TMI Blog2010 (8) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... d precede the application of clause (v). It is, however, not necessary to consider the implications of Section 115A in detail, having regard to the clear provision in Tax Treaty. It is well settled that an assessee can seek the benefit of Tax Treaty (DTAA) irrespective of the provisions in domestic law. - It may be noted that in AAI case (2010 -TMI - 75810 - AUTHORITY FOR ADVANCE RULINGS), customization of software was involved and moreover the software had to be modified and adapted as per the requirements at the site. None of these features are present in the instant case - the amount payable under SLTC contract to the applicant does not amount to 'royalty' within the meaning of Article 12.4 of DTAA (Tax Treaty) between India and The Netherlands, nor can it be treated as 'fees for technical services' - A.A.R. No. 774 of 2008 - - - Dated:- 6-8-2010 - PRESENT: Mr. Justice. P.V. Reddi (Chairman) Mr. J. Khosla (Member) Mr. V.K. Shridhar (Member) A.A.R. No. 774 of 2008 Name address of the applicant: GeoQuest Systems B.V. Gevers Deynootweg61 2586, BJ The Hague The Netherlands Commissioner Concerned: Director of Income-tax (International Taxation-I), New ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his work will be carried out by Schlumberger Solutions Pvt. Ltd. (SSPL) which is an affiliate entity of the applicant. The total cost thereof including service tax is 11,224 US dollars. The said amount had to be paid by ONGC directly to SSPL after successful installation and commissioning. The third item is training and post warranty Annual Maintenance Contract (AMC). It will have to be provided by SSPL on behalf of the applicant. It has been clarified by the applicant vide its written submissions dated 9.7.2010 that no AMC was awarded by ONGC to the applicant or SSPL in pursuance of the contract under consideration. However, a centralized AMC was entered into between ONGC and SSPL for 3 years for maintenance, support and upgradation of various software applications. Here, it needs to be mentioned that as per the original bid document, the applicant quoted the cost of installation and commissioning and training charges on the premise that all these works would be carried out by the applicant itself. The training charges stipulated was US $ 125,000 for 50 days. 1.3. The applicant has filed a copy of the contract between ONGC and SSPL to establish that the training part has been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts associate proprietary information and the term "use" shall be limited to the processing of information and the process of copying, recording or transcribing software. It does not include modifying software in any manner, creation of derivative version thereof, the reverse assembling, compiling or engineering or distributing it to other parties or making it available for 'use' directly or indirectly by another person, any such utilization of software being expressly prohibited. Under clause (4), the customer (ONGC) (ONGC) agrees not to copy or reproduce the software or any portion thereof for any other purpose. The previous clause 3.3 makes it clear that the licensed use of the software shall be restricted to the processing or interpretation by customer of geo-science, reservoir and production related data owned or licensed by customer in connection with oil, gas and other natural resource development ventures where customer is active as operator or partner. 4. On the facts stated by the applicant, supported by the documents annexed, there can be no doubt that the software packages were supplied by the applicant from outside India i.e. the Netherlands, and the consideration wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Revenue centered is whether the consideration received by the applicant from ONGC under the Agreement (SLTC) is for conferring on the customer any rights in respect of the copyright or a right to use the copyright attached to the software supplied and licensed by the applicant. Whereas the applicant contends that no rights in or over the copyright of the product has been granted to the customer, the contention of the Revenue is that such rights have been conveyed to the customer. In other words, it is the contention of the Revenue that what was granted under the license agreement was the right to use software together with copyright therein. On behalf of the applicant, the distinction between transfer of copyright in a product and the transfer of copyrighted product has been stressed. This very issue has been considered by this Authority in two recent rulings i.e. FactSet Research Systems Inc.{317 ITR 169} and Dassault Systems K.K.{322 ITR 125}. The latter case is more directly in point and the various aspects concerning copyright were comprehensively dealt with. It would be appropriate to extract relevant passages in both the rulings. 6. In the case of FactSet, this Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred to the end-user was copyrighted software containing computer programme but not the copyright therein and accepted the contention of the applicant therein. We would like to refer the passages in the ruling in Dassault case in extenso: "14.1 . The applicant grants to VAR a non-exclusive, non-transferable license to market and distribute the products for the internal use of any end- user within the territory. Such license shall also include a non-exclusive, non- transferable right to set, invoice and collect license fee due by the end-user pursuant to the EULA as long as VAR remains a party to such EULA. (cl.3.1.1). VAR acknowledges that except for demonstration purposes, it has no right to develop any product or derivative work from products and it has no right to engage in reverse engineering of any products for which demonstration license has been granted (cl. 3.4.1 3.4.2). VAR further acknowledges that the agreement does not grant VAR any right or license to the products or the proprietary rights therein or to the source code for the products. (cl.3.4.3). Clause 8.1 which bears the heading "Ownership of Products" declares that the applicant and its licensor shall r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual property rights in the licensed programmes will remain exclusively with the applicant (or its licensors) and the non-exclusive and non-transferable character of licence are all meant to ensure that none of the rights vesting in the applicant as copyright-holder can be claimed or enjoyed by the licensee and that they will remain intact and are preserved. The entire tenor of the agreement and the various stipulations contained therein make it clear that no rights in derogation of the applicant's exclusive rights in relation to the copyright have been conferred on the licensee i.e., the end-user or VAR. The core of the transaction is to authorize the end-user to have access to and make use of the licensed software products over which the applicant has exclusive copyright, without giving any scope for dealing with them any further. 17.1 ..Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven a non-exclusive licence permitting user for in-house purpose would be covered by that expression. Any and every licence is not what is contemplated. It should take colour from the preceding expression "transfer of rights in respect of copyright". Apparently, grant of 'licence' has been referred to in the definition to dispel the possible controversy a licence - whatever be its nature, can be characterized as transfer. 18. It has been contended on behalf of the Revenue that the right to reproduce the work in any material from including the storing of it in any medium by electronic means (vide section 14(a) (i) of the C.R. Act) must be deemed to have been conveyed to the end-user. It is pointed out that a CD without right of reproduction on the hard disc is of no value to the end-user and such a right should necessarily be transferred to make it workable. It appears to us that the contention is based on a mis-understanding of the scope of right in sub-clause (i) of Section 14(a). As stated in Copinger's treatise on Copyright, "the exclusive right to prevent copying or reproduction of a work is the most fundamental and historically oldest right of a copyright owner". We do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat reproduction and adaptation envisaged by Section 14(a)(xi) and (vi) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. Copyright being a negative right (in the sense explained in para 9 supra), it would only be appropriate and proper to test it in terms of infringement. What has been excluded under S. 52(aa) is not commercial exploitation, but only utilizing the copyrighted product for one's own use. The exclusion should be given due meaning and effect; otherwise, Section 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one's own use. Even without such licence, the buyer of product cannot be said to have infringed the owner's copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer /licensee of product has acquired a copyright therein." 8. The following observations in FactSet case are also apposite: "25. Even examining from the standpoint of Treaty, we do not think that "the use of or right to use any copyright of a literary or scientific work" is involved in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, directly or indirectly, by another are almost the same as in Dassault case. There is also a specific provision in both the Agreements that Intellectual Property Rights would always remain with the owner of the product or the licensor. Such restrictions placed on the user of software and the fact that the licensee/customer had no right to interfere with source code and that the licensed product cannot be commercially exploited by the licensee/customer are inconsistent with the inference that the rights in respect of copyright or the right to use the copyright of the computer programme have been conveyed to the customer. Further, there is nothing in the Agreement to suggest that the underlying technical knowledge in developing the software has been transferred. Notwithstanding the grant of authority to use the licence (on non-exclusive and non-transferable basis), the copyright imbedded in the software remains with the owner in tact. 10. The Revenue has sought to place reliance on the proviso to section 9(1)(vi) and sub-section (1A) of Section 115A in order to contend that the Act contemplated charging of 'royalty' for authorization to use computer software as such and it is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable to interpret the word 'copyright' to qualify not only the 'book' but also the 'computer software'. If the transfer of computer software, per se was contemplated to fall within the definition of 'royalty', it should have been stated so in the definition clause contained in Explanation 2 to Section 9(1)(vi). Clause (v) as noticed earlier speaks of "transfer of all or any rights' in respect of any copy right". Thus, whether copyright has been transferred or not is the line of inquiry which should precede the application of clause (v). It is, however, not necessary to consider the implications of Section 115A in detail, having regard to the clear provision in Tax Treaty. It is well settled that an assessee can seek the benefit of Tax Treaty (DTAA) irrespective of the provisions in domestic law. The relevant clause in the DTAA between India and the Netherlands is reproduced below: "4. The term "royalties" as used in this Article 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 including cinematograph films, any patent, trade mark, design or model, plan secret formula or process, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the contract is providing technical services and imparting technical knowledge and expertise possessed by the applicant to the customer (ONGC) so as to enable the customer to operate the integrated system on its own in the future. The case of the applicant falls within the ratio of the ruling in AAI case{323 ITR 211}. 13. The expression 'fee for technical services' has been defined in Article 12.5. of DTAA as follows: "5. For the purposes of this Article, "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this Article is received; or (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. We are unable to see how the contract in question for providing special purpose software to ONGC could be categorized as fees fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponsibilities of Raytheon are specified in Cl. 3.1 as follows .. ." Then, Raytheon is bound to provide the necessary information to operate, maintain and repair the system delivered under the contract (Cl.10.1). The installation is done after suitably modifying and adapting the software on physical verification and the study of various factors on ground. A site acceptance test is finally done and the procedure therefor is contained in a document. After trial testing, a Systems Manual is provided. Software as such has no value to AAI unless Raytheon in close collaboration with AAI make the system functional at all times without the presence of Raytheon's technicians. The software of the automation system is the mechanism through which the information and inputs concerning various technical aspects based on the expertise and experience of Raytheon are made available to the AAI personnel which in turn equips them with the necessary technical skills and operational efficiency. By means of various technical services provided by Raytheon's personnel and the sharing of their technical knowledge and experiences with AAI personnel at the time of integration with the existing system ..... X X X X Extracts X X X X X X X X Extracts X X X X
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