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In Re : SkillSoft Ireland Limited

2015 (8) TMI 135 - AUTHORITY FOR ADVANCE RULINGS

‘Fees for technical services’ under Article 12(3)(b) of the Agreement between the Government of the Republic of India and the Government of Ireland - whether payments received by the Applicant would be characterized as ‘royalty’ under Article 12(3)(a) of the India-Ireland Treaty? - Permanent Establishment (“PE’) - whether the payments received by the Applicant for the SkillSoft Products would be subject to withholding tax in accordance with the provisions of section 195 ? - Held that:- A SkillSo .....

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s are permitted to access the e-learning platforms and the educational content. SkillSoft India provides to the end-users the access code/web-link by which they could access the SkillSoft Products.

We have also gone through a demo of the website of the applicant and could see that they were marketing several copyrighted software containing simulation exercises and such software simulations were especially designed by them. Such especially designed software are not available in public .....

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icle 12(3)(a).

The payments received by the applicant from the distributor for sale of the software product are in the nature of royalty both within the meaning of section 9(1)(vi) of the IT Act and within the meaning of Article 12 of the DTAA

As regards definition of royalty under DTAA, it was held in the case of Synopsis [2013 (2) TMI 448 - KARNATAKA HIGH COURT ] that under the DTAA to constitute royalty there need not be any transfer or any rights in respect of any copy .....

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the case of Synopsis.

No permanent establishment is created for the applicant in India under the provision of Article 5 of the DTAA. The payment received by the applicant would be subject to withholding tax in accordance with the provisions of the section 195 of the IT Act. - Decided in favor of revenue. - A.A.R. No 985 of 2010 - Dated:- 20-7-2015 - Mr V.S. Sirpurkar & Mr. A.K. Tewary, Member, JJ. For the Petitioner : Shri Nageshwar Rao, Advocate, Shri Pankaj Agarwal, C.A, Shri An .....

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Agreement dated 9th February, 2009 with SkillSoft Software Services India Private Limited (SkillSoft India) appointing it as a Reseller. SkillSoft India buys the SkillSoft products from the applicant on a principal-to- principal basis and sells the same to Indian end users/customers in its own name. According to the applicant by using software and techniques, it has developed copy righted products on several topics which were electronically stored on its server outside India. 2. The applicant h .....

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reaty )? (b) Where the answer to Question 1 is in the negative, whether based on the facts and circumstances of the case, the payments received by the Applicant would be characterized as royalty under Article 12(3)(a) of the India-Ireland Treaty? (c) Whether based on the facts and circumstances of the case a Permanent Establishment ( PE ) is created for the Applicant in India under the provisions of Article 5 of the India-Ireland Treaty? (d) Where the answer to Question 1,2 and 3 are in the nega .....

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formats. SkillPort supports a spectrum of learning content in areas of software development, web designing, desktop skills, finance and accounting. SkillPort enables users to perform on-demand, integrated searches across the full library of resources on SkillPort, and be directed to the specific book page, course topic or other tool needed for instant and relevant answers.  SkillChoice - It is an e-learning platform that provides access to a robust collection of online courses and simula .....

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007 (Word, Excel, Outlook, Power Point and Vista).  SkillSims - SkillSims enhances the SkillSoft interactive courseware experience by immersing learners in rich media, task-based, multi-path simulations to provide realistic practice in the subjects being taught. 4. The applicant has further explained that its products consist of two components namely the course content and the software through which the course content is delivered to the end-customer. Its e-learning platforms are not ins .....

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cess to SkillSoft Products in the Territory (i.e. India). The SkillSoft products purchased by SkillSoft India from the applicant are licensed to Indian end users/customer under the Master License Agreement between SkillSoft India and Indian endusers. SkillSoft India grants to the Indian end-users a non-exclusive, non-transferable license to use and to allow the applicable authorized audience to access and use the SkillSoft Products. This agreement is primarily in the nature of a software/conduct .....

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, the applicant has submitted that such content provided through the e-learning software platform is similar to the content of books/learning manuals rather than any services. According to the applicant the payment for provision of access to the SkillSoft Product is not FTS under Article 12(3)(b) of the India-Ireland Treaty. As regards the question relating to royalty the applicant submitted that the grant of right to the Indian end-users to access the educational content should not be construed .....

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e of royalty, i.e., whether the payments made by the SkillSoft India to the applicant on account of sale of SkillSoft Products would result in royalty income in the hands of the applicant. Accordingly, in the following paragraphs we will focus on the submissions made by both the applicant and the Revenue on the issue of Royalty. 8. In order to argue his case that the payments made are not royalty, the applicant s counsel has mainly relied upon the following case laws:- (I) FactSet Research Syste .....

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in the article. Since payments for books are not regarded as royalty, it was argued that payments for the educational course offerings like SkillSoft Products, being akin to such books, should not be regarded as royalty under the India-Ireland Treaty. The applicant s counsel mainly emphasized the facts that no right in the copyright was transferred to the SkillSoft India or to the Indian end-users. He also made a distinction between copyright and copyrighted article and stated that payment rece .....

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Safe Harbour Rules . It may be relevant here to point out that these rules are applicable only to the person who has exercised a valid option for application of safe Harbour Rules. In this case the applicant has not exercised such option and is not covered under these rules. In order to support his argument that no right in the Copyright as defined under section 14 of the copyright Act, 1957 has been granted for the use by the Indian end-user or SkillSoft India, reliance was placed on the ruling .....

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the customer was available in public domain. It was held that there was no use or right to use any copyright or literary or scientific work or any patent trade-mark, or imparting of information concerning commercial experience, and therefore, the payment did not fall under the category of royalty . 10. The applicant s counsel emphasized that the ruling in the case of FactSet is binding in nature and pointed out that even though the decision of the Authority in one case is not binding in another .....

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entary in the context of distributor arrangement: Arrangements between a software copyright holder and a distribution intermediary frequently will grant to the distribution intermediary the right to distribute copies of the program without the right to reproduce that program. In these transactions, the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program. In such transactions, Distributors are pay .....

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e 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the Distributor having the right to reproduce the software), or whether the software is subject to minor customization for the purposes of its installation. 12. Relying further on the decision in the case on the Dassult Systems (supra), wherein it was held that even though 3 parties were involved, the arrangement does not result in a royalty, t .....

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der consideration by this court, to support their reasoning. In Madhav Rao Jivaji Rao Sindia Najadir vs Union of India (1971) 3 SCR 9, AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC). It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing full exposition of the law on a question when the question did not even fall to be answered in that judgment. … 13. Without prejudice to the abov .....

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a copyrighted article or product with an owner retaining his copyright is not the same thing as transferring or assigning the rights in relation to the copy right. 14. The Revenue has contended that the payments received by the applicant from SkillSoft India amount to royalty under the India-Ireland Treaty. For this purpose they have relied on the following case laws:- (1) CIT vs Samsung Electronics Co Ltd & Ors. 345 ITR 494 (Kar) (2) CIT vs Synopsis International Old Ltd. 212 TAXMAN 454 (Ka .....

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:- Appointment Subject to the terms and conditions of this Agreement, Principal hereby grants to Reseller, and Reseller hereby accepts, a personal, non-transferable, non-exclusive right and license to the Products: (a) To license, market, promote, demonstrate and distribute Products by providing online access to Customers in the Territory (Products in CD/HDD supplied to customers in the territory, if any, shall be incidental to online access and provided to customers free of cost); (b) To provid .....

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the restrictions stated in this Agreement and any Order Form issued under this Agreement, SkillSoft grants to Customer and Customer accepts, a non-exclusive, non-transferable license (without the right to sublicense) for the License Term set forth in the applicable Order Form, to use and to allow the applicable Authorized Audience to access and use the SkillSoft Products(s) set forth therein for internal training purposes only. 16. The counsel for the Revenue further brought our attention to the .....

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ss and use the SkillSoft Products(s) set forth therein for internal training purposes only. 17. According to the counsel of the Revenue the present application is covered under Article12(3)(a) of the India-Ireland Treaty which is as under:- Under Article 12(3)(a) of the India -Ireland Treaty, royalties have been defined to mean - payments of any kind received as a consideration for the use of, or right to use, any copyright of literary, artistic or scientific work including cinematograph film or .....

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o the facts of the present case because FactSet entered into a master client license agreement directly with its customers whereas in the present case there is an intermediary through which such agreement is entered into. Moreover, in the case of FactSet the question related to subscription fee in respect of which the authority has ruled that such subscription fee is not taxable in India as royalty. 19. The Revenue s counsel relied heavily on the decision of the Hon ble Karnataka High Court in t .....

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is superseding the definition of term royalty under the Act, the consideration paid to him is not liable to be taxed in India. It is submitted that as the Article which is licensed in this case and the consideration paid to the same does not fall within the definition of royalty, under Article 12 the assessee is not liable to pay tax. 39. It is no doubt true the provisions of the DTAA override the provisions of the Income-tax Act. In the DTAA for the term royalty means payments of any kind rece .....

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y in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. Therefore, we do not see any substance in the said contention. 40 A license is a grant of authority to do a particular thing. It enables a person to do lawfully what he could not otherwise lawfully do. A license does not, in law .....

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article. 41. Licenses may be exclusive, or non-exclusive. Non-exclusive license is not defined in the Act. The term exclusive license is defined in section 2, clause (j). It confers on the licensee and persons authorized by him, to the exclusion of all, other persons, including the owner of the copyright, any right comprised in the copyright in a work. A non-exclusive license is the grant of authority to do a particular thing with no right of exclusion whatsoever. It never conveys, by itself, an .....

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is disconnected and distinct from the general property in the material book, picture or other object. Hence, the sale or other transfer of the material object does not, of itself, constitute a transfer of the copyright therein. An assignment carries with it the whole interest in the thing assigned, including the right of reassign, while a license is personal and not assignable without the grantor s consent. An exclusive licensee have to do a thing, and a contract not to give leave to anybody els .....

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rk. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software license will be akin to a license of confidential information or know-how. The owner or licensor of a copyright, has a right to grant permission to use the software or a computer programme, in respect of which they have a copyright, without transferring the right in copyright. It is one of the rights of a copyright, owner or licensor .....

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e documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used in the said license it does not take away the software out of the definition of the copyright. The word licensed software has been defined. Similarly, the words design, design technique is also defined. The word documentation is also defined and it is not a dispute what is granted is .....

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software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax. 46. If ther .....

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accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the nonresident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non resident has rendered services in India. Therefore, the object is to tax on the income of a non-resident, if it has accrued or arisen in India and one such income from royalty. 20. As regards the terms of the agreement with the en .....

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es are involved with one agreement only. 21. The counsel for the Revenue further citied the case of Citirx where this authority has held that the payment received by the applicant or the distributor for sale of its software product is in the nature of royalty within the meaning of section 9(1)(vi) of the IT Act as well as article 12 of the DTAA. It was contended that the facts of the present case are similar to the facts in the case of Citrix (3 Tier transaction involving 3 parties and 2 agreeme .....

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nt entered into a distribution agreement with Ingram Micro India Ltd. (hereinafter referred to as Ingram ), and independent Indian company engaged in the business of distribution of computer software and hardware. Under the agreement, Ingram was appointed as a non-exclusive distributor of the products of the applicant in India. Some of the key products distributed under the agreement are Citrix XenApp, Citrix Access Gatway and Citrix Netscaler. According to the applicant, under the agreement, th .....

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x XenApp, the distributor places orders of purchase with the applicant and makes payments for the same to the applicant. The applicant then directly transmits a key to the end-user customer who is required to download the XenApp software. On receipt of the key, the enduser customer downloads the software from the server of the applicant. The distributor Ingram owns the responsibility for collection of the price for the product from its customers. In addition to the distribution of hardware produ .....

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e manner as the case of software products. All transactions between Ingram and the applicant 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. 22. We have carefully gone through the facts of the case, extensive arguments put forward by both counsels and several case laws cited by them. It is necessary in this case to first understand the facts clearly. In the application .....

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of a software/content license agreement whereby the Indian endusers are permitted to access the e-learning platforms and the educational content. SkillSoft India provides to the end-users the access code/web-link by which they could access the SkillSoft Products. It is seen that the facts of the Citrix Systems Asia Pacific Private Limited are also similar. In the case of Citrix also under the first agreement the software products are purchased by the distributor from the applicant and sold by th .....

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misplaced. Moreover, the ruling in the case of FactSet was delivered in June 2009 whereas the ruling in the case of Citrix was announced in February 2012, after duly considering the case of FactSet and Dassult in detail. The authority also considered the decision of the Karnataka High Court in the case of the Samsung Electronics Private Limited and the decision of the Delhi High Court in the case of the Director of IT vs Ericsson A.B., 2012 (246 ITR 422) before giving the ruling in the case of .....

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patent, design or model, plan, secret formula or process, trademark or other like property or right. In Union of India vs Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) the Supreme Court has spoken as to how a treaty is to be interpreted. It is a contract between sovereign States and varying considerations go into making it. It is a matter of bargain between the two countries involving adjustments and compromises. According to Bennion on Statutory Interpretation the words .....

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poses of that Act, especially when construing the tax convention. 31. The article speaks of the use of or the right to use of any copyright. Use of a copyright takes place when the copyright is used. This is distinct from the right to use a copyright. The two expressions are used disjunctively and the expression used is or . The context does not warrant the reading of or as and . If so, the consideration received for permitting another to use a copyright is also royalty. 32. Considerable argumen .....

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, the Copyright Act or the IT Act or the IT Act or the DTAC does not use the expression copyrighted article , which could have been used if the intention was as claimed by the applicant. In the circumstances, the distinction sought to be made appears to be illusory. 23. The applicant s counsel tried hard to say that the ruling in the case of FactSet is binding on us and relied on the decisions in the cases of Dun and BradStreet, Linde AG and Sun Engineering. In all these cases the emphasis was t .....

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he applicant s counsel, the following the following issues arise which are relevant to answer the questions raised by the applicant:- (i) Whether computer programme and computer database (software) are covered under Article 12(3)(a) of DTAA for the purpose of Royalty? (ii) Whether there is any distinction between copyright and copyrighted articles for the purpose of royalty in this case? (iii) Whether grant of non-exclusive, non-transferable rights would be akin to transfer of rights in the copy .....

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) that By an inclusive definition in section 2(o) of Copyright Act, computer programmes and computer databases are included within the ambit of literary work. There is no need to further discuss this aspect. The applicant s counsel has further tried to say that such software shall be covered under ITES. However, this is a fallacious argument because the notification dated 18th September, 2013 issued by CBDT defining ITEA does not apply to the applicant. This notification is only meant for such e .....

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ite of the applicant and could see that they were marketing several copyrighted software containing simulation exercises and such software simulations were especially designed by them. Such especially designed software are not available in public domain. It is clearly mentioned by them that these products are licensed by the Applicant to SkillSoft India under the Agreement and further sub-licensed/distributed to end customers in India under the Customer Agreement. It is not correct to say that t .....

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no rights in the copyright are granted to the Indian end-users. We noticed that this authority had examined the same issue in the case of Citrix and had concluded that such distinction is illusory. The observations of the authority are as under:- 32. Considerable arguments are raised on the socalled distinction between copyright and copyrighted articles. What is a copyrighted article? It is nothing but an article which incorporates the copyright of the owner, the assignee, the exclusive license .....

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to be made appears to be illusory. We respectfully agree with the ruling. 27. Grant of non-exclusive, non-transferable rights in the license It is the applicant s main argument that it does not involve provision of the right to use in copyright of a literary, realistic or scientific work, in patent, trademark, design or model plan etc. The applicant s counsel argued that the grant of right to Indian end-users to access the educational content should not be construed as granting a copy right. It .....

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without right of sub-license, of use the software and design technologies only in the quality authorized by a licensee in accordance with the documentation in the use area. In the present case also the reseller agreement grants to customer a non-exclusive, nontransferrable license (without the right to sub-license). The Hon ble High Court had mentioned categorically that merely because the words nonexclusive and non-transferrable is used in the said license it does not take away the software ou .....

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