TMI Blog2022 (1) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... e Royalty. Thus as relying on ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED [ 2021 (3) TMI 138 - SUPREME COURT] we hold that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of consideration for grant of software license held not to be Royalty under the provisions of Income Tax Act, 1961, the question of considering under the provisions as per DTAA between India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed. Bring to tax software maintenance fee and consulting service fee and training fees as Fees for Technical services within the meaning of Article 12(5)(a) of the India and Netherland treaty - DRP held that the receipts of assessee from the software maintenance, consulting services and training fees are chargeable to tax as Fees for Technical services as per Article 12 (5)(a) of India and Netherland treaty - HELD THAT:- Clause 5 of Article 12 defines fees for technical services to mean the payment of any kind to any person in consideration of rendering any technical or consultancy services that are ancillary and subsidiary to application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the Hon'ble DRP erred in directing the Ld. AO to tax the receipt of ₹ 5,99,03,443 towards software maintenance fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.3: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to tax the receipt of ₹ 5,36,19,958 towards consulting service fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.4: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to tax the receipt of ₹ 1,44,10,721 towards training fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India- Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration is a standard software and not a customized software. It is upgraded on an annual/periodic basis/. The software is imported via the electronic medium or physical medium. The title to, ownership and all rights in patents, copyrights, trade secrets and other Intellectual rights in the software do not transfer to the customer and continue to vest with the TIBCO Group ( TIBCO ). The customer cannot make any modifications or enhancements to the software, create any derivative works of software or merge or separate any component. All rights with respect to this remain with TIBCO B.V. The customer cannot reverse compile, dissemble or otherwise reverse engineer the software. If the customer requires modification to the software to make it further useful to him, the same would have to be made by TIBCO B.V. 6. The AO was of the opinion that the consideration received towards use of the software is taxable as Royalty u/s.9(1)(vi) of the Act as well as under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Netherland placing reliance on the following decisions : a) CIT Vs. Samsung Electronics Co. Ltd. (ITA No.2808 of 2005) dt. 15-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges the action of the lower authorities in bringing to tax the software license fees at ₹ 22,81,56,726/- as Royalty within the meaning of Article 12 of the India and Netherland DTAA. It is submitted before us that in the immediate preceding assessment year 2012-13 the Coordinate Bench of this Tribunal had decided this issue in favour of the appellant and finally submitted that the reasoning of the lower authorities in treating the software license fee as Royalty was not approved by the Hon ble Supreme Court in the case of Engineering Analysis Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). 9. The ld. CIT-DR placing reliance on the orders of the lower authorities justified the action of bringing to tax the software license fee of ₹ 22,71,56,726/- as Royalty. 10. We heard the rival submissions and perused the material on record. The appellant company granted the software license fee on non-exclusive non-transferable basis during the license term. The subject software is standard software not customised software. The title, the ownership and all rights in patents, copyrights and trade secrets and other software contained does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income And Capital Gains,40 [ India- Ireland DTAA ]. Article 12 of the aforesaid treaty defining royalties would alone be relevant to determine taxability under the DTAA, as it is more beneficial to the assessee as compared to section 9(1)( vi ) of the Income-tax Act, as construed by the High Court. Here again, section 90(2) of the Income-tax Act, read with explanation 4 thereof, has not been properly appreciated. 109. Fifthly, the finding that when a copyrighted article is sold, the enduser gets the right to use the intellectual property rights embodied in the copyright which would therefore amount to transfer of an exclusive right of the copyright owner in the work, is also wholly incorrect. For all these reasons, therefore, the judgment of the High Court of Karnataka in Synopsis International Old. Ltd. ( supra ) also does not state the law correctly. 110. A series of judgments by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act. The term all materials, articles and commodities includes both tangible and intangible/incorporeal property which is capable of ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under section 14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the Revenue. (page 281) The High Court then followed its own judgment in Ericsson A.B. ( supra ), deciding the case in favour of the assessee. 112. In DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88/[2014] 220 Taxman 273 (Delhi) [ Infrasoft ], 43 a Division Bench of the High Court of Delhi, by an exhaustive analysis of the provisions contained the India- USA DTAA, the Income-tax Act and the Copyright Act, dealt with a situation in which the assessee who was primarily into the business of developing and manufacturing civil engineering software, licensed the said software to persons engaged in civil engineering work in India. The High Court referred to a decision of the Special Bench of the ITAT (New Delhi) in Motorola Inc. v. Dy. CIT [2005] 147 Taxman 39 (Mag.)/95 ITD 269 [ Motorola (ITAT) ] as follows: 65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of Motorola Inc v. Deputy Cit And Deputy Cit V. Nokia (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under: 155. It appears to us from a close examination of the manner in which the case has procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title License , says that JTM is granted a non-exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation. 158. Secondly, under the definition of copyright in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the Assessee is expressly stated in clause 20.1 as a non exclusive restricted license . This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objection cannot be accepted. (pages 365-366) 114. Referring to the High Court's earlier judgments in Ericsson A.B . ( supra ) and Nokia Networks OY ( supra ) and the determinations of the AAR in Dassault Systems K.K. ( supra ) and Geoquest Systems B.V. ( supra ), the High Court concluded: 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. (pages 385-386) 115. The High Court of Delhi also expressed its disagreement with the impugned judgment of the High Court of Karnataka dated 15-10-2011, in Samsung Electronics Co. Ltd. ( supra ) as follows: 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a computer programme,- (i) to do any of the acts specified in clause ( a ) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. The reference to clause ( a ) and ( b ) means that all the rights which are in literary works i.e. ( i ) to reproduce the work in any material form including the storing of it in any medium by electronic means; ( ii ) to issue copies of the work to the public not being copies already in circulation; ( iii ) to perform the work in public, or communicate it to the public; ( iv ) to make any cinematograph film or sound recording in respect of the work; ( v ) to make any translation of the work; ( vi ) to make any adaptation of the work; ( vii ) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub clauses ( i ) to ( vi ) inhere in the owner of copyright of a computer programme. Therefore, the copyright owner's rights are spelt out comprehensively by thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. (iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. (iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsulting service fee of ₹ 5,36,19,958/- and training fees of ₹ 1,44,10,721/- as Fees for Technical services within the meaning of Article 12(5)(a) of the India and Netherland treaty. The DRP held that the receipts of assessee from the software maintenance, consulting services and training fees are chargeable to tax as Fees for Technical services as per Article 12 (5)(a) of India and Netherland treaty. 13. On the other hand the ld. AR submits that the consideration received towards software maintenance, consulting services and training services cannot be considered as Fees for Technical services under Article 12(5)(a)of the treaty. He also submitted that the question of treating the above consideration as Fees for Technical service does not arise as the consideration received towards software license fees cannot be considered as Royalty as per para 4 of Article 12 of the DTAA, placing reliance on the following decisions : Datamine International Ltd. Vs. ADIT (2016) 68 taxmann.com 97 Technip Singapore Pte Ltd. V. ADIT 385 ITR 408 (Delhi) Aspect Software Inc. Vs. ADIT (2015) 61 taxmann.com 36 (Delhi) DDIT Vs. Scientific Atlanta Inv. (2009) 33 SOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals, making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (Independent Personal Services) of this Convention.] 7. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of one of the States, carries on business in the other State, in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for technical services are effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 8. Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treaty. Our view is fortified by the judgment of Hon ble Delhi High Court in the case of Datamine International Ltd. Vs. ADIT (2016) 68 taxmann.com 97. We, therefore, we hold that software maintenance fees, consultancy services fees and training services fees cannot be held to be Fees for Technical services . Thus, grounds of appeal no. 2 to 4 stands allowed. 16. Ground of appeal No.5 challenges short credit of deduction of tax at source by ₹ 43,54,684/-. This ground of appeal is restored to the file of AO with a direction to allow tax as per the information contained in Form No.26AS. Thus, grounds of appeal is allowed for statistical purposes. 17. Ground of appeal No.6 relates to levy of education while computing tax liability. Since we have held that consideration received towards software license fee, consultation charges and training fee is not taxable in India, this ground of appeal becomes academic and therefore, dismissed as such. 18. The last ground in this appeal relating to initiation of penalty u/s.271(1)(c) is consequential in nature and the same is dismissed. 19. In the result, the appeal is partly allowed for statistical purposes. Order pronoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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