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TMI Blog2011 (9) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... with its parent company for the distribution of software products in India. After perusing the RSA, the AD found that i) the appellant company was appointed a distributor by its parent company for the sale of software products in India; ii) the software products are general products developed by the parent company, a licensed copy of which can be sold to the end-users; iii) what is sold to the end-user is only a copy of the software product; iv) the end-user gets only a license to use the software product for a particular period. Based on these facts, the AD concluded that what was sold was only the right to use the licensed version of the software product developed by the parent company. Accordingly, he treated the payments as royalty to non-resident covered u/s 9(l)(vi) of the Act and brought it within the ambit of tax deduction u/s 195. The AD had also sought the directions of the AddL. CIT u/s 144A as to whether the payments are to be treated as royalty under section 9(1) (vi) of the Act. The Addl. CIT issued the directions vide his letter dated December 4, 2008. In the said letter, the Addl. CIT has referred to certain clauses of the Regional Support Agreement, which are repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot provided to Distributor by ABAQUS or (ii) to use ABA QUS (s trademark and Program names outside the Territory." 4. On the basis of the above clauses, reproduced in his directions u/s 144A, the Addl. CIT arrived at the following conclusions: i) The appellant was given the right to use ABAQUS trademarks and programs in its business for marketing; ii) appellant has been given the right to reproduce, affix or have affixed copyrights; iii) ABAQUS Inc has also allowed the appellant to generate license keys for delivery to customers and iv) the appellant is also allowed to customize and modify the programs for its business. Accordingly, the Addl. CIT concluded that it is not a purchase of mere software and held that the payment made was a royalty u/s 9(1) (vi) of the Act. He has also relied on the decision of Chennai Bench of the ITAT in Zylog Systems Ltd, which was stated to be identical on facts. Further, he referred to the decision of the Hyderabad Bench of ITAT in Cheminor Drugs Ltd (76 ITO 3), where it was held that the assessee cannot take an unilateral decision that payments made by him are not chargeable to tax and that he has to necessarily approach the AD u/s 195(2) to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (via the links) and installs the software using the license key. The process of generation of license key does not require any engineering knowledge, and can be undertaken by anyone who understands the basic use of computers. The generation of keys is similar to the password for running the software in customer's system and at any rate it cannot be compared to "replication" or "duplication" of the software, as it only facilitates the installation and activation of the software, when it is used for the first time. Once the installation is done, the appellant submits the invoice for payment to the customer. Abaqus Inc in turn raises an invoice on the appellant for the products sold to the appellant, clearly mentioning the name of customer to whom the software is sold by distributor. The invoice is settled periodically by the appellant retaining its own share of agreed margin. The software is procured and distributed by the appellant on agreed margin of 7/11 of the sales consideration. The software of Aba qus Inc is shrink wrap software, ready for distribution and does not require any customi2ation". 6. The Id. AR further stated that the appellant does not have any right to make cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) of the RSA. The relevant portions were reproduced as below: "Clause 5(a) - Abaqus encourages distributor to perform consulting and other services outside the scope of Section 4 that promote the use of the programs and to receive compensation for such additional services from customers and prospective customers. Distributor shall not represent or imply that such services are being performed by or on behalf of Abaqus. Clause 5(b) Distributor may use the tools provided with the programs to customi2e the Programs for Customers. Distributor may develop and provide application or utility software for customers to use for the programs. However, Distributor shall not modify any Program. Bundle any software with any Program, or distribute or make any non-Program software available as if such software were a part of the Program." 8. On the basis of the above, the Id. AR submitted that these are only Additional Services, which may be provided by the assessee to the customers and it receives separate compensation for such services. With regard to clause 5(d) of the RSA, the Id. AR submitted that the RSA is a standard document used globally by Abaqus Inc. The documentation referred to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guard the interests of Abaqus Inc. With regard to clause 8(b) of the RSA, the appellant submitted that the whole clause 8(b) had to be read, which is reproduced as follows: "During the term of this Agreement, Distributor shall have the right to use ABA QUS's trademarks and Program names in any advertising, marketing, technical or other material produced or distributed by the Distributor in connection with the Programs. However, Distributor must first obtain ABAQUS approval: (i) to use materials that were not provided to Distributor by ABAQUS or (ii) to use ABA QUS's trademark and Program names outside the Territory. In using ABA QUS's trademark and Program names, Distributor shall clearly indicate ABA QUS's right to those trademarks or trade names. Distributor shall acquire no rights in or to any such trademark or Program name by virtue of use and shall immediately cease such use upon termination of this Agreement" 10. In this regard, the Id. AR submitted that being a distributor of Abaqus Inc's products, the appellant company was bound to use the brand name of Abaqus while marketing its products, which could not be equated with the use of trademark or copyright. Further, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of the case are identical to the appellant Gs case and involves the product life-cycle management software solutions, which are similar to the products distributed by the appellant. The Id. AR also submitted that the payment does not fit within the meaning of royalty under section 14 of the Copyright Act, 1957 and hence cannot be treated as royalty under section 9(1) (vi) of the Act. This was upheld by the ITAT, Special Bench decision in Motorola Inc (Supra) and the AAR ruling in Dassault Systems KK (supra). The Id. AR has further relied upon various decisions of the Tribunal, which relate to similar payments of software purchase, where it was held that the payments cannot be treated as royalty under the Act. At the time of final hearing, he has placed reliance on some recent decisions i.e., ITO (IT) v. Prasad Productions Ltd, [2010*TIOL*182* ITAT*MAD*SB], Van Oord ACZ India (P) Ltd v. CIT, [2010-TIOL*187- HC-DEL*IT] and Velankani Mauritus Ltd v. DDIT (IT) [2010*TII64* ITAT* BANG*I NTL]. 12. The Id. AR, in the alternative, has taken the course to the non discrimination clause under the DTAA between India and USA. He argued that even if the payments are considered to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d context. This aspect has been explained in detail by the Id. AR in the earlier part of this order with which I am in agreement. For instance, the conclusion as to reproduction of copyrights has been taken out of the context from the RSA, whereas the relevant clause merely referred to a duty on the appellant, and not its right, to ensure that labels are affixed etc. Further, the generation of license keys was more a duty on the appellant and not a right granted. The clause relating to the right to use trademark is more linked with the normal activity of distribution of the US Company's products by way of sale in India. Further, the RSA does not permit the appellant to make any copy or modify the software. Based on the invoice submitted by the Id. AR, which were also before the AO at the time of assessment, I find that the purchase of software products by the appellant was directly related to the sale of the product to the ultimate customers. From a careful perusal of the actual terms of the RSA, it is found that the conclusions drawn are not fully supported by the facts. Further, the activities carried out by the appellant, as explained in its submissions and reproduced earlier, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as income from royalty either under the IT Act or under the terms of DTAAI. Further, the Special Bench of ITAT, Chennai in the case of Prasad Productions Ltd (supra) after considering various decisions including that of Frontier Offshore Exploration (India) Ltd, ITA No.2037/Mds/2006, Transmission Corporation of AP Ltd v. CIT 239 ITR 587 (SC), CIT v. Eli Lilly & Co (India) (P) Ltd 178 Taxman 505 (SC), CIT v. Samsung Electronics Co. Ltd 320 ITR 209 (Kar), Van Oord ACZ India (P) Ltd v. CIT 189 Taxman 232 (Del) etc. has held that when the payer has a bona fide belief that the income is not chargeable to tax at all, there is no application of the section 195 at all and there is no liability on the payer to follow its provisions when making payment to non-residents. As a consequence, all the proceedings as a result of non-compliance thereof would be otiose. In view of the above factual position and legal authorities, I am of the considered opinion that the payments cannot be treated as royalty u/s 9(1)(vi) of the Act. 6.1.3 I also find merit in the alternate ground (ground no.6) raised by the appellant in respect of the non-discrimination clause under the DTAA between India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a licence) in respect of any copyright, literary, artistic or scientific work" - a provision which is clearly larger in scope than the provision of Article 12(3) of the Indo Israel tax treaty. The word "of' between 'copyright' and 'literary, artistic or scientific work" is also missing in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statutory provision, and, by the virtue of Section 90(2) of the Act, the provisions of India Israel tax treaty clearly override this statutory provision. In Gracemac decision (supra), the coordinate bench was of the view that the provisions of the applicable tax treaty and the Income Tax Act are "identical" - a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac decision (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for "process" as a computer program is a nothing but a set of instruction lying in the passive state and this execution of instructions is' a process' or' a series of processes'. No doubt, in terms of the provisions of Section 2 (ffc) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 9(1) (vi) of the Act". It cannot, therefore, be open to us to approve the stand of the revenue to the effect that the payment for software is de facto a payment for process. That is a hyper technical approach totally divorced from the ground business realities. It is also important to bear in mind the fact that the expression 'process' appears immediately after, and in the company of, expressions "any patent, trade mark, design or model, plan, secret formula or process". We find that these expressions are used together in the treaty and as it is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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