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2016 (3) TMI 540 - ITAT DELHI

2016 (3) TMI 540 - ITAT DELHI - [2016] 48 ITR (Trib) 229 - Treating 'Business receipts' towards sale of software as 'Royalty' - Held that:- Para 6 of Article 13, to the extent applicable, states that the provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise throug .....

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er which the provision of Article 7 (Business profits) of this Convention shall apply. On the fulfillment of the conditions in the first part of para 6, the amount shall not be considered as 'royalties' under paras 1 and 2 of Article 13, but shall fall for consideration under Article 7 of the DTAA, being, 'Business profits'. There is no dispute on the fact that the assessee is a UK company having its branch office in India (which is its permanent establishment) and the transactions in question a .....

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ofits) to Article 13 (royalties), being contrary to the mandate of the DTAA, is liable to be and is hereby set aside. Thus we approve the assessee's stand on the sale of computer software as business profits, by jettisoning the Revenue's viewpoint of royalty. - Decided in favour of assessee.

Receipt towards Annual maintenance contract - Held that:- AO finally treated receipts from annual maintenance contract as part of Royalty covered under section 9(1)(vi) of Article 13(3), as having .....

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e, we want to clarify that we have not independently examined the character of receipt from annual maintenance contract as `Royalties' or 'Fees for technical services'. It is so because of the AO himself finally holding it to be of the same character as the sale of software, and thus royalty covered under Article 13(3) read with section 9(1)(vi) and not Fees for technical services covered under Article 13(4) read with section 9(1)(vii).- Decided in favour of assessee.

Receipts from tr .....

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ia, for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article. This shows that in so far as consideration for services that are ancillary, subsidiary, and inextricably linked to the sale of property described in paragraph 3(a) of the Article 13 is concerned, the provisions of para 4 apply. If however, consideration is for services that are ancillary, subsidiary, and inex .....

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is ancillary and subsidiary to the sale of software, the same, being covered under para 5, cannot be treated as 'Fees for technical services' as per para 4 of Article 13 of the DTAA. Ex consequenti, we allow this ground by approving the assessee's stand of including such receipts under Article 7 of the DTAA.- Decided in favour of assessee.

Estimation of income from business at the rate of 18% on Consultancy receipts and Miscellaneous income - Held that:- We find that the AO has estima .....

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ngly held these two amounts be included in the income of the assessee as originally declared. - Decided in favour of assessee - ITA No. 5651/Del/2010 - Dated:- 14-3-2016 - Shri R. S. Syal, AM And Shri A. T. Varkey, JM For the Petitioner : Shri V.K. Aggarwal, AR For the Respondent : Shri Anuj Arora, CIT, DR ORDER Per R. S. Syal, AM This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C(1) of the Income-tax .....

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9;). The Indian branch is engaged in the activity of providing specialized mining software solutions, developed by its Group, to mining industry in India. The assessee, inter alia, declared 'Software sales' of ₹ 1,04,18,783/- in its Profit & Loss Account as business receipts. During the course of assessment proceedings, the assessee was asked to submit various Agreements including the license agreement under which software were claimed to have been sold to end-users. After goin .....

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39;process' to the customer who 'use' the process while carrying out their business. In the backdrop of this factual matrix, the AO held that the consideration for software license falls within the definition of Royalty' under section 9(1)(vi), clauses (i), (iii) and (v) of Explanation 2 of the Act and also Article 13(3)(a) of Indo-UK Double Taxation Avoidance Agreement (hereinafter called the DTAA'). The assessee failed to convince the Dispute Resolution Panel (DRP) on its l .....

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any in respect of income from its branch office in India. The short controversy before us is to decide the nature of receipts amounting to ₹ 1.04 crore which the assessee claims as Business receipts' from sale of software, whereas the Revenue has held it to be Royalty'. Chain of transaction of sale of mining solutions is that the Indian branch receives orders of software from end users; such orders are then placed by the Indian Branch to its head office; the Head office, in turn, p .....

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e the Distributor's Agreement, a copy of which has been placed at page 125 onwards of the paper book. As per this Agreement, the Distributor (the assessee, Datamine International Ltd., including its Indian branch office) purchase licenses of defined Software Products from Datamine Corporate for reselling or renting to End Users and for the supply of maintenance and related services to the Products. It has been categorically mentioned that: 'This Agreement is not Royalty Agreement; it con .....

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t provides that the Corporate shall make available to the Distributor a reasonable number of Not-For-Resale copies of the Products to allow the Distributor to market the Products. It has specifically been provided that: 'the Distributor may not copy the software except for reasonable back-up purposes, nor shall the Distributor sell or pass on these Not for sale copies to any other organization'. Clause 4 of the Agreement contains Obligations of Distributor', whose relevant part oblig .....

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t all times with Datamine Corporate ... and do not pass in any way to the Distributor'. It further provides that the Distributor agrees that the Products are proprietary information and trade secrets of Datamine Corporate for which the distributor shall maintain the confidentiality. Para 8.2, which is quite relevant for our purpose, provides that the : Distributor shall not attempt to register any Trade Mark, logos, company name, ... that may be identical to or confused with those already ow .....

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anyone except by way of sale of Software Products. 5. Now, we espouse the End user Agreement' between Datamine Corporate Ltd. and the end-user of the software products, who purchases such software through the assessee, a distributor of the software product. A copy of this Agreement is placed at page 122 onwards of the paper book. Clause 'Usage rights' clearly states that Datamine Corporate Ltd. (DCL) grants to the end user: 'the perpetual right to use the number of seats of the .....

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nder:- "Under this agreement you may: a. Install the software on any number of computers over which you have control; b. make copies of the software in machine readable form for backup purposes; c. make copies of any documentation for your use only; and d. execute as many simultaneous copies of the software products as you have purchased seats. You may not: a. Contrive for the software to be executed by more than the number of simultaneous users for which you have purchased seats; b. modify .....

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an install the software on any number of computers, make copies for back up purposes for his own use only but with the qualification that he cannot operate/execute simultaneous copies of the software product more than the purchased seats. For example, if three copies of a product are purchased, these three software can be installed in any number of computers, but, at a time the usage cannot by of more than three seats. If only one copy is purchased, that can be installed by the end customer on a .....

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pies purchased. It further shows that intellectual property rights vest in Corporate alone and the end user has simply a right to use the product, which is albeit perpetual. 7. Under such circumstances, the question arises as to whether the sale of software can be treated as Royalty' as held by the authorities or Business receipts' as canvassed by the assessee. The ld. AR was fair enough to concede that Explanation 4 to section 9(1)(vi) inserted by the Finance Act, 2012 with retrospectiv .....

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nd thus going by the language of Article 13 of the DTAA as so amended, the case of the assessee falls within the same. 8.1. We first take up the contention of the ld. DR that the retrospective amendment to the provisions of the Act should be considered for determining the taxability of the amount even under the DTAA. This contention, in our considered opinion, is partly correct. Any amendment carried out to the provisions of the Act with retrospective effect shall no doubt have the effect of alt .....

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governing the deductibility of the expenses, the same shall apply under the Treaty as well. 8.2. Article 3(3) of the DTAA provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning tax to which the Convention applies. The nitty-gritty of Article 3(3) in the present context is that if a particular term has not been defined in the Treaty but the same has been defined in the Act and further .....

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its provisions. An amendment to a Treaty can be made bilaterally after entertaining deliberations from both the countries who signed it. If there is no amendment to the provision of the Treaty but there is some amendment adverse to the assessee in the Act, which provision has been specifically defined in the Treaty or there is no reference in the Treaty to the adoption of such provision from the Act, then such amendment will have no effect on the DTAA. 8.3. Reverting to the facts of the extant c .....

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of Royalties' as per Article 13 of the DTAA. As such, it becomes vivid that the contention of the learned Departmental Representative that the retrospective insertion of Explanation 4 to section 9(1)(vi) should be read into the DTAA also, cannot be accepted. 9. Now we proceed to evaluate the contention of the ld. AR that the provisions of the DTAA do not permit taxability of receipt from sale of software as Royalties', defined as per Article 13, whose relevant part reads as under : - ART .....

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e tax so charged shall not exceed :...... (3) For the purposes of this Article, the term "royalties" means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for informat .....

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y also be taxed in India. As the assessee is a resident of UK, income from royalties arising in India, is otherwise chargeable to tax in India at the stipulated rate of tax. But in order to tax any amount under this Article, it is sine qua non that the receipt must fall within the scope of Royalties' as defined in para 3 of the Article 13. The AO has enclosed the case of the assessee within sub-para (a) of para 3. It is apparent that sub-para (b) of para 3 of Article 13, dealing with conside .....

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s, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 11. The Department has covered the case with in the four corners of this Article on two counts. First is that the consideration from the alleged sale of software is nothing, but, for use' of 'process'. In our considered opinion, this ap .....

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ts in-built processes or technology which facilitated in the manufacturing of a refrigerator. In the same manner, several processes may be involved in making a computer software, but the customer uses the software as such and not the processes involved into it. We, therefore, refuse to accept the view point of the Revenue that the assessee received consideration from end users for the use of or the right to use any process'. 12.1. As regards second count, the ld. DR accentuated on the langua .....

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e is no specific mention of computer software' in para 3(a) of the Article 13 along with literary, artistic or scientific work, patent, trademark etc. Such language of the DTAA is in sharp contrast to the specific use of the term computer software' or computer software programme' together with literary, artistic or scientific work, patent, trademark etc. in many DTAAs. To illustrate, Article 12 of the DTAA between India and Malaysia defines 'Royalties' to mean payments of any .....

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graph films...'. Similarly, the DTAA with Turkmenistan also defines Royalties' in Article 12 to mean : 'payments of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work, ..... computer software, any patent, trade mark...'. It is thus clear that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the conce .....

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overed with in any of the terms specifically mentioned in the Article, such as information concerning commercial experience etc.', then also the instant sale consideration cannot be brought within the purview of Article 13. This is for the reason that in order to be covered with in the scope of this Article, it is necessary that user should get a copyright of information concerning commercial experience' etc. and not the output or products of literary work', or information concerning .....

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omers have been given a copyright of the software or the software as such. The ld. DR harped on the relevant parts of the assessment order to put forth that it has been specifically mentioned in the End user Agreement that the customer gets simply the right to use the product under the license, which is non-transferrable. It was argued that there are several restrictions placed as per the terms of the license which prevent the customer from using it as per its own sweet will. 12.4. This contenti .....

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storing of it in any medium by electronic means, ii. to issue copies of the work to the public not being copies already in circulation, iii. to perform the work in public, or communicate it to the public, iv. to make any cinematograph film or sound recording in respect of the work, v. to make any translation of the work 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 clauses (I .....

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lready in circulation." 12.5. When we consider the relevant parts of the End user Agreement, it clearly emerges that the customers have not been assigned any of the things which have been mentioned in section 14 of the Copyright Act, so as to constitute an assignment of a copyright of the computer software to the end user. Insofar as the view point of the ld. DR about the taking of copies of the Software by the end customer is concerned, we find that the same is for self use and thus covere .....

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e back up copies purely as a temporary protection against loss, destruction or damage in order only to utilize the computer programme for the purpose for which it was supplied;" 12.6. We have discussed supra the relevant clauses of the End user Agreement and seen what has been precisely transferred to the end users of the software. It clearly emerges that none of the elements of Copyright' as mentioned in section 14 of the Copyright have been transferred to the end user inasmuch as he c .....

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puter software and not copyright of a computer software. As the DTAA treats consideration for the use of copyright of a literary or artistic work, etc. as royalties, there can be no question of including consideration for the use of a literary or artistic work, etc. within the ambit of Royalties' as per Article 13(3)(a) of the DTAA. 12.7. There is another dimension of this issue. While going through the Distributors Agreement, we have noted that the assessee has simply purchased shrink-wrapp .....

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TAA as the same is a consideration for sale of a copyrighted product and not use of any copyright. 13.1. Now we take up the contention of the ld. DR that provisions of section 9(1)(vi) should be applied to determine the taxability of the amount. It was contended that as the ld. AR has admitted the amount of sale of software covered under Explanation 4 to section 9(1)(vi), the same should be taxed as such. 13.2. In this regard, we find that sub-section (1) of section 90 of the Act provides that t .....

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om such agreement applies, ' the provisions of this Act shall apply to the extent they are more beneficial to that assessee'. The crux of sub-section (2) is that where a DTAA has been entered into with another country, then the provisions of the Act shall apply only if they are more beneficial to the assessee. In simple words, if there is a conflict between the provisions under the Act and the DTAA, the assessee will be subjected to the more beneficial provision out of the two. If the pr .....

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iew has been taken by the Hon'ble Bombay High Court in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.). In the light of the above discussion, it becomes vivid that if the provisions of the Treaty are more beneficial to the assessee vis-a-vis its counterpart in the Act, then the assessee shall be entitled to be ruled by the provisions of the Treaty. We have held above that amount from sale of software falls under Article 7 (Business profits) and not under Article 13 (Royalties). S .....

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en if the view point of the AO is accepted for a moment, with which we do not really agree, that such amount falls under para 3(a) of Article 13, in our considered opinion, even then the amount cannot be taxed as Royalties' because of the operation of para 6 of Article 13, which reads as under : - "6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carri .....

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or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply." 14.2. Para 6 of Article 13, to the extent applicable, states that the provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment s .....

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icle 7 (Business profits) of this Convention shall apply. In other words, on the fulfillment of the conditions in the first part of para 6, the amount shall not be considered as royalties' under paras 1 and 2 of Article 13, but shall fall for consideration under Article 7 of the DTAA, being, Business profits'. There is no dispute on the fact that the assessee is a UK company having its branch office in India (which is its permanent establishment) and the transactions in question are sale .....

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le 13 (royalties), being contrary to the mandate of the DTAA, is liable to be and is hereby set aside. 15. In the final analysis, we approve the assessee's stand on the sale of computer software as business profits, by jettisoning the Revenue's viewpoint of royalty. This ground is allowed. 16.1. The next item in dispute is receipt of ₹ 36,69,021/- towards Annual maintenance contract. The assessee declared such amount as business receipts and offered it accordingly. The AO treated t .....

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herefore, held this amount to be falling under clause (vi) of Explanation 2 below section 9(1)(vi) of the Act. In the next para, he again held this amount as royalties' under the DTAA. Thereafter, he discussed the relevance of para 4 of Article 13 of the DTAA, being 'Fees for technical services.' He also held such receipts as falling within the description of 'Fees for technical services' within the meaning of Article 13(4)(a) of the Indo-UK DTAA. In the ultimate analysis, he .....

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e nature of business receipts covered under Article 7 and not Article 13 of the DTAA. Going by the AO's own version of receipts from annual maintenance contract having the same character as that of software sales, we consequently hold such receipts also falling under Article 7 of 'Business profits'. 16.3. Before parting with this issue, we want to clarify that we have not independently examined the character of receipt from annual maintenance contract as Royalties' or 'Fees f .....

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cussion in the assessment order about the nature of training receipts except one line written on page 31 of the assessment order treating training fees of ₹ 9.62 lac as 'Fees for technical services' under Article 13 of DTAA. The assessee is aggrieved against this treatment given by the authorities as against its claim of business receipt covered under Article 7 of the DTAA. 17.2. We have heard the rival submissions and perused the relevant material on record. Primary question in th .....

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ndering of any technical or consultancy services (including the provision of services of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this article is received; or (c) make available technical knowledge, expe .....

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es for technical services'. It is noticeable that provisions of para 4 are subject to paragraph 5. It means that if a payment falls under para 5, then it shall be removed from para 4, even if it is covered within that. When we read para 4 in juxtaposition to para 5 of the Article 13, the position which follows is that whereas Article 13(4) defines the term "fees for technical services" to mean payments, inter alia, for rendering of any technical or consultancy services that are anc .....

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ancillary, subsidiary, and inextricably linked to the sale of property described in paragraph 3(a) of the Article 13 is concerned, the provisions of para 4 apply. If however, consideration is for services that are ancillary, subsidiary, and inextricably linked to the sale of property other than that described in paragraph 3(a) of the Article 13, then it falls in para 5 and thus cease to be fee for technical services' as per para 4 of Article 13. While discussing the nature of receipts from .....

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