9911796707
TMI Blog2012 (5) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... A General"). For the assessment year under consideration, assessee filed its return of income declaring a total income of Rs. 33,55,248/-. The Assessing Officer noticed that during the previous year relevant to the assessment year under consideration, assessee received payments from BA Life and BA General, on account of three categories of transactions viz., re-insurance transactions, technical awareness workshop; and, transactions under a software license agreement. The subject-matter of dispute before us are the amounts of Rs. 39,08,506/- and Rs. 1,22,30,020/- received from BA Life and BA General respectively in terms of the third category of transactions, i.e. under a software license agreement. Therefore, hereinafter we are confining ourselves to the facts pertaining to such transactions alone. 3. The assessee entered into separate Opus Software License Agreements (in short "License agreement") with B A Life and B A General whereby the latter companies were granted the right to use the Opus software for their internal business purposes and the amounts received by the assessee as per agreement have been christened as 'license charges' and claimed to be exempt from tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, the BA Life and BA General are specifically prohibited from changing, translating or decompiling of software opus; and renting, leasing or selling of the software opus or putting it up for someone's disposal free of charge. In terms of the termination Clauses, BA Life and BA General are required to return or destroy the original and all copies of the software, manual etc., except archival copy. Further in terms of the confidentiality and protection against unauthorized use clauses, BA Life and BA General have agreed not to share any information/knowledge regarding software opus with third parties. 5. In this background, we may now refer to the stand of the Revenue that the license charges received by the assessee of Rs. 1,61,38,526/- constitute 'royalty' within the meaning of section 9(1)(vi) of the Act and is, therefore, subject to taxation in India. Further, as per the Revenue such license charges fall for consideration in Article 12 of the Double Taxation Avoidance Agreement (in short 'DTAA") between India Germany and accordingly the same are liable to be taxed as royalty at the rate of 10%. 6. The primary plea raised by the assessee against the case set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the agreement dated 19.1.1999 (supra). As per the Assessing Officer, since it is only the right to use the software which has been transferred, the same is liable to be treated as royalty within the meaning of 9(1)(vi) read with Explanation thereof. Before us also the learned Departmental Representative has reiterated the arguments set out by the Assessing Officer. Further, it is submitted by the learned Departmental Representative that BA Life and BA General have utilized the software Opus for the purposes of their respective businesses, which constitutes commercial exploitation of the software and, therefore, consideration paid for the same is to be understood as 'royalty'. It has also been pointed out that in terms of the license agreement, BA Life and BA General are not prohibited from developing special solutions or to customize the Opus software to meet the local requirements and that the use of such modifications outside the Allianz Group is permitted subject to the consent of both the licensor and licensee. In the course of the hearing, the learned CIT-Departmental Representative has referred to a decision of the Authority for Advance Rulings in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software OPUS lies only with Allianz despite the fact that the copyright of OPUS lies with CGI Group. In respect of exercising the right to use the software OPUS, Allianz will have no limitation except as those binding on it by the terms of the Agreement. But will definitely enjoy the right to use the software as its owner. There won't be any other rights associated with OPUS at the disposal of Allianz. e.g. it cannot brand this product as its own, it cannot term this produce as its own, it cannot market this produce etc. Similar to the rights of Allianz in the Authorised Territory, the BA Life and BA General will enjoy the rights in India. The rights in this regard only mean the right to use the Software in India. 5.5.............................................................................. .........The thing to be noted here is that the copyright over the software remained with the CGI Group." Pertinently, there is no disagreement that the copyright continue to remain with the CGI as observed by the Assessing Officer. The point to be addressed is as to whether the payments in question have been received by the assessee for grant of use of a copyright or for grant of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... programme still vests with the assessee. Therefore, payments made or the licence to use the software programme give rise to royalty for the purposes of both the IT Act as well as DTAA entered into between Sweden and India. Referring to Explanation II (v) to section 1(vi) of the Act as well as Article 13, para 3 of DTAA, it was argued that for the purposes of Income-tax law, is essentially a payment received as consideration for the use or right to use a particular integral property right, whether partially or entirely. 52. We find that the Tribunal has held that there was no payment towards any royalty and this conclusion is based on the following reasoning: (i) Payment made by the cellular operator cannot be characterized as royalty either under the Income Tax Act or under the DTAA. (ii) The operator has not been given any of the seven rights under S.14 (a) (i) to (vii) of the Copyright Act, 1957 and, therefore what is transferred is not a copyright but actually a copyrighted article (iii) The cellular operator cannot commercially exploit the software and therefore a copyright is not transferred. (iv) Further, the parties to the agreement have no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther argued that reference to OECD Commentary was not apposite as it could not be used to interpret the scope of the relevant provisions of DTAA. 54. It is difficult to accept the aforesaid submissions in the fact present casco We have already held above that the assessee did l1( any business connection in India. We have also held that the sur equipment in question was in the nature of supply of goods. The this issue is to be examined keeping in view these findings. MOI another finding of fact is recorded by the Tribunal that the C Operator did not acquire any of the copyrights referred to in Sect] (b) of the Copyright Act, 1957. 55. Once we proceed on the basis of aforesaid factual finding~ difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as we software, therefore, the Tribunal is right in holding that it permissible for the Revenue to assess the same under two articles. The software that was loaded on the hardware did not l independent existence. The software supply is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pable of abstraction, consumption and use and which can be transmitted, transferred, delivered, Stored, Possessessed etc. The Software programmes have all these attributes." "In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (yct Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the miistry of musicians and in itself is not a "good," but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessee that this separate specification of the hardware/software supply was necessary because of the differential customs duty payable. 59. Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work. Section 2 (0) of the Copyright Act makes it clear that a computer programme is to be regarded as a 'literary work'. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act,1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply contract. Distinction has to be made between the acquisition of a 'copyright right" and a "copyrighted arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Karnataka High Court was dealing with a case of requirement to deduct tax at source under section 195(1) on amounts paid to foreign software supplier. As per Hon'ble High Court, consideration received for granting of right to use software under certain circumstances could be regarded as 'royalty'. The two contrary view, namely, that the Hon'ble Delhi High Court on one hand and that of the Hon'ble Karnataka High Court were before the Mumbai Bench of the Tribunal in the case of Dy. DIT v. Solid Works Corpn. [2012] 18 taxmann.com 189. The Tribunal after making following discussion applied the view expressed by the Hon'ble Delhi High Court in the case of DIT v. Ericsson A.B., [2012] 204 Taxman 192/[2011] 16 taxmann.com 371 which was favourable to the assessee:- "8. On the argument of the ld DR that where two views are available on an issue one favourable to the assessee should be preferred, should not be applied to non-resident assessees, we are of the view the same cannot be accepted in view of Article 24 of the DTAA between India and USA which provides for non-discrimination. Article 24(1) lays down that Nationals of a contracting State shall not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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