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M/s. Capgemini Business Services (India) Ltd. Versus Assistant Commissioner of Income Tax-1 (2) , Mumbai

2016 (3) TMI 280 - ITAT MUMBAI

Transfer pricing adjustment - selection of comparable - Held that:- Direct the AO to exclude Vishal International Technology Ltd. and Mold-Tek Technologies Ltd. while determining the arm's length price of the assessee relating to the transactions with its AEs.

Disallowance of club entrance fees - the assessee has made a claim that the special membership would help in building better relationship with clients - Held that:- Hon’ble Punjab & Haryana High Court in the case of “CIT vs. Gro .....

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aryana High Court, this ground is decided in favour of the assessee.

Disallowance of tax credit of branch profit tax paid in USA - Held that:- The scope of Article II relating to “Taxes Covered” has been explained in the said guide/technical explanation. It has been specifically provided that the taxes covered in the case of US, as indicated in paragraph 1(a) of Article II, are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums pai .....

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n excluded from the purview of the DTAA have been specifically mentioned therein. Further, as observed above, the accumulated earning tax, which has been provided under section 531 of the Internal Revenue Code of the US, is different from ‘branch profit tax’ which is dealt with under separate section 884. The ‘section 884’ dealing with branch profit tax has not been specifically excluded from the DTAA and thus being a part of the Internal Revenue Code is covered by the US treaty. This issue is a .....

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AA can not be accepted as it is apparent that the definition under the DTAA is short and restrictive whereas the definition under the Income Tax Act is wide, inclusive and extended. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken.

DRP has given a specific finding of fact that what the assessee in the present case has purchased is th .....

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me Tax Act. Hence, without expressing our opinion or any view in relation to the definition of ‘royalty’ vis-à-vis ‘computer software’ as provided under the Income Tax Act, we have given our findings only in respect of the scope of ‘royality’ under the DTAA.

In view of our detailed discussion made above, the assessee can not be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be .....

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the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957. - Decided in favour of assessee - ITA No.7779/M/2011 - Dated:- 29-2-2016 - SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER For The Assessee : Shri M.M. Golvala, A.R. For The Revenue : Shri A.A. Khan, D.R. ORDER Per Sanjay Garg, Judicial Member: The present appeal has been preferred by the assessee against the orde .....

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gistered office in Mumbai and corporate office in Bangalore. Cape Gemini SA., France acquired 51% shareholding in CBSIL from HUL on 11 October 2006 (during the relevant AY 2007-08). Pursuant to the acquisition, the name of the company has been changed from Unilever India Shared Services Limited to Capgemini Business Services (India) Limited with effect from 14 May 2007. During A.Y 2007-08, the assessee had primarily provided business process management services in the areas of finance accounts, .....

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nilever group entities came under the purview of Indian Transfer Pricing (TP) Regulations . The assessee had selected the Transactional Net Margin Method (TNMM) as the most appropriate method to determine the arm's length price for the provision of ITES to group entities and had selected comparable companies rendering ITES for determination of arm's length price. Based on the analysis carried out by the assessee, the international transactions were determined as meeting with the arm' .....

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RP. However, the DRP rejected the assessee s objections not only in relation to transfer pricing adjustments but also in relation to disallowances proposed by the AO in relation to club entrance fee, credit of branch profit tax paid by the assessee in USA and the expenditure incurred towards purchase of software . Being aggrieved by the order of the Ld. DRP, the assessee has come in appeal before us with the following grounds of appeal: Ground No.1 - Transfer Pricing ( TP') adjustment of  .....

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nagement services rendered to Associated Enterprises ('AEs') at ₹ 50,99,80,530 instead of ₹ 47,69,09,996 as determined by Capgemini Business Services (India) Limited ('the Appellant') by: a. considering the Appellant's transactions with overseas Unilever group entities, post transfer of the Appellant's shareholding to Capgemini Group from Unilever Group on 11 October 2006, as international transaction, having failed to appreciate that Unilever Plc's shareh .....

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his own comparability analysis which is not in accordance with contemporaneous documentation requirement under Indian TP regulations, having failed to appreciate that in the case under consideration, none of the conditions set out in Section 920(3) of the Act are satisfied; d. selecting companies that are not comparable to the Appellant vis-a-vis its AEs, for the determination of the arm's length price; e. using current year's financial data (i.e. Financial Year 2006-07) for the compara .....

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e the arm's length price and accordingly, the AO be directed to delete the adjustment of ₹ 3,30,70,534. 2. Club entrance fees On the facts, in law and in the circumstances of the present case, the AO erred in disallowing expense of ₹ 550,000 incurred towards club entrance fees. The Appellant prays that the sum of ₹ 550,000 be allowed as business expense and the additions made by the AO be deleted. 3. Tax credit in India for Branch Profit Tax paid by the Appellant in USA On .....

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llowing expenditure of ₹ 953,437, incurred for purchase of 'off the shelf' software from QAD Singapore Pte Ltd., Singapore, under Section 40(a)(i) of the Act alleging that the said expenditure is subject to deduction of tax at source under Section 195 of the Act. The Appellant prays that the expenditure towards purchase of 'off the shelf' software be allowed. 5. On the facts, in law and in the circumstances of the present case, the learned AO erred in levying interest under .....

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ransfer pricing adjustments are concerned, the assessee had provided 12 comparables whereas the TPO accepted only 4 out of those. The TPO himself added 25 comparables for arriving at arm's length price for determining the transfer pricing adjustments. The TPO had accepted the analysis of the assessee using the TNMM as most appropriated method for determination of ALP of international transactions whereby the operating margin of the assessee was compared vis-à-vis its transactions with .....

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bles taken by the TPO, the OP/OC ratio came to 28.23%. The short contention of the Ld. A.R. before us has been that the assessee otherwise will be satisfied if the comparables introduced by the AO are taken for analysis except the two i.e. Mold-Tek Technologies Ltd. (SCG) mentioned at Sl. No.20 and in case of Vishal International Technology Ltd. mentioned at Sl. No.24 of the comparables taken by the TPO in his order. He has submitted that if the above two comparables are excluded, the arm's .....

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old-Tek Technologies Ltd., wherein it has been provided that during the year, the IT division of the said company commenced engineering services to high rise buildings for clients in US and Canada which offered excellent growth prospects. The company had two divisions, one is plastic division and the other is KPO division. KPO division deals with IT enabled services providing services in relation to designing and detailing of the buildings apart from other activities. The Ld. A.R. has further in .....

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ver the Special Bench of the Tribunal in para 81 of the order has observed that from the annual report of the said company for the financial year 2007-08, it revealed that the said company was providing structural engineering KPO services and its business activity was entirely different from that of the assessee s BPO/KPO services provided by the assessee in relation to back office support, data processing and analysis etc. The relevant observations of the Special Bench of the Tribunal for the s .....

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is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that i t i s a leading provider of engineer ing and design services wi th specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant desig .....

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l report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services. 4. A perusal of the record reveals that the business activity of the Mold- Tek Technologies Ltd. and that of the assessee are entirely different. The scope o .....

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ded by Mold-Tek Technologies Ltd. are entirely different from that of the assessee. The assessee s services are mainly relating to data analysis and back up office support services which do not require much involvement of high skilled knowledge process and expense whereas, in case of Mold-Tek Technologies Ltd. the nature of services, itself, reveals that the same involved high-tech skills, domain knowledge and experience of highly skilled and professionals/ persons and that the profit margin in .....

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ble for the purpose of calculating the bench mark operating profit margin on the ground that the business model of the said company was different. It was contended that Vishal International Technology Ltd. was engaged in the services of data analytics and providing data services solutions. However, the employees salary cost of Vishal International Technology Ltd. was relatively very low as compared to that of the assessee. The Vishal International Technology Ltd. had outsourced significant parts .....

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in out sourcing of its operations has not only been considered by the special bench of the Tribunal but also by the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra). 5. Considering the above facts on the file and the submissions made by the Ld. Representatives of the parties, in our view, the Mold-Tek Technologies Ltd. and Vishal International Technology Ltd. cannot be taken as comparables. 6. We, accordingly, direct the AO to exclude Vishal International Technology .....

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n this respect. Before us, the Ld. A.R. of the assessee has submitted that the same was a corporate membership and the company had nominated two of its employees i.e. CEO and Chief Engineer Operations for availing the membership facilities. He has further invited our attention to the full bench decision of the Hon ble Punjab & Haryana High Court in the case of CIT vs. Groz Beckert Asia Ltd. reported as (2013) 351 ITR 196 P&H (FB), wherein, the Hon ble High Court has held that no capital .....

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essee has agitated the action of the lower authorities in not allowing tax credit of branch profit tax paid in USA. The lower authorities, in this respect, have relied upon Article 2 of the Indo US DTAA (Double Taxation Avoidance Agreement), wherein, the taxes covered under the treaty in the United States inter alia are the federal income taxes imposed by the US Internal Revenue Code but excluding the accumulated earning tax , the personal holding tax and social security taxes etc. The contentio .....

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ch profit tax. He, in this respect, has argued that the accumulated earning tax and the branch profit tax are the different taxes which have been dealt by different sections. Section 531 of the Internal Revenue Code deals with imposition of accumulated earning tax, whereas, section 884 deals with branch profit tax . The Ld. A.R. has further invited our attention to page 1167 of the paper book which is the Official Technical Explanation of the Convention and Protocol between the US and India . Th .....

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oes not apply to the accumulated earning tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). State and local taxes in the United States are also not covered by the Convention. A perusal of the Article II of the DTAA read with the technical explanation to the convention reveals beyond doubt that the taxes which have been excluded from the purview of the DTAA have been specifically mentioned therein. Further, .....

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allowance of expenditure of ₹ 9,53,437/- incurred for purchase of off the shelf software from QAD Singapore Pvt. Ltd. under section 40(a)(i) of the Act on the ground that the said expenditure was subject to deduction of tax at source under section 195 of the Act. The AO noticed that the assessee had incurred expenses in foreign currency for the purchase of software from QAD Singapore Pvt. Ltd. The case of the assessee has been that it had not purchased any copyright in the software rather, .....

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accrued in India. 10. Before the DRP, the assessee adduced evidence in the form of invoice and other documents/material in respect of the software purchased to prove that the said software has been standard software and that the payment made by the assessee for the said software was a onetime payment and not a recurring payment for use of software. It was also explained by the assessee that what it had purchased was a copyrighted article and not the copyright, itself, so as to classify it as ro .....

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ion on a certified machine. Therefore, payment made by the end user was towards license to use copyright in software and not for sale of software. The DRP, therefore, held that the license to use the software would fall under the purview of royalty. Being aggrieved by the above finding of the DRP, the assessee has come in appeal before us. 11. We have heard the rival contentions and have also gone through the records. The Ld. A.R. of the assessee has contended that MFG Pro Software purchased by .....

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the royalty and hence the assessee was not liable to deduct TDS on the payment for the purchase of goods from the foreign company as the same was business income in the hands of the recipient and not the royalty. The Ld. A.R. of the assessee, in this respect has relied upon the decision of the Hon ble Delhi High Court in the case of DIT vs. Infrasoft Ltd. (2013) 39 taxmann.com 88 (Del.) and further on another decision of the Hon ble Delhi High Court in the case of DIT vs. Ericson A.B. (2012) 34 .....

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the software had remained with the owner; the assessee was just a given license to use the software which was the right to use of copyright in the software. The Tribunal in the said decision (supra) has relied upon the decision of the Hon ble Karnataka High Court in the case of CIT vs. Samsung Electronics Company Ltd. & Others (2012) 345 ITR 494 and upon another decision of the Hon ble Karnataka High Court in the case of CIT vs. Synopsis International Old Ltd. (2013) 212 taxman 454. The Ld. .....

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for determining the tax liability of the assessee in this respect. The contention of the Ld. AR, on the other hand is that the definition of royalty, since provided in the DTAA is to be looked into only and that the definition, if any, provided under the Act is to be ignored. 13. After hearing the Ld. Representatives of the parties, the first and foremost question for adjudication before us is as to whether the definition of Royalty as provided under the Income Tax Act is to be taken or that wh .....

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mmunication Singapore (supra) has been followed by the Mumbai Bench of the Tribunal in Viacom 18 Media Pvt. Ltd. vs. ADIT (International Taxation) reported in (2014) 44 taxman.com 1 (Mumbai). He, therefore, has vehemently contended that the definition of royalty as provided under the various clauses and explanations of section 9 of the Income Tax Act should be adopted. He, in this respect, has stated that the Explanation 4 to section 9(1) (vi), introduced vide Amendment Act of 2012, is clarifica .....

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f the Income Tax Act as provided under section 90 of the Income Tax Act. He, in this respect, has relied upon the decision of the Hon ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 607. 15. We have considered the rival contentions of the Ld. Representatives in this respect. We have also gone through the relevant definitions as provided under the DTAA and under the Income Tax Act. So far as the definition of royalty as provided under section 9(1)(vi)of The .....

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who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of inform .....

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nt made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be d .....

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sessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the pur .....

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a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transf .....

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he purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (inclu .....

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ation is in India. Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret; 16. The definition of royalty as provided in the DTAA of India with Singapore, for the sake of convenience and comparison .....

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ding gains derived from the alienation of any such right, property or information; b. any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 17. We further find that in the various treaties with different countries, the Article 12 therein, generally, deals with the payments in respect of royalties and almost identical/similar definition has been provided in various treaties with various ot .....

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der the Income Tax Act reveals that the DTAA covers only a part of the items mentioned under sub clause (i) to (v) to Explanation 2 to section 9(1)(vi). We may mention here that the section 9(1)(vi) having sub clauses (a), (b), & (c) is very vast to cover consideration paid for any right, property or information used or services utilized for the purpose of business or profession. Further, we find that in the said sub clauses (a), (b) & (c) of section 9(1) (vi), the wording is somewhat va .....

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vide explanation 2 the vast definition provided in sub clauses (a), (b) & (c) of section 9(1) (vi), have been restricted only to the consideration paid for the items as mentioned (i) to (vi) of Explanation 2. However, Explanation 4 inserted by Finance Act, 2012, provides that the transfer of rights in respect of any right, property or information includes and has always included the right for use or right to use a computer software including granting of a license. We find that so far as Inco .....

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use (vi) to section 9(1). Hence, the computer software has been recognized as a separate item not only in 2nd proviso to clause (vi) but in Explanation 4 also and has been included in the definition and within the scope of the words right , property or information . The same has not been included in the meaning and scope of the term literary work under clause (v) to Explanation 2. It is to be further noted that the consideration paid for computer software has not been specifically included under .....

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of section 90, the definition of royalty as provided under DTAA is to be taken. So far as the reliance of the Ld. D.R. on the decision of the Hon ble Madras High Court in the case of Vrizon Communication Singapore (supra) and of the Mumbai Tribunal in the case of Viacom 18 Media Pvt. Ltd. (supra) is concerned, we find that the said decisions have been rendered in context of some other item relating to the consideration paid for transponder/band width/telecom services. In that context, the Hon b .....

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) has held that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect from 1.6.1976 to provide that all consideration for user of software shall be assessable as royalty , the definition in the DTAA has been left unchanged. In Siemens AG 310 ITR 320 (Bom), it was held that amendments cannot be read into the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as royalty despite the retrospective amendmen .....

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isses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. 21. Further, in a recent judgment in the case of DIT Vs New .....

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ected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. As held by the Hon ble Supreme Court in Azadi Bachao Andolan (2003) 263 ITR 607, these treaties are creations of a different process subject to negotiations by sovereign nations. While relying .....

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t amending the treaty itself. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Hon ble Delhi High Court concluded in the said decision (supra) that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it wou .....

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he decisions relied upon by the assessee of the Hon ble Delhi High Court in the case of Infrasoft Ltd. (supra) and Ericson A.B. (supra) but also in the decisions relied upon by the Revenue i.e. Samsung Electronics Company Ltd. & Others (supra), Synopsis International Old Ltd. (supra) and of the Tribunal in the case of Reliance Infocom Ltd. (supra), the different Benches of the High Courts and the Tribunal have been unanimous to hold that as per the law laid down by the Hon ble Supreme Court .....

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x Act is broader in its content. Therefore, the definition of royalty in DTAA is more beneficial to the assessee and hence the case of the assessee is to be examined in the light of the definition of royalty as provided in the DTAA and that the provisions of the DTAA will, in such an event, override the provisions of the Income Tax Act. Since, the Ld. AR of the assessee has stated that the definition of treaty in the DTAA with Singapore is more beneficial to the assessee and that the case of the .....

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of or the right to use any copyright of literary, artistic, scientific work including ….. (emphasis supplied by us). Hence, what is relevant is the consideration paid for the use of or the right to use any copyright . The right to use a computer software/programme has not been specifically mentioned in the treaty with Singapore or even in the identically worded treaty with US and or with any other country. However, the Ld. DR, at this stage, has stressed on the definition of word literary .....

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xt otherwise requires, have the meaning which it has under the laws of that State concerning the tax to which the convention applies. Hence, the reference is to be made to the respective law of the taxing State (India in this case) regarding the definition of literary work and copyright . The relevant part of the Article 3 of the DTAA with Singapore for the purpose of ready reference is reproduced as under: Art 3. (2.) As regards the application of the Agreement by a Contracting State, any term .....

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quality. It must be expressed in some material form, i.e. writing or print or in some form of notation or symbols, which means in a form capable of either visually or audibly recreating the representation of the original work. As per the provisions of section 2(o) of the Indian Copyright Act, 1957 the term literary work includes computer programs, tables and compilations including computer data base. Therefore, the computer software has been recognized as a copyright work in India, if they are .....

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copyright protects the expression of an idea and not the idea itself. The ideas embedded in the software are therefore not protected but the ways by which the ideas are expressed in the source code are protected. 26. In the past, software were often sold as an integral part of the computer system, but now a days, software products are sold or licensed in the form of computer readable media such as diskettes and CD-ROMs or directly over the Internet. Though such floppy disc; the CD-ROM or the Ha .....

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ery specific in their scope, indicating clearly to the purchaser the actions that he/she is permitted to perform in relation to the software embedded in those discs. 27. Now, the question before us is as to whether the sale of shrink wrapped /off the shelf computer software by the non-resident to the resident assessee amounts to the transfer for the use of or the right to use any copyright in a literary work. Before deliberating further in this respect, we think it proper to first discuss the na .....

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omputer software installation and diskettes or the owner s manual. These agreements contain typical clauses on anti-reuse, anti-reverse engineering and limited copyright provision. Sometimes, these may have clauses disclaiming of warranties and liabilities. End user is bound and is considered to have agreed with the license, if he tears open the package. Shrink wrap agreements do not follow the normal practice of an agreement between the parties, where the terms of an agreement are negotiated be .....

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gree and I decline . The I agree or Ok button/icon constitutes agreement to the click wrapped license agreement. Some times when shrink wrapped software is downloaded on the computer, it may again ask to agree to certain terms as in case of Click wrap software. The purchaser or the end user once has clicked the Ok button he has no right to decline the terms of agreement by returning the software. There is no bargaining involved in these licenses whose terms are set by the licensor. 28. Software .....

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cences, the copyright owner retains substantial rights and greater ability to control the use of software. Licence may have provisions relating to the persons who may use the programme, the number of copies that can be made, warranty, limitation of liability, distribution of the software, etc. These are generally biased towards the licensor. 29. The plea raised on behalf of the Revenue is that sale of off-the-shelf software may be easily termed as sale but in such a 'buying', the title t .....

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al property rights; that the copyright is a negative right. It is a bundle of many rights and license is granted for making use of the copyright in respect of shrink wrapped software / off the shelf software under the respective agreement which authorizes the end user i.e. the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and that the same would amount to transfer of part of the copyright and .....

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rnational Old Ltd. (2013) 212 taxman 454 wherein the Hon ble Karnataka High Court has observed that even in case of end-user software license agreement granted for a non exclusive, non transferable, without right of sub license of use of the licensed software and design techniques, that does not take away the software out of the definition of the copyright. Even if it is not a transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in .....

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essary that there should be a transfer of exclusive right in the copyright. That the consideration paid is for rights in respect of copyright and for the user of the confidential information embedded in the software/computer program, therefore, it falls within the mischief of explanation 2 of clause (vi) of sub section (1) of section 9 of the Income Tax Act and there is a liability to pay the tax in India. 30. However, different benches of the Hon ble Delhi High Court in the above cited decision .....

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access to it. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. The Hon ble Delhi High Court has observed that in such a case there is no transfer of any right in respect of copyright to the assessee and it is a case of transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty. The Hon ble Delhi High Court has .....

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OY (2013) 212 taxman 68 wherein the Hon ble Delhi High Court has held that the copyright is distinct from material object. It is intangible, incorporeal right in the nature of privilege, quite independent of any material substance such as manuscript. The transfer of the ownership of a physical thing in which copyright exists comes to the purchaser with the right to do with it whatever he pleases, except the right to make copies and issue them to the public. Just because one has the copyrighted .....

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g crops, grass....' This definition of 'goods' thus includes all types of movable properties, whether tangible or intangible. The Hon ble Supreme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh 271 ITR 401 (2004), has considered computer software as 'goods' and stated that notwithstanding the fact that computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (shrink-wrapped) or .....

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ods.' The Hon ble Apex court while citing the decision of the US court in Advent Systems Ltd v Unisys Corporation (925) F 2d 670 (3rd Cir 1991), held 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, the program is tangible, movable and available in the market place. In such a case, the intellectual property has been incorporated on a media for purposes of transfer. The software and the media .....

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ce or information technology, an intangible asset, but the moment the information or advice is put on media, whether paper or cassette or diskette or any other thing, that what is supplied, it becomes chattel. The Hon ble Supreme Court, thus, held that the intellectual property such as drawings, license and technical material when put on a media is to be regarded as an article and there is no scope for splitting the engineering drawings or encyclopedia into intellectual input on the one hand and .....

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pyright Act 1957 "Computer programme" means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result; As per Explanation 3 to section 9(1)(vi), the computer software has been defined as follows: computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any s .....

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r CD or screen etc. Now a days not only the computer programmes but also the other literary work can be transmitted over the internet from one media/computer to the other media /computer. But these expressions of ideas called literary work including computer programmes can not be read or utilized without downloading or writing them on a media. Hence, though the same as a result of advancement in technology can be transmitted in an intangible form, but to constitute a literary work, these have to .....

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the way or the manner in which such ideas are expressed. 33. Further, it is also not disputed that in case of shrink wrapped software, the product is available off the shelf in the market. The owner or the licensor does not invite any expression of interest from the intending users of the product. He does not grant license by seeing the names and details of the persons seeking the license to use software rather the situation is a diagonally opposite. The license is not granted to any specific p .....

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re in the shape of restrictions or limitations to the effect that the buyer will not misuse the product which may amount to infringe of copyright in the product. So what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the paper/cover are the conditions of sale restricting misuse and can not be said to be license to use. However, the purchaser is entitled to perform all or any of the activities which is essent .....

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the expiry of which the same becomes unusable, he in-fact receives the price for the expected life of the work and product. In such case the purchaser pays the price for the product itself and not the license to use. 34. The next contention of the Revenue is that in case of software Licenses, the copyright owner gives a license to use the copyright in the software and that the owner of software exercises power over not only the software itself but also over people who may wish to use the softwar .....

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s sold is the CD ROM or diskette wrapped in a transparent cover and in a paper put inside the cover, the conditions of use along with restrictions and limitations of use of the said article/product are mentioned. In our view, the sale of such a CD ROM/diskette is not a license but it is a sale of a product which of course is a copyrighted product and the owner of the copyright puts the conditions and restrictions on the use of the product so that his copyrights in the copyrighted article or the .....

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ftware license is that the user will not infringe the copyrights in the product of the copyright owner of the work. The purchaser is always entitled to fair use of the work which he has purchased. Thus at the most, what can be said to be granted under such a license is the right to use the copyrighted work and the right to use the copyright itself in the work. What is prohibited through these conditions is its misuse which may infringe the rights of the owner of the software e.g. the purchaser o .....

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rstly there are severe doubts about the enforceability of such agreements. In the so called internet license agreement, the end user is supposed to click the icon I agree which means that the end user has agreed to the terms of the license agreement. However, it may be noted that such agreements do not ask the name or address or other details of the user. It is not mentioned in such type of agreements that who is using the product. It is the computer upon which such software is loaded that can b .....

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nt it is not known who is actual user or which person actually has violated the terms of the agreement. Suppose, in case of a company a product is purchased by the staff of the company, for its use in regular course of work or business of the company and an employee of the company while installing the software on the computer in the office of the company clicks the button or the icon I agree and thereafter such an employee or any other employee of the company violates any condition of the licens .....

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nforceability of such a license is highly doubtful. So far as the legal enforceability of such a Licence Agreements is concerned, in spite of the fact that it may fulfill all the requirements of a valid contract, such an agreement may not be enforceable, if, its stipulations conflict with the law governed in the country where such licenses are intended to be enforced, or if it is an unconscionable or unreasonable bargain. In computer software, generally it is the tendency of software producers t .....

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fair use that copy of software even without a license from the software publisher and any condition put in a license restricting the fair or reasonable use of the product purchased by the buyer in that respect will have to be ignored. If the license severely limits the rights of the consumers, such as implied conditions and warranties in a contract, it cannot be enforced. If in the license agreement, there are certain conditions which are in violation of the provisions of the Contract Act, then .....

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d are generally not read by the other party/buyer of the product, should be fair and any unfair condition restricting the users rights relating to the goods or the services availed of, which can be held to be unreasonable and against the public policy, cannot be enforced. Thus these licenses create a clear conflict between copyright law and contract law, which have different purposes and objectives. The technological restrictions such as encryption technology and transactional design having rest .....

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he user/purchaser of the product. It is also a determinative factor as to whether the property in the goods after buying off the shelf product in case of shrink wrapped software has passed on to the purchaser or not as per the provisions of Sale Of Goods Act 1930. 37. As discussed above, in case of shrink wrapped software, the work is embedded in the diskette/CD ROM which is when sold to the buyer in retail transaction as in case of sale of goods and consequently on the completion of the sale, t .....

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lly required for the fair use and for the purpose for which the product is purchased by the buyer. 38. It may also be pointed out here that even, if, such a license agreement is not signed by the end user still the owner of the product will have the copyrights in such a product, as are defined and explained under the Indian Copyright Act; even the registration of the product or the work under the Copyright Act is not compulsory. The owner of the work is deemed to be protected in relation to the .....

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work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it cannot be said that the user has infringed the rights of the purchaser, who in fact has paid the consideration to use the copyrighted work. The use of information in the work by the purchaser for which he purchases such a product/diskette/CD ROM is thus comes within the scope of fair use. Copyright does not protect the fair or exclusive use .....

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n specifically excluded from patentable items under the Patents Act, 1970. 40. At this stage, we think it appropriate to discuss here the relevant provisions of the Copyright Act, 1957 also. The copyright has been defined under section 14 of the Copyright Act, 1957 as under: 14. Meaning of copyright - For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorize the doing of ay of the following acts in respect of a work or any substan .....

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k; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-cls. (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in cl. (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the pr .....

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pyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act- (i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or (ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware and had no reasonable ground for .....

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all apply to the import of one copy of any work for the private and domestic use of the importer. Explanation.- For the purposes of this section, the reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an "infringing copy" 42. Certain provisions of section 52 of the Copyright Act which are relevant are also reproduced as under: 52. Certain acts not to be infringement of copyright.-(1) The following acts shall not cons .....

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ed; or to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied; (ab) the doing of any act necessary to obtain information essential for operating inter-operability of an independently created computer programme with other programmes by a lawful possessor of a computer programme provided that such information is not otherwise readily available; (ac) the observation, study .....

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as under: 57. [Author s special rights. (1) Independently of the author s copyright and even after the assignment either wholly or partially of the said copyright, the author of a work shall have the right- (a) to claim authorship of the work; and (b) to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work which is done before the expiration of the term of copyright if such distortion, mutilation, modification or other act wou .....

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acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work and as per section 51 of the Act, copyright in a work shall be deemed to be infringed when any person without license granted by the owner of the copyright or in contravention of the conditions of a license so granted does anything, the copyright of the owner is stated to be infringed. However a perusal of the above provisions of the Copyright Act also reveals that even in some cases unauthorized uses of .....

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s for certain other exceptions and the doing of such acts as mentioned under section 52 is not considered as infringement of the copyright as per the statute. In case of software, it has been provided that making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme from such copy in order to utilize the computer programme for the purpose of which it was supplied or to make back-up copies purely as a temporary protection against loss, destru .....

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ing of copies or adaptation of computer programme from a personally and legally obtained copy from non-commercial personal use, have been excluded from the definition of infringement of copyright. Even import of one infringed copy of the work for private and domestic work of the importer has been excluded from the scope of infringement of Copyright under the Act. 45. It is also pertinent to mention here that the Income Tax Act does not specifically include the computer software in the term liter .....

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tion of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Cop .....

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published outside India, the author on the date of publication, if the author is dead, at the time of his death, should be citizen of India. In case of unpublished work, the author on the date of making of a work should be a citizen of India or domicile in India. Section 40 of the Copyright Act 1957, provides for International Copyrights. As per the section 40 of the Act, the Government of India may by an order published in the official gazette direct that all or any provisions of this Act shall .....

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however, put certain restrictions on the rights in works of foreign authors first published in India wherein it has been provided that if a foreign country does not give adequate protection to the works of the Indian authors, the Central Government may direct that such of the provisions of the Act as confer copyright on works first published in India of the foreign authors shall not apply. So if a foreign country recognizes the copyrights of the Indian authors in their copyrighted work, the Indi .....

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he foreign author are to be examined in the light of the Copyright Act and the relevant treaty or the convention, if any, signed by India with that country to which the foreign author belongs. The copyright in a foreign product thus does not flow automatically or impliedly, so far as the Indian copyright laws are concerned. 48. Hence, while interpreting the definition of royalty as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the copyright its .....

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Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957. 49. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, suc .....

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s Company Ltd. & Others (supra) while relying upon Article 3 sub section (2) of the DTAA with US as the identically worded article being there in almost all the tax treaties with other countries, that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it is under the laws of that State concerning the tax to which the convention applies. In view of above, when we see the definition as per the statutory provisions/domestic law of the cou .....

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of the statute and as held by the Hon ble Delhi High Court in the case of Infrasoft Ltd. (supra), the same would amount to the sale of a goods and the acts done such as downloading of the same to the computer or making backup copies etc. would be the necessary acts for enabling the use of the product and would not amount to the transfer of copyright or right therein, but only the transfer of the copyrighted product and thus will not be covered under the definition of royalty under DTAA. The cons .....

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the same in any way can not be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 50. Now coming to the facts of the case in hand, the DRP has given a specific finding of fact that what the assessee in the present case has purchased is the shrink wrapped /off the shelf software. It has also been discussed in detail in paras above that the definition of royalty given in the treaty is more beneficial to the assessee as compared to the .....

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nly in respect of the scope of royality under the DTAA. 51. In view of our detailed discussion made above, the assessee can not be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of good by the owner. The consideration paid by the assessee thus as per the clauses of DTAA can not be said to be royalty and the same will be outside the scope of the definition of royalty as .....

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