TMI Blog2012 (2) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, payments concerned would be royalty as defined in Article 12 of the DTAA between India and Australia and u/s 9(1)(vi) of the Income-tax Act. Payment received by way of Subscription for the updates would also be royalty and not 'FTS' under DTAC & Income Tax Act. Applicant contention about non-existence of PE in India – Held that:- Since payment received is royalty, the amount is liable to be taxed in India under Article 12.2 of the DTAC. Further, distributor IMI Ltd is required to withhold taxes in India in terms of Section 195 of the Income-tax Act at the rate of 10% of the gross amount of royalty, as provided under Article 12.2 of the DTAC. - A.A.R. No.822 of 2009 - - - Dated:- 6-2-2012 - Mr Justice P.K. Balasubramanyan, Mr. V.K. Shridhar, JJ. Present for the applicant : Mr. Rajan R. Vora, CA Mr. Jitesh Bansal, CA Mr. Manoneet Dalal, Advocate Present for the Department : Ms. Meera Srivastava, JDIT, Bangalore. R U L I N G [By Justice P.K. Balasubramanyan) The applicant is a company incorporated in Australia. It claims to be one of the leading providers of software services which help in virtualization, networking and application delivery. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are on a principal to principal basis. Ingram effects direct sales to the customers at its discretion and earns a profit on every sale based on a percentage of the sale price. 2. The applicant is seeking an advance ruling on the taxability in India of the payments made by Ingram to it for the software product, Citrix XenApp and the Subscription Advantage Programme. The application under section 245Q of the Income-tax Act is made in that context. 3. While admitting the application for a ruling under section 245R(2) of the Act, this Authority accepted the following questions for the ruling. 1. Whether the payments received by the applicant from the Distributor for sale of the software product is in the nature of royalty‟ within the meaning of the term in Explanation 2 to clause (vi) of Section 9(1) of the Income-tax Act, 1961 ( the Act )? 2. Whether the payments received by the applicant from the Distributor for sale of the software product is in the nature of royalty‟ within the meaning of the term in Article 12 of the Agreement between the Government of Australia and the Government of Republic of India for the avoidance of Double Taxation and the Prevention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to show what are included within the scope of royalty‟. A patent, copyright, etc. would be Intellectual Property. The applicant further submits that a computer programme (software) is protected under the Indian Copyright Act, 1957. In the context of that Act, a computer programme cannot be characterized as a patent, invention, model, design, secret formula or process. Taxability of a computer programme has to examined under clause (v) of Explanation 2 to Section 9(1)(vi) of the Act which specifically deals with taxability of transfer of rights in respect of a copyright. 6. Under the Distribution Agreement, the applicant as the owner of the copyright in the software, is offering it for distribution through the Distributor. The distributor is granted license to use the software for its internal purposes. The Distributor is to locate the end-users. No order procured by the Distributor is binding on the applicant. On accepting a subscriber, the software is distributed electronically, direct to the end-user. The right to translate the software vests with the applicant. The software is for operation only with the computer systems specified on software packaging and/ or docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork in public or communicate it to the public, to make any cinematograph film or sound recording in respect of the work, to make any translation of the work, to make any adaptation of the work, to do in relation to translation or adaptation of the work any of the acts specified above. In the case of a computer programme it is to do any of the acts specified above, to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. According to the applicant, copyright clearly vests in the person who has an exclusive right to do all or any of the acts mentioned above to the exclusion of others. He may exercise those exclusive rights by himself or he may authorize others to exercise a particular right or a combination of the rights. Therefore, what has to be seen is whether there is a transfer of the right, the right of commercial exploitation of the intellectual property contained in the product. 11. According to the applicant, in the case on hand, the payment by Ingram is towards purchase of a software product. Ingram gets only the right to re-sell/distribute the software product and does not get any right to reproduce or make copie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yrighted article as contended by the applicant, since no physical product was being delivered, but what was being transferred was a right to use the software which is facilitated by another right to copy the software. The payment is, therefore, in the nature of royalty. The Revenue seeks to take inspiration from Section 115A(IA) of the Income-tax Act and also the Board‟s Circular No. 621 dated 19.12.1991. In the case on hand, the applicant was supplying software separately and not along with the hardware. The payment was royalty within the meaning of the Income-tax Act. As regards the concept of royalty under Article 12 of the DTAC, the arguments as above are reiterated. 14. In its additional written submissions, the Revenue has reiterated its position in a more elaborate manner. The interpretation of the term royalty‟ is dealt with. The reliance on the Copyright Act, 1957 for adjudicating on the liability to tax under the Income-tax Act is questioned and it is pointed out that the Act contains the definition of royalty‟ and the DTAC also contains the definition of royalty‟ and we have to test the claim of the applicant in the light of those definitions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputer 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. Some of the definitions are also relevant. Section 2(y) defines work‟ as meaning: (i) literary, dramatic or musical work. (ii) A cinematograph film; (iii) A sound recording Section 2(ffb) defines computer‟ as including any electronic or similar device having information processing capabilities. Section 2(ffc) defines computer programme‟ as meaning, a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. Section 2(o) defines literary work‟ as including computer programmes, tables and compilations including computer databases. Section 2 does not define a license but it defines an exclusive license‟ as meaning a license which confers on the licensee to the exclusion of all others, including the owner of the copyright , any right comprised in a copyright in a work. Section 17 specifies who is the first owner of the copyright. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mere licence limited in point of right, limited in point of user, limited in point of duration. The farming out of that right under Section 30 of the Act is neither an assignment nor need it be exclusive license. It can be a mere license. 18. Thus, a reference to the Copyright Act indicates that use of a copyright either by an owner or a licensee, would not be an infringement of a copyright. The transfer of ownership can be by an assignment to another of the copyright either wholly or partially, either generally or with special limitations and either for the whole term of the copyright or any part thereof. Similarly, a license can be granted by the owner of the copyright of any interest in the right. An exclusive right also can be granted excluding even oneself from the right to use the copyright owned. So, a transgression of the limitations of an assignment or of a license would prime facie be an infringement of the copyright and invite the consequences provided for under the Act. Similarly, the act of taking copies or act of adaptation will not be an infringement only if it is done by a lawful possessor of a copy of the computer programme. A lawful possessor can only be an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve on commercial rental any copy of the computer programme. A computer programme as defined only means a set of instructions expressed in words, codes, schemes or in any other form including a machine readable medium capable of causing a computer to perform a particular task or achieve a particular result. A software is nothing but a programme and other operating information used by a computer. Is not a software a set of instructions in machine readable medium capable of causing a computer to perform a particular task or achieve a particular result? So, sale or licensing of a software for use passes to the grantee a copyright as defined in section 14 of the Copyright Act. 22. The definition of royalty; in the Income-tax Act is, consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, innovation, model, design, secret formula or process or trade-mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... base fell within the definition of literary work in the Copyright Act. It was also held that the data base was the intellectual property of the applicant in that case and a copyright was attached to it and the question was posed whether in making the centralized data available to a licensee for a consideration, any of the rights which the applicant had as the owner of copyright in the data base, was being passed on in favour of the customer. It was stated that no proprietary right and no exclusive right which the applicant had, was made over to the customer. The copyright or the proprietary right remained, in tact, with the applicant notwithstanding the fact that the right to view and make use of the data for internal purposes of the customer was conferred on the licensee. 24. It was emphasized that the licensee had not been given the exclusive right to reproduce or adapt the work or to distribute the contents of the data base to others. The grant of license was only to authorize the licensee to have access to the copyrighted data base rather than granting any right in or over the copyright as such. We may notice with respect, that the definition of royalty in the Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in the sale of a software programme. The Court had no occasion to consider what all are the rights that pass on to the grantee when a software programme is transferred or licensed to him. It was concluded in Dassault, that in the absence of an independent right to conclude a sale or offer for sale, section 14 could not be invoked to bring the case within Section 9(1) (vi) of the Act by invoking sub-clause (ii) of Clause (b) of that section. It was concluded that no right to use the copyright as such has been conferred on the licensee. In our view whenever software is transferred or licensed for use, it takes within it the copyright embedded in the software and the one cannot be divorced from the other. 26. In the Income-tax Act, royalty is defined as consideration for the transfer of all or any rights (including the grant of license) in respect of any Copyright. Computer software is also defined as meaning of any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. The expression computer software is not used in the body of the section or in Explanation 2 to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usive definition denote extension and they cannot be treated as restricted in any sense. When inclusive definition is dealt with, it would be inappropriate to put a restrictive interpretation upon terms of wider denomination. The word includes‟ is an inclusive definition and expands the meaning. [See for instance, Corporation of the City of Nagpur v. Its employees (AIR 1960 SC 675), Vasudev Ramachandra Shelat V. Pranlal Jayanand Thaker (AIR 1974 SC 1728) and Doypack Systems (P) Ltd. v. Union of India (AIR 1988 SC 782)]. With great respect, we therefore feel, that a license cannot be restricted to transfer of a right dealt with earlier by the provision and should be understood as taking in, the grant of a license simpliciter. We cannot also forget that the Copyright Act has separately dealt with a computer programme different from copyrights covered by Section 14(1) of that Act. We are therefore unable to agree with this line of argument. 30. Article 12 of the India-Australia DTAC defines royalties to mean payment made as consideration for the use of or the right to use any copyright, patent, design or model, plan, secret formula or process, trademark or other like proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Authority, it was held that the consideration payable by the Indian Company for this privilege was royalty. Various aspects were considered in detail. This Authority noticed that the practice in Canada, the USA and other developed countries, allowing the use of protected software for a consideration by way of a contract was to treat the income as royalty. Commentary by Klaus Vogel was also quoted in support. The reasoning appeals to us. We see no compelling reason why we should depart from this position adopted by other countries while interpreting Article 12.3 of the DTAC and even Section 9(1)(vi) of the Act . 34. In IMT Labs (India) Pvt. Ltd., In re (287 ITR 450), this Authority held that payments made by a resident to use the software developed by the non-resident on its server platform, was royalty. 35. In Airport Authority of India, In re (304 ITR 216), this Authority holding that the ratio of the decision in Tata Consultancy (AIR 2003, SC 371) cannot conclude the question, proceeded to observe that the OECD views are not binding, India being not a signatory to the convention and that there is no unanimity even among the member countries of OECD. This Authority held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B are also brought to our notice where the view has been taken that the payment would not be royalty. The decision of a Delhi Tribunal, taking a contrary view has also been brought to our notice. We are not persuaded to adopt the reasoning of the Bombay Tribunal and that of the High Court of Delhi in the light of our discussion above and that in the Ruling in Millennium. 42. In the light of our discussion above, on question no.1, it has to be ruled that the payments received by the applicant from the distributor for sale of the software product is in the nature of royalty within the meaning of Section 9(1)(vi) of the Income-tax Act. 43. Question no. 2 is whether the payments concerned would be royalty as defined in Article 12 of the DTAA between India and Australia. On the basis of the reasoning leading to our ruling on question no. 1, the payment would be royalty. That apart, Article 12.3 of the DTAA defines royalties as payments, whether periodical or not and however described or computed, as consideration for the use of, or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right. The definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of Article 12 of the DTAA between India and Australia. We have already reasoned that the subscription for the programme update would be a payment for the use of and the right to use the copyright embedded in the programme. In this view, we rule that the payment would be royalty. In view of the fact that the payment would be royalty in terms of clause (a) of Article 12.3 of the DTAC, it is not necessary to consider the question whether it will fall under clause (g) of Article 12.3 of the DTAC. We decline to rule on that aspect of the question. 47. While raising question no. 6, the applicant has taken up the position that it does not have a permanent establishment in India. Even if we accept that position adopted, in our view that the payment received is royalty, the amount is liable to be taxed in India under Article 12.2 of the DTAC. Therefore, the ruling on this question is that the consideration received by the applicant in respect of the original software and the Subscription Advantage Programme are both taxable as royalty in India. 48. In view of our answers above, ruling on question no. 7 is that the distributor Ingram is required to withhold taxes in India at the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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