and the India-US Tax Treaty and demarcated between 'copyright right' and 'copyrighted article'. The High Court after examining a catena of judgments already laying down principles relating to taxability of any remittance, as royalty, concluded in the facts of the case that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. Similarly, in another judgment pronounced in the case of DIT Vs. Ericsson A.B. 343 ITR 470, wherein the issue was relating to taxability of payments received against supply of GSM mobile telephone system, which consisted of both hardware and software, the Hon'ble Delhi High Court held that there was no wayin which an independent use of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a royalty . The term royalties means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary artistic or scientific work, hence the AO has rightly concluded that the Sale of Software was nothing but receipt of royalty as per section 9(1) of the Income Tax Act and therefore, the addition of ₹ 9,84,51,776/- made by the AO should be sustained. 9. We have heard both the parties and perused the material available on record. First of all, we deal with Article 12 of the India vs. Ireland DTAA which deals with Royalties and Fees for Technical Services the same is reproduced below for ready reference: India - Ireland - ARTICLE 12 - ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. After going through Article 12 of India vs. Ireland DTAA,as mentioned above, we note that the term royalty is defined to meanpayments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The license agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The license agreement stipulates that upon termination of the agreement for any reason, the licensee shall return the software including supporting information and license authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copy righter mains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry protection against loss, destruction or damage has been held by the Delhi High Court in Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software. 99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. 100. The question of law is thus answered in favour of the Assessee and against the Revenue that the Income-tax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America. We note that the Ld. DRP did not deny that the present case is not covered by the Delhi High Court decision in Infrasoft (supra) but did not follow it merely on the ground that the department is in appeal against the said decision before the Hon'ble Supreme Court. We note that an appeal before the higher forum doesn't vitiates t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For Test Scripts and for all Professional services deliverables that do not constitute software, Ixia hereby grants to Buyer a limited, non-exclusive, nontransferable, perpetual, worldwide license to copy and use such items only for buyer's internal business purposes. As between Ixia and Buyer, Ixia is and shall remain the exclusive owner of all intellectual property rights in or related to any of the Products. We note that Coordinate Bench of ITAT Kolkata in the case of ITC Limited Vs ADIT. IT 2(1), reported in [2017/185 TTJ 145 (Kol-Trib.], on similar facts held that payment made by assessee an Indian company to a Singapore based company for right to use software could not be regarded as royalty, as assessee only had a right to use computer software and did not have right to use copyright in computer software. The important findings of the coordinate bench is given below: 20. A perusal of the above provisions of the copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The relevant findings of the Hon'ble Delhi High Court as given in para 23 of the said decision, for the sake of convenience are reproduced as under: However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. 22. Further, in a recent judgment in the case of DIT v New Skies Satellite BV [2016] 382 ITR 144/238 Taxman 577/68 taxmann.com 8 (Delhi), the Hon'ble Delhi High Court has observed that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend its operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright and the same does not give rise to any royalty income and would be the 'business income' of the non-resident. The learned DR however placed reliance on the decision of the Hon'ble Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. [2012] 345 ITR 494/[2011] 203 Taxman 477/16 taxmann.com 141 wherein it has been observed that under the agreement, what had been transferred was only a license to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement and that the non-resident supplier continued to be the owner of the copyright and all other intellectual property rights; license is granted for making use of the copyright in respect of software under the respective agreement and that the same would amount to transfer of part of the copyright. The learned counsel for the Assessee submitted that there is no decision of the Hon'ble Calcutta High Court rendered on the issue and therefore where two views are possible on an issue, the view favourable to the Assessee should be followed. It was his contention that following the view expressed by the Hon'ble Delhi High Court in the case of Ericss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal. 26. For the reasons given above, we hold that the amount paid by the appellant to NPL is not in the nature of royalty within the meaning of the DTAA between India and Singapore and therefore the amount received by NPL would be in the nature of business income which would be chargeable to tax in India under Article 7(1) of the DTAA only if NPL has a Permanent Establishment (PE) in India. Admittedly NPL did not have a PE in India and therefore the payment in question is not chargeable to tax in India and therefore there was no obligation on the part of the appellant to deduct tax at source u/s.195 of the Act. Consequently, the Assessee could not be treated as an Assessee in default u/s.201(1) of the Act nor could interest be levied on tax not deducted at source on tax not deducted at source till date of payment to the account of the Central Government u/s.201(1A) of the Act. The orders u/s.201(1) and 201(1A) of the Act are accordingly cancelled. 11. We note that in the case of Union of India Vs Azadi Bachao Andolan reported in 263 ITR 706, the Hon'ble Apex Court has inter-alia held that the provisions of the DTAA would ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payments for any license for simple use of computer software i.e., where the end-user acquires only the right to run the programme, whether on a single computer or on the licensee's computer network, and does not acquire any rights to use the copyright in the programme may not be construed as 'royalties'. 12.Our view is fortified by the judgment of the Coordinate bench of Mumbai in the case of Intec Billing Ireland Vs. ADIT reported in 90 taxmann.com94 (Mumbai Tribunal) decided on January 8,2018 while examining various decisions cited above and Article 12 of the Indo- Ireland DTAA held as follows: ... we hold that the receipts from supply of software are not taxable in the hands of Intec-Ireland as Royalty under new Ireland tax treaty. Intec-Ireland does not have PE in India and accordingly amounts received by Intec-Ireland towards supply of software are not liable to tax in India. Therefore, in view of the above discussion and respectfully following the said decisions we hold that payment received by the assessee was not in the nature of Royalty and cannot be therefore brought to tax Therefore, we note that since asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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