TMI Blog2010 (10) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... ent - ITA NOS. 116 & 119 (MUM.) OF 2008 AND 1123, 1125 TO 1127, 1129, 1131, 1134, 1181, 1183 TO 1185, 1187, 1188 & 1190 (MUM.) OF 2009 - - - Dated:- 29-10-2010 - R.V. Easwar, J. Sudhakar Reddy, JJ. Narendra Singh for the Appellant. Arvind Sonde for the Respondent. ITA Nos. 116 119 (MUM.) of 2008 and 1123, 1125 to 1127, 1129, 1131, 1134, 1181, 1183 to 1185, 1187, 1188 1190 (Mum.) of 2009 ORDER Per Bench. All these appeals are filed by the Revenue and directed against identical orders of the CIT (Appeals)-XXXI, Mumbai. As the issues arising in all these appeals are common and as they relate to the same issue of purchase/use of software, from different parties, who are residents of United States of America and as all these agreements of purchase/use of software are covered by the Double Taxation Avoidance Agreement entered into by India with United States of America, for the sake of convenience they are heard together and disposed of by way of this common order. Both the parties submitted that the issues arising in all these appeals and the facts are similar and the arguments advanced in one case, should be adopted for all other cases. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in software is very high and therefore life of software is limited. The title and proprietary rights would remain with M/s TIBCO and the appellant would not be the owner of the software but would be only a licensee for the use of or the right to use of the copyright. The Assessing Officer thereafter examined the provisions of Income-tax Act and held after examining the Copyright Act and section 9(1)(vi), that the said license is merely for the use of software and accordingly held that payment made for the license to use software amounts to royalty within the meaning of section 9(1)(vi). 1.4 The Assessing Officer also held that the software can be termed as patent or invention and also scientific work and therefore payment for the use of software would be covered under these categories also as per section 9(1)(vi). 1.5 The Assessing Officer also held that software can be termed a secret formula or process. The Assessing Officer referred to the commentary of Klaus Vogel on Double Tax Conventions wherein the Assessing Officer said it was stated that in Canada and USA payment for using of software by virtue of contract, where program is kept confidential amounts to payment for us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of US$ 13,00,000 for the supply of software for use in the Appellant Business. Appeal on ground No. 1 to 7 is allowed. 4. Aggrieved, the Revenue is in appeal on the following grounds : 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the payment made to M/s TIBCO Software Inc., USA for the purpose of computer software does not amount to business receipts and in the absence of any Permanent Establishment in India, the business profit arising in the transaction is not taxable in India. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the payment for obtaining computer software is in the nature of royalty which is liable for taxation in India. 5. Shri Narendra Singh, learned CIT-DR has represented the Revenue and Shri Arvind Sonde, learned counsel, argued on behalf of the assessee. Both parties agreed that the issue in question is covered by the following case laws : (i) Hewlett-Packard (India) (P.) Ltd. v. ITO (International Taxation) [2006] 5 SOT 660 (Bang.) (ii) Samsung Electronics Co. v. ITO (TDS) [2005] 94 ITD 91 (Bang.). (iii) Motorol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information Technology Software including mobile development environment software. 10. 1181/Mum/2009 M/s. Tibco Software Inc. USA Information Technology Software including smart socket RT server bundle Integration. 11. 1183/Mum/2009 M/s. Peregrine Remedy Inc USA Supply of remedy trouble ticketing software. 12. 1184/Mum/2009 M/s. Tibco Software Inc. USA Information Technology Software including smart socket RT server bundle Integration. 13. 1185/Mum/2009 Landmark Graphics Corporation USA For supply of desk top SGI Octane software for O G Business. 14. 1187/Mum/2009 M/s. Financial Engineering Associates Inc. USA Supply of VaR Works and Make VC software. 15. 1188/Mum/2009 M/s. First Virtual Communications Inc USA Providing software for visual conferencing services through internet. 16. 1190/Mum/2009 SOTS Inc USA Information Technology Software consist of Inforwave Database, data collection module and slice management for data collection and retention. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general terms and conditions, which have been summarized in para 8 above : 1. License. Capitalized terms used herein shall have the meaning set forth on the Cover Pages and as set forth herein, including the last section hereof entitled Definitions . TIBCO hereby grants Licenses a non-exclusive, perpetual, irrevocable (except in the event of a material breach of the Agreement), royalty free, worldwide license to use the number of copies of TIBCO Software set forth on the Cover Pages at Licensee s premises, solely for Licensee s own internal operations, including use of the TIBCO Software as its backend infrastructure for application service provider services ( ASP Services ) and Web Housing services, where the TIBCO Software is not directly accessible to any third party utilizing the ASP Services and Web Housing provided, however, that in no event may Licensee use the TIBCO Software for purposes of providing ASP Services on behalf of a third party. No right to use, copy, duplicate or display the TIBCO Software is granted, except as expressly provided herein. 2. Limits. Licensee agrees not to (directly or indirectly, and in whole or in part): (a) make more copies of the TI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lve claims related to (b) in the manner provided in the section entitled indemnity . The foregoing shall be Licensee s sole and exclusive remedies and the entire liability of TIBCO and its licensors for any breach of these limited warranties under (a) No tibco agent or employee is authorized to make any modifications, extensions or additions to these limited warranties. Except as provided above the Tibco Software and services are provided as is and all other express or implied conditions, representations and warranties including, without limitation any implied warranty or merchantability, fitness for a particular purpose (even if informed of such purpose), or arising from a course of dealing, usage, or trae practice, are hereby excluded to the extent allowed by applicable law. No warranty is made that the Tibco Software s functionality or services will meet licensee s requirements, or that the operation of the Tibco Software or services will be uninterrupted or error-free. 10. At para 2.4 of the same order she observed as follows : A perusal of the agreement reveals that the appellant has not received any right for transferring or modifying the software license or decomp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision, the Tribunal has dealt with all the issues raised by the Assessing Officer in his order, such as applicability of section 9(1)(vi), as to whether it is a Patent , invention or whether it is an intellectual property and all the issues were concluded in favour of the interpretation that, the payment for purchase of software, cannot be brought under any of these terms so as to label it as a Royalty . The Delhi Special Bench of the Tribunal in the case of Motorola Inc. (supra) in the following paras held as follows : 155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payments is really for a copyrighted article, then it only represents the purchase price of the article and therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public; (e) in the case of a sound recording,- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation. For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation. It is clear from the above definition that a computer programme mentioned in clause (b) of the section has all the rights mentioned in clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15-1-2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in sub-clause (ii) of clause (b) of section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in clauses (a) and (b) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a computer or in any other medium. Finally, the Special Bench of ITAT, Delhi, in para No. 184 concluded as follows : 184. In view of the foregoing discussion, we hold that the software supplied was a copyrighted article and not a copyright right, and the payment received by the assessee in respect of the software cannot be considered as royalty either under the Income-tax Act or the DTAA. The tests laid down in para 168 of the decision when applied to the terms and conditions stated in para 8 of his order, we have to hold that the payment is for a copyrighted article and not for copyright itself. Similarly, the Assessing Officer s observation on which it is a Patent, invention etc. have been dealt in this order. Applying this binding order to the facts of the case, we have to hold that the payment made by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides that royalty receivable by a non-resident from a person in India is deemed to accrue or arise in India. Further, section 90(2) provides that if the provisions of Tax Treaty between India and the country of the non-resident are more beneficial to such non-resident, then the provisions of Tax Treaty shall override the provisions of the Act [Para 6]. Article 12(3) of the India-USA DTAA defines the term royalty . As per the India-USA DTAA royalty in respect of the subject-matter of a copyright includes only the payments for the use i.e., exploitation of the copyright of such literary/artistic or scientific work. Therefore, in order to be classified as royalty, the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which is otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of a copyright of a copyrighted work is different from use of such work itself. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploit the copyright, does not amount to use or right to use the copyright of such literary/artistic/scientifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to a media and then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the Assessing Officer is wrong in holding that Computer software on a media, continues to be an intellectual property right and that the Assessing Officer was wrong in treating this computer software as a Patent or as Invention . Thus the payment cannot be termed as Royalty . (b) That the definition of the term Royalty in article 12(3) of the Indo-US DTAA is more restrictive than what is provided in section 9(1)(vii) of the Income-tax Act, 1961 and that in such a situation the provisions of the Double Taxation Avoidance Agreement override the domestic law. (c) That the assessee has purchased a copyrighted article and not the copyright itself. There is no transfer of any part of copyright. (d) As what is paid is not royalty under the Indo-US DTAA, and as it is covered under Article 7, which deals with Business Profit and as the foreign party does not have a Permanent Establishment in India, the same is not taxable in India and hence the assessee is not required to deduct tax at source from the said payment. 13. In view of the above discussion, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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