TMI Blog2019 (12) TMI 1642X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT(A). As per the taxation of payment for licencing of software, we find that the issue is covered in favour of the assessee by a coordinate bench decision in the case of ADIT vs TII Team Telecom International Ltd. [ 2011 (8) TMI 497 - ITAT MUMBAI ] Payment for licence fee of software is not taxable in nature. No contrary decision, which is binding in nature, has been cited before us. We uphold the plea of the assessee and hold that no tax was deductible from remittance in question. Decided in favour of assessee. - ITA No. 7300/Mum/2016 - - - Dated:- 10-12-2019 - Pramod Kumar (Vice President) And Ravish Sood (Judicial Member) For the Appellant : Dr. Sunil Moti Lal. For the Respondent : Avaneesh Tiwari. ORDER PER PRAMOD KUMAR, VP: 1. By way of this appeal, the assessee appellant has challenged correctness of learned CIT(A), order dated 2nd August 2016, in the matter of ascertainment of tax withholding liability under section 195 of the Income Tax Act 1961, during the period relevant to the assessment year 2014-15. 2. Grievances raised in the appeal are as follows: Ground No. 1: On the facts and circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; sold by Exida Asia Pacific Pte Ltd. This is server license which allows the appellant Two basic issues arise for consideration which will be relevant for determination of its nature i. Whether the purchased software represents sale of a copyrighted article and hence not liable to be treated as royalty under India Singapore DTAA; or ii. Whether even if the purchase represents sale of copyrighted article, it is required to be treated as royalty as concluded by the AO in his order. Clearly, if the character of the license is such that the purchase does not represent sale of copyrighted article, there would not be any need to discuss the various issues raised by the appellant with respect to the character of copyrighted article as against right to a copyright. 6.2 The appellant has purchased a server license for a soft ware to 'exSILentia Version 3 Ultimate bundle . The character of the software has been analyzed based on information given on the website of the company to determine the character of the software. As per the Software License Agreement, The software is owned by exida and is protect eel by copyright laws and international copyright treaties, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived front the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 6.6 In light of the specific facts of this case, the dispute with respect to whether the license represents right to a copyrighted article or a right to use the copyright itself does not arise. The payment represents a payment for use or right to use any copyright of a design or model information concerning industrial, commercial or scientific experience. It is clear that this is not a case of sale of software per se. In light of these facts, there is hardly any need to into the dispute of copyright vs copyrighted article although I find no reason or justification for the reliance placed by the appellant on the Statues of US, Australia and OECD rather than the DTAA and the Indian Income Tax Act. 4. Aggrieved, assessee is in appeal before us. 5. We have heard the rival contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware licence cannot bring the software hence consideration within the scope of royalty. Nothing, therefore, turns on the reasoning adopted by the learned CIT(A). 8. As per the taxation of payment for licencing of software, we find that the issue is covered in favour of the assessee by a coordinate bench decision in the case of ADIT vs TII Team Telecom International Ltd. [12 ITR (Tri) 688 (Mum)] whereas, dealing with materially similar issue, has observed as follows:- 14. It is an admitted position that the assessee did not have any permanent establishment in India, in terms of the provisions of Article 5 of the tax treaty, and, accordingly, the assessee cannot be held liable to be taxed in respect of business profits, under Article 7, on supply of software in question. The case of the revenue really rests on taxability under Article 12 which provides as follows: Royalties. (1) Royalties 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Article 12(3) of the Indo Israel tax treaty, royalty is defined, for the purposes of this tax treaty, as 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 films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience . The question then arises whether a payment for computer software cannot be a payment for use of or right to use of 'a copyright of literary, artistic or scientific work, including cinema photographic film', and, while examining this question, it is important to bear in mind the fact that there is a specific mention about the use of copyright. The only other clause in which payment for software could possibly fall is consideration for use of, or right to use of, a process . Let us examine these two aspects of the definition of 'royalty' under the India Israel tax treaty. 16. As regards the question whether the payment for software could be treated as payment for use of, or the right to use, any copyright of literary, ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the Special Bench, in Motorola Inc. case (supra), the four rights which, if acquired by the transferee, constitute him the owner of a copyright right, and these rights are : (i) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending. (ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme (iii) The right to make a public performance of the computer programme. (iv) The right to publicly display the computer programme. 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 Corpn. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually pays for a product which gives certain results, and not the process of execution of instructions embedded therein. As a matter of fact, under standard terms and conditions for sale of software, the buyer of software is not even allowed to tinker with the process on the basis of which such software runs or to even work around the technical limitations of the software. In Asia Satellite Telecommunications Ltd. v. Dy. CIT [2003] 78 TTJ 489, 85 ITD 478 (Delhi), a coordinate 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 in fact a payment for process liable to be treated as 'royalty' within meanings of that expression under Explanation 2 to section 9 (1)(vi) of the Incometax 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. v. CIT [2011] 332 ITR 340/ 197 Taxman 263. Their Lordships, after a very erudite and detailed discussion, concluded that we are unable to subscribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve colour from the surrounding words. 18. Viewed in this perspective, and taking note of lowest common factors in all the items covered by definition of the expression 'royalty' in Article 12(3), the 'process' has to be in the nature of know-how and not a product. In this view of the matter, and in view of Hon'ble Delhi High Court's declining to uphold the coordinate bench's decision in the case of Asia Satellite Telecommunication Co. Ltd. (supra), we are of the considered view that the payment for software, by no stretch of logic, can be treated as a payment for a process liable to be taxed as royalty. This is precisely what was held by a coordinate bench of this Tribunal in the case of Sonata Information Technology Ltd. (supra), though for different reasons. 9. Respectfully following the above views, we hold that the payment for licence fee of software is not taxable in nature. No contrary decision, which is binding in nature, has been cited before us. 10. In view of the above discussions, as also hearing in mind entirety of the case, we uphold the plea of the assessee and hold that no tax was deductible from remittance in question. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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