TMI Blog2014 (4) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... business purpose - The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee - The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA - The right to make a backup copy purely as a temporary protection against loss, destruction or damage does not amount to acquiring a copyright in the software - What has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income - The consideration received on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America – the add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not taxable in India. During the assessment proceedings a letter was written by the Assessing Officer on 9.12.2010 stating therein that assessee has received a gross amount of Rs. 6,03,64,143/- for sale and maintenance of software from its Indian customers in relation the agreements entered into by it. During the course of assessment proceedings, assessee was asked to show cause as to why receipt in sale of software should not be regarded as royalty and receipt in lieu of provision of maintenance services associated with it should not be regarded as royalty/fee for technical services in terms of the provisions of Income Tax read with article 12 of the Indian US DTAA and taxed accordingly. 2.3 Assessee filed reply in response to above show cause notice and while elaborately discussing requisite of section 9(1)(vi) of the Act and also article 12 of the DTAA and relying upon various case law as noted by the Assessing Officer, it was observed that receipt from sale of software cannot be construed as income in the nature of royalty and thus concluded as under: Therefore, in view of the facts and the circumstances above, and in the light of the decision of the Tribunal in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 154/144C(1) of the Act was passed wherein the income was computed at Rs.11,08,72,926/-. On receipt of the draft order, the assessee filed its objections with the DRP. The order of the DRP was received in this office on 28.09.2011, in which no adverse inference was drawn and the variations made by the assessee ewer confirmed. Therefore, in view of the above, the taxable income of the assessee is computed as under: Particulars Amount (Rs.) Gross amount received by the assessee company as Royalty 11,08,72,926 Total income rounded off 11,08,72,930 Income tax payable @ 15% 1,66,30,940 Hence, the income of the assessee is assessed at Rs.11,.08,72,930/-. Charge Interest u/s 234A, 234B and 234C as applicable. 2.4 Aggrieved by the order of the Assessing Officer, assessee has come up in appeal and raised following grounds: 1. That the Assessing Officer has erred on facts and in law in holding that the payments received by the appellant from sale of software and provision of maintenance and other support service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software for the purpose of its business. The mode of use of the license by the customers has been mutually agreed upon between the parties under the above contracts. It is pertinent to mention that the copyright in the software licensed to the customers shall, at all times, vest with the assessee. Further, all support services related to the use of the software are provided remotely and no personnel of the assessee visit India. In view of the above factual background, the taxability of the income of the assessee in India is discussed in the following paragraphs. Relevant provisions of the Act The taxability or otherwise, of the income of the assessee in India as per the Act is governed by the provisions of section 5 read with section 9(1) of the Act. Explanation 2 to section 9(1)(vi) defines royalty to include any consideration for transfer of all or any rights in respect of any copyright, literary, artistic or scientific work. The expression 'copyright' is not defined in the Act it must be understood in accordance with the law governing copyright in India, i.e. the Copyright Act, 1957 (hereinafter referred to as the ICA ). In te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Andhra Pradesh [2004] 271 ITR 401. Reliance in this regard may also be placed on the Authority for Advance Ruling decision in the case of Dassault Systems K.K. In re [2010] 322 ITR 125 wherein it has been emphasized that the right to download and store a computer programme for internal business purpose is use of the copyrighted product and payments made in this regard cannot be considered as 'royalties' taxable under the provisions of the Act or under the tax treaty. Accordingly, the Authority held that payments received from sale of licensed software would be characterized as 'business profits', which in the absence of PE shall not be taxable in India. In the present case, the purpose of the license or the transaction is only to establish access to the copyrighted product for internal business purpose. Thus it cannot be said that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the use is a highly specialized one. The parting of intellectual property rights, inherent in and attached to the software product, in favour of the licensee/ customer is mandatory re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) a non-exclusive and non-transferable license to use the software for the purpose of their business. The mode of use of the license by the customer has been mutually agreed upon between the parties under the above agreements. Royalty is defined under Explanation 2 to section 9(1)(vi) of the Act, to include any consideration for transfer of all or any rights in respect of copyright, literary, artistic or scientific work. For the purpose of this discussion, it is relevant to consider whether the sale of software by assessee amount to transfer of any 'copyright' so as to be taxable as 'royalty'. Copyright has not been defined under the Act and thus, the definition provided under the law governing copyright in India i.e. the Copyright Act, 1957 (the ICA ) may be referred. In terms of the ICA, computer programme is considered as a literary work and is a subject matter of copyright. Royalty has been defined in a similar manner under Article 13 of the DTAA to include consideration received for the use of, or the right to use, any copyright or a literary, artistic, or scientific work. From the above, it may be inferred that the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, sale of the same cannot amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. Accordingly, receipts from sale of software cannot be construed as income in nature of royalty. In view of the above, the receipts from sale of software shall constitute business profits and can be brought to tax in India only in cases where the assessee has a PE in the country. In this regard, it is submitted that the assessee does not have any business presence in India and all services in relation to supply and/or maintenance of pre-packaged software are rendered outside India. Accordingly, the assessee cannot be said to be having a PE in India and receipts from sale of software are not taxable as per the provisions of the Act as well as the DTAA. In the facts of the instant case, the assessee provides maintenance services in relation to the pre-packaged software supplied by it. Provision of these services primarily involves utilization of technical know-how/ skill, etc. during the process of rendering of services and no knowledge or skill for further use of the customer is provided. Therefore it cannot be said that any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decisions by the Ld. A.R. for the assessee has been distinguished by Ld. D.R. as under: (i) DIT vs. Ericsson AB, (Delhi):- It has been argued by the AR that the taxpayer's case is covered by the aforesaid decision of the Hon'ble Delhi High Court. As submitted at the time of hearing before the Hon'ble Bench the Ericsson A.B. case (supra) is distinguishable on facts. At the time of hearing reference was made to paragraphs 54 to 61 (page 15 to 17) of the decision wherefrom it can be seen that the major thrust of the decision was on the fact that the software that was loaded on the hardware did not have any independent existence and no separate payment was agreed for it: On these facts it was held by the High Court that the payment for software was not royalty. In the present case the software is not embedded in any hardware. The assessee has supplied the software on standalone basis. Also, as submitted in detail at the time of hearing, there is no sale of software and only license was given to use it. The software had to be returned to the taxpayer after the expiry of the license which was normally for one year. Thus, there was no sale of any copyrighted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be treated as goods and whether there is sale of the software. The Supreme Court's decision in the case of TCS has also been discussed. The High Court has held that the aforesaid decision of the Supreme Court is not applicable as the question whether the payment made for supply of software was royalty or not was not at all the issue in TCS case. The Court held that the aforesaid decision would not preclude it from holding that the payment received by the supplier would amount to royalty unless it is proved that the payment is for the sale of software. In para 23 (page 45) the High Court had referred to the definition of copyright under the Copyright Act, 1957 wherein it is clearly stated that 'literary work' includes computer programmes etc. In para 24 (page 47) the High Court after referring to section 51 and 52 of the Copyright Act has held that licence is granted for taking copy of software and to store it in the hard disk and to take a backup copy and right to make and copy itself is a part of the copyright. The High Court further held that when licence to make use of the software by making copy of the same and to store it to the hard disk is given then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-ARA-INTL.: This decision of the AAR also pertains to the payment for supply of shrink wrapped software. In para 1 6 (page 8 9) the terms of agreement are mentioned. In paragraph 10 to 12 (Page 10) the submissions of the taxpayers, reference to DECO commentary, distinction between copyright and copyrighted article, etc. are mentioned. In para 15 to 17 (page 11 12) the AAR has discussed the various provisions of the Copyright Act. In para. 18 page 12 the AAR has stated that use of a copyright either by a owner or a licensee would not be an infringement of a copyright. The transfer of ownership can be by an assignment of the copyright either wholly or partially. A licence can be granted by the owner of copyright of any interest in the right. The AAR has held that when a licensee acquires a computer programme he also gets the right to use that programme to a limited extent. He also gets the right, absolute or limited to use the copyright. In para 19 (page 13) the AAR has held that when a software is created by a person who acquires a copyright for it, he becomes the owner of that copyright and he can transfer or licence that right. While selling or licensing the softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder to counter the submission of ld. DR, ld. Counsel for the assessee submitted that this is not sale of software by any company and there is termination clause and TCS needs to be applied and it is a case where copyrighted article is transferred and not copyright as admitted by the DR. No person visited India and reference was made to Paper book Page 156, 157, 181 and 182. It was submitted that only plan was transferred but nobody visited India and assessee has entered into separate agreement. Under the treaty, assessee is liable to be taxed. 2.9 This case was earlier heard and draft order was prepared and discussed by both the members but fresh development after latest decision on the subject has come to the notice of the members of the Bench. So, the case was refixed for clarification and the same was heard again. Ld. Counsel for the assessee submitted that the issue raised in this appeal is now squarely covered by the latest decision of Hon'ble Delhi High Court in the case of DIT v. Infrasoft Ltd. [2014] 220 dated Nov. 22, 2013 and reported in 2013-TII-15-HC DEL-INTL, i is in favour of the assessee, a copy of which order has been filed and it was pleaded that such issu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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