TMI Blog2013 (8) TMI 952X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Samsung Electronics co. Ltd. oths [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT] payment made by the respondents to the non-resident supplier amounts to royalty and is rightly brought to tax in India. The assessee is not entitled to get the immunity of the DTAA between India and USA. When the decision of the Hon ble High Court of Karnataka is available then it is not necessary for the Tribunal to show more wisdom unless some contrary decision on the issue of another High Court or the Supreme Court has been brought to our notice. In our opinion, all the decisions relied upon by the assessee are not helpful to decide the nature of payment received by the assessee in present case which is described as licence fee but in fact it is the royalty only. - BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER, AND SHRI R.K.PANDA, ACCOUNTANT MEMBER For the Appellant: Shri Ranjan Vora/Shri R.G. Agiwal For the Respondent: Shri Mukesh Varma ORDER PER R.S. PADVEKAR, JM: These two appeals are filed by the assessee challenging the respective assessment orders for the A.Y. 2004-05 and 2006-07 passed on the directions of the Dispute Resolution Panel (in short DRP ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. 4. In the case of the assessee, the original assessment for A.Y. 2004-05 has been completed u/s 143(3) of the Act vide order dated 28-10-2006. The A.O issued notice to the assessee u/s 148 of the Act dated 30-3-2009 which was served on the assessee on 31-3-2009. In this case, it is in not dispute that notice u/s 148 of the Act has been served on the assessee within four years from the end of the A.Y. 2004-05. The main contention of the assessee is that the re-assessment proceedings are initiated merely on the change of opinion. As noted in the reasons recorded by the A.O for issuing notice u/s 148 that while completing scrutiny assessment for A.Y. 2005-06, it was noticed by the A.O that the assessee has claimed exemption in respect of licence fee it has received from CIL and CDSS for information technology support. The assessee took a stand that what has been transferred to CIL and CDSS was the user right in the copy righted software and not the use of copy right. The A.O examined the agreement between the assessee, CIL and CDSS under the terms of which the Indian company has engaged the assessee to license and sub-licence certain software rights and for the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Paints Ltd. Vs. Dy. CIT (2009) 308 ITR 195 (Bom) (f) Asteroids Trading Investments (P) Ltd. Vs. DCIT (2009) 308 ITR 190 (Bom) (g) Cartini India Ltd. Vs. Addi. CIT (2009) 314 ITR 275 (Bom) (h) Aventis Pharma Ltd. Vs. ACIT (2010) 323 ITR 570 (Bom) (i) Siemens Information Systems Ltd. Vs. ACIT (2007) 295 ITR 333 (Bom) 6. Per contra, the learned DR supported the action of the A.O for initiating proceedings u/s 147 of the Act. The learned CIT (DR) took us through the original assessment order passed u/s 143(3) of the Act and submits that in his one page order, the A.O has not at all considered the important issue which is clear from cryptic order. He submits that there is not even a whisper in the assessment order in respect of the contention of the assessee. It is also seen that the A.O has not called for any clarification or explanation. He submits that the A.O discharged his functions as a revenue protector and he is under the legal obligation to examine all the issues and to see that no income is escaped. He submits that even if the bunch of judgments relied on by the learned counsel, the decision will be only on examining the record as there are supportin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the value of international transactions vide the transfer pricing assessment order passed by the Joint Commissioner of Income-tax (Transfer Pricing I), Mumbai dt 29-09-2006. Assessed u/s 143(3} of the Income-tax Act, 1961. Give credit for the- taxes paid after due verification. Charge interest as per Law. Issue Demand Notice and challan accordingly. 8. It is clear from the above assessment order that there is not a whisper in respect of very important issue which is one of complex legal issue. Nothing is there on record even to suggest that the A.O made any inquiry whether the said receipt was taxable in the hands of the assessee under the normal provision of the Act and particularly u/s 9(1)(iv) of the Act as well as under Article 12 of the DTAA between India and USA. We are unable to accept the contention of the assessee that re-assessment proceedings are initiated u/s 147 merely on the change of opinion. Admittedly in this case, a notice u/s 148 has been served on the assessee within four years from the end of A.Y. 2004-05 and hence, limitation put on the powers of the A.O. in proviso to Sec. 147(1) of the Act is not applicable. Though the assessee has relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxability of the said payment to the assessee by CIL and CDSS under the normal provisions of the Act. The assessee had entered into an agreement with CIL and CDSS on 7-6-2004 which are effective for the period from 1-4-2003 to 1-3-2006. The A.O has reproduced both the agreements in the assessment order. There are two exhibits i.e. A B, to the agreement in which the payment of licence fee has been mentioned. The A.O has observed that the said payments are covered under Sec. 9(1)(vi) of the Act and same is taxable as royalty in the hands of the assessee in India. The A.O also examined the provisions of Indian Copyright Act 1957 and held that as per the definition of literary work the computer programme is also included. The A.O also examined the Articles of DTAA between India and USA and finally held that the said amount partakes the character of the royalty and hence within the meaning of Article 12(3) of the DTAA, the said amount is taxable in the source country. The A.O finally held that the licence fees received by the assessee from CIL and CDSS are in the nature of royalty within the meaning of sec. 9(1)(vi) of the Act and as well as covered under Article 12(3) of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... function of purchasing, planning, manufacturing and finance applications including receivables, payables and general ledger. 2. Desktop/Laptop Software license These are generally used PC and day to day office automation and documentation work tools like Microsoft Office -Word, Excess, antivirus, and Basic Operating System for PC - Windows and other smaller application provided by various software vendors and certified by Cummins to be used on PC for software automation. These are mostly in the nature of off-the-shelf software products. 3. Internal Mail This is IBM company Lotus Notes Application which is essentially email software. 4. Legacy Software IMS for engineering This is mainframe System developed for Engineering Product definition and release. It is also for Product structure (Bill of material definition) and item release engineering control (Engineering release). The appellant's products are maintained in this system and it is used by the engineering department for its internal use. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UM/2010 for A.Y. 2006-07 dt. 8-1-2012 (e) Novel Inc Vs. DDIT (IT) ITA No. 4368/MUM/2010 for A.Y. 2007-08 dt. 28-11-2011 (f) ADIT (IT) Vs. TII Team Telecom International Pvt.Ltd (2011) 60 DTR 177 (MUM) (g) B4U International Holdings Ltd Vs. DCIT (ITA No. 3326/MUM/2006 for A.Y. 2002-03) dt. 28-5-2012 (h) Sonata Information Technology Vs. ACIT (2007) 106 TTJ (Bang) 797 (i) DDIT (Mum) Vs. Reliance Industries Ltd (010-TII-154-ITT-MUM-INTL) (j) ADIT (Mum) Vs. Tata Communications (2010-TII-157-ITAT-MUM- INTL) (k) Kansai Nerolac Paints Ltd Vs. ADIT (IT) (2010) 43 DTR 385 (Mum, ITAT) (l) DDIT (IT) Vs. Daimler Chrysler AG (ITA No. 3817/Mum/2008 and 4325/Mum/2008 for A.Y. 2004-05 dt. 30-11-2010. 12. Per contra, the learned CIT-DR has filed detailed written submissions. The learned CIT (DR) vehemently argued that the software acquired by the assessee cannot be said to be the off-the-shelf software but in fact it is customized software. He submits that due to amendment to sec. 9(1)(vi) by the insertion of Explanation (4) with retrospective effect from 1-6-1976, consideration or fees paid for the transfer of all or any right for the use or righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S towards use of the software is concerned, the same has become taxable in India under normal provisions of the Act by insertion of Explanation-4 below sec. 9(1)(vi) of the Act by the Finance Act 2012 with retrospective effect from 01-06-1976. Once the statute or Act has been amended with retrospective effect and the matter is pending before the Tribunal then we have to take cognizance of any amendment having bearing on the issue as the appellate proceeding is the continuation of the assessment proceedings only. In our opinion, there is no dispute so far as the taxability of the payment received by the assessee now under normal provisions of the Act and we hold that the licence fees received by the assessee from CIL and CDSS is in the nature of royalty under the normal provisions of the Act more particularly u/s 9(1)(vi) of the Act. At the same time if it is held as royalty, then the next question is whether the same is exempt under DTAA between India and USA. In this case, it is not disputed that the DTAA between India and USA is applicable as the assessee company as it a tax resident of the USA. The stand of the assessee is that the assessee procured software from Oracle which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only the right to use programme and does not acquire any right of ownership. As per condition No. 2(iii) the liberty is given to the assessee to transfer the programme to CPU in any other location in the assessee s organisation upon written notice to Oracle. It is provided that if the assessee wants to transfer the progrmamme outside USA then prior permission of Oracle is required. It is provided that technical support services will be provided by Oracle to the assessee. As per terms 4.1 the assessee has been granted licence which shall remain in effect perpetually. The assessee can terminate the said agreement or licence at any time. The Oracle may terminate the said agreement or any licence in case of breach of the agreement. The warranty is also given. The other general terms are also incorporated. 14. The assessee has also entered into agreement dated 7-6-2004 with CIL and also a separate agreement with CDSS. The assessee has filed copies of Licence/Sub-Licence agreement entered with CIL and CDSS which are at Page Nos. 40 to 59 (Paper Book No. 1). In our opinion the reproduction of the terms between the assessee and CIL/CDSS are very relevant to determine the nature of pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Invoices should denote period and number of users. CIL shall pay invoiced amounts within sixty (5) days of the invoice date. All payments shall be made in United States Dollars. 4. Taxes The payment to Cummins under this Agreement is subject to Indian Income Tax at rates applicable from time to time. Cummins shall be responsible for the payment of any estimated state and federal income tax liability, social security and self-employment tax liability, and for maintaining appropriate records relating thereto as independent contractor. 5. Term; Termination The term of this Agreement shall commence on April 1, 2003 and expire on March 31, 2006 (the Term ), and may be renewed from time to time by written agreement. This Agreement or Licences to use the software may be terminated without cause by either party any time upon giving the other party one hundred eighty (180) days prior written notice of such termination. Alternatively, if Cummins is failing to perform a material part of the Licences, and persists in this non-performance for thirty (30) days after notice from CIL, CIL may terminate the contract immediately. In either case, Cummins will be paid for Lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely referred to herein as Data ) of CIL which Cummins becomes aware under this agreement. Cummins agrees that it will not directly or indirectly disclose the same to others or use any such Data for itself or on behalf of others without the prior written approval of CIL. Upon request by CIL any writing, drawing, diagram, electronic or other medium embodying the Data will be immediately returned to CIL or, at CIL request, such material shall be destroyed by Cummins and Cummins shall provide an inventory and a certificate of destruction. Dissemination of the Data will be limited to Cummins employees who need the Data to perform the Services, and who either (i) agree in writing to the terms of this Agreement or (ii) are bound under a written obligation of confidentiality to Cummins. Cummins acknowledges that Data is CIL s proprietary business property which gives CIL an opportunity to obtain an advantage over competition, and that Cummins promises contained herein are material and necessary for the conduct of CIL business. Further, Cummins agrees to keep confidential the facts of this Agreement and of its performance hereunder. These obligations of confidence do not apply to: A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Columbus, IN 47202-3005 12. Force Majeure Neither party shall incur liability to the other for delay in performance or for failure to perform under this Agreement if due to causes beyond its control, including, but not limited to, acts of God, acts of war, fire, riot, strike or other labor trouble, or intervention by any governmental authority, and each party shall take steps to minimize any such delay. 13. Non-Waiver The failure of either party herein insist in any one or more instances upon performance of any of the provisions of this Agreement or to pursue their rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights. 14. Entire Agreement This Agreement contains the entire agreement between the parties, and supersedes all previous negotiations, letters of intent, letter contracts, writings, agreements and understandings, if any heretofore had between the parties with respect to the subject matter hereof. 15. Survival The obligations set forth in Paragraphs 4, 7, 8 and 10 above shall survive the termination of this Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that copy right is a negative right which is an umbrella of many rights and licence is granted to use of copy right in respect of particular software/off the shelf software in the respective agreement which authorizes the user i.e. customer, to make use of copy right software contained in the said software which is purchased and the same would amount to transfer of part of the copy rights for use in internal business as per the terms of the agreement. In our opinion, the decision of the Hon ble Karnataka High Court is a direct decision on this issue. 17. It is necessary to narrate some relevant facts of the said case. In the said case, the assessee was engaged in the development of computer software and also export of the software. The said assessee imported software product from USA, France and Sweden. The revenue objected for non-deduction of tax at source (TAS) as in the opinion of ITO (TDS) the payment made by the assessee company to the software company was royalty u/s. 9(1)(vi) of the I.T. Act and also as per the provisions of DTAA between India-USA. As per the revenue, there was a legal obligation on the assessee to deduct tax u/s 195(1) of the Act and there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. Sales Tax and Income Tax are entirely different as Income Tax is a direct tax and Sales Tax is an indirect tax and wherefore, mere finding that the computer software would be included within the term Sales Tax would not preclude this Court from holding that the said payments made by the respondents to the non-resident Company in the present cases would amount to royalty unless the respondents are able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in the absence of any permanent establishment of the non-resident suppliers, there is no obligation on the part of the payee to make deduction under Section 195(1) of the Act. 23. It is well settled that in the absence of any definition of copyright in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of Copyright, namely Copyright Act, 1957, in India, wherein it is clearly stated that literary work includes computer programmes, tables and compilations including computer (databases). Section 16 of the Copyright Act, 1957 states that no person s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v); (d) in the case of a cinematograph film:- (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) in the case of a sound recording:- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public; Explanation:- For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.) It may also be noted that under Section 51 of the Act dealing with When Copyright infringed states that Copyright in a work shall be deemed to be infringed when any person, without a licence granted by the owner of the Copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .02.2011 = (2011-TII-08-HC-DEL-INTL) relied upon by Sri Aravind Dattar, learned senior counsel appearing for the respondents in some of the cases in support of his contention that by no stretch of imagination., payment made by the respondents to the non-resident suppliers can be treated as royalty is not helpful to the respondents in the present cases as in the said case, Delhi High Court was considering the provisions of Sections 40(a)(i) of the Act and the order of the High Court reads as follows:- What is found, as a matter of fact, is that the assesses has been, purchasing the software from Microsoft and sold it further in Indian market. By no stretch of imagination, it would be termed as royalty . Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same, the Legislature in its wisdom, has treated the literary work like books and other articles separately from computer software within the meaning of the Copyright as referred to above under Section 14 of the Copyright Act. 25. It is also clear from the above said analysis of the DTAA Income Tax Act, Copyright Act that the payment would constitute royalty within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of the Act as the definition of royalty under clause 9(1)(vi) of the Act is broader than the definition of royalty under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute royalty for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of explanation 2 to Section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the r ..... 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