TMI Blog2015 (8) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... lSoft 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 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 the applicant’s case is completely different from the facts of a case surrounding software. The fact is that software and computer databases created by the applicant are included within the ambit of ‘literary work’ and therefore covered under Article 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 DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( the Applicant ) would be characterized as fees for technical services ( FTS ) under Article 12(3)(b) of the Agreement between the Government of the Republic of India and the Government of Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income( India-Ireland Treaty )? (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 negative, 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 of the Act? 3. In the application (Annexure III) the applicant has given a brief description of the key e-learning platforms offered to Indian customers as under:- SkillPort The SkillP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sers. 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 licensing agreement whereby the Indian end-users/customers are permitted to access the elearning platform and the educational content. 6. In the application the applicant has mentioned that the payments for SkillSoft Products are not for services that are managerial or consultancy or technical in nature but instead for a product. According to the applicant the end line software platform should be regarded as software and not services. As regards the second component comprising education content, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of information technology enabled services (ITES) and for this purpose he cited notification dated 18th September, 2013 issued by Central Board of Direct Taxes in respect of 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 of this authority in the case of FactSet Research Systems Inc.(supra) saying that the facts are similar to that of the applicant. In this case it was held that The grant of license is only to authorize the licensee to have access to the copyrighted database rather than granting any rights in or over the copyright as such. The consideration paid is for a facility made available to the licensee. ----------------------------------------------------------------------------------------- The data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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, the applicant s counsel cited the observations of Hon ble Supreme Court in the case of Sun Engineering Works Pvt. Ltd. (supra), as under:- A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgement, divorced from the context of the questions under 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. Withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including, but not limited to, right or obligations relating to the renewal of subscription based licenses, the support and maintenance of Products. Subject to 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 Master License Agreement (MLA) between the Indian customer and SkillSoft India. He particularly pointed out clause 2.1 of this agreement as under:- Subject to the restrictions stated in this Agreement and any Order Form issued under this Agreement, SkillSoft grants to Customer and Customer accepts, a non-exclusive, nontransferable license (without the right to sub-license) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... override the provisions of the Income-tax Act. In the DTAA for the term royalty means payments of any kind received as a consideration for the use of the right to use any copyright of literary, artistic or scientific work whereas in the Income-tax Act, royalty means consideration for the transfer of all or any rights including the granting of a license. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty 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, confer a right. It only prevents that from being unlawful which, but for the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be permission to copy a copyright work. 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. Without such right, being transferred, the end-user has no right to use the software or computer programme. 45. As is clear from the description of the agreement it is an enduser software license agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licensee a non-exclusive, non-transferable license, without right of sub-license of use the licensed software and design techniques only in the quantity authorized by a licensee in accordance with the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the clauses related to the license (2.1) and SkillSoft Product being the property of the applicant (2.2), warranty (5.1) and products (1.3) are similar in the case of the applicant as well as in the case of Synopsis International Old Limited. It was also pointed out that in the case of the applicant it is a 3 Tier transaction involving 3 parties and 2 agreements whereas in the case of Infrasoft and FactSet India (relied upon by the applicant) 2 parties 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 agreements) which are as under:- 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. It also offers a range ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngram 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 the applicant has given the description of its business. A SkillSoft Product consist of two components. The first is course content and the second is the software through which the course is delivered to the end customer. The applicant enters into a Reseller Agreement with the SkillSoft India for sale of SkillSoft Products. SkillSoft India buys the SkillSoft Product from the applicant and sells the same to the Indian end-users under the master license agreement, which is primarily in the nature 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 Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be understood as it is commonly understood. There is much to be said for the argument on behalf of the Revenue, that we should not feel ourselves constrained by the definition of copyright in s.14 of the Copyright Act, a definition that explicitly states that it is for the purposes 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 arguments are raised on the so-called distinction between a 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 licensee or the licensee. So, when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware 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 eligible assesses who have exercised a valid option for application of Safe Harbor Rules. The analogy drawn by the applicant s counsel to the on-line banking facility provided by a bank or to an e-library (book) is also not at all appropriate. As mentioned earlier, SkillSoft Products consist of the software through which the course content is delivered to the end-customer who gains access to a especially designed software for understanding the content. 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to between the parties which dealt with grant of rights. It was provided therein that Synopsis granted licensee offering a non-exclusive, nontransferable license, 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 out of definition of copyright. It was further held that even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid license makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. It was further held that it is not necessary that there should be a transfer of exclusive right in the copyright. In this case also sim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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