TMI Blog2016 (5) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... ose, modify, merge etc. the software except for archival purposes and not allowed to exploit the computer software commercially. On identical facts and circumstances, honourable Delhi high court has held that what is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article, which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be chargeable to tax as business income. Therefore respectfully following the decision of Honourable Delhi high court we hold that that consideration received by the assessee on sale of software is not chargeable to tax as royalty such as equipment royalty, process royalty etc. Under Article 12 of DTAA but as business income under article 7 of the INDO Finland DTAA. - Decided in favour of assessee. - ITA No.5411/Del/2010, ITA No.5587/Del/2011, ITA No.699/Del/2013 - - - Dated:- 12-4-2016 - SHRI A.T.VARKEY, JUDICIAL MEMBER AND SHRI PRASHAN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That on the facts and circumstances of the case in law, the Ld. AO/ DRP erred in not allowing the TDS credit for the payments received on net of tax contracts in spite of charging to tax the gross amount of the payments. 5. That on the facts and circumstances of the case in law, the Ld. AO/DRP erred in not applying the correct conversion rate on the grossed up amount of USD 39,55,712 and coming to the wrong INR equivalent of ₹ 17,17,49,104/-. 6. That on the facts and circumstances of the case in law, the Ld. AO erred in applying the tax rate of 15% on all the receipts without appreciating that the agreements entered with Vodafone Essar and Idea Cellular were post June, 2005 and accordingly receipts, even if treating the same as royalty thereof ought to be taxed at the rate of 10% in view of the provisions of section 115A of the Act. 7. That on the facts and circumstances of the case in law, the Ld. AO/DRP erred in levying the interest under section 234A and 234B of the Act. 3. The assessee has raised the following grounds of appeal in ITA No.5587/Del/2011 for the Assessment Year Assessment Year: 2008-09:- 1. That on the facts and circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the same as royalty thereof ought to be taxed at the rate of 10% in view of the provisions of section 115A of the Act. 6. That on the facts and circumstances of the case in law, the Ld. AO/DRP erred in levying the interest under section 234B of the Act. 4. The assessee has raised the following grounds of appeal in ITA No. 699/Del/2013 for Assessment Year: 2009-10:- 1. THAT on the facts and circumstances of the case in law, the impugned order passed by the Assistant Director of Income Tax, Range - 1, (International Taxation) New Delhi ( Ld. AO ) under section 143(3) read with section 144C of the Income-tax Act, 1961 ( the Act ) is bad in law and void ab-initio. 1.1 THAT on the facts and circumstances of the case in law, the Ld. AO grossly erred in assessing the income of the Appellant at ₹ 52,94,74,960/- as against the nil income declared by the Appellant in the return of income. 2. THAT on the facts and circumstances of the case in law, the Ld. AO/DRP erred in holding that the receipts in the hands of the Appellant from sale of standard software are in the nature of royalty under section 9(1) (vi) clauses (i), (iii), (iva) (v) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case and in law, the Ld DRP grossly erred in not disposing of the objection raised by the Appellant in relation to taxing the receipts on account of the invoices raised directly on customers after grossing up the same. 5.1 THAT on the facts and circumstances of the case in law, the Ld. DRP erred in not issuing any direction to the Ld. AO who erred in grossing up the receipts without appreciating that the same can be done only in the hands of the payer for the purpose of deduction of taxes and not for computing the income 6. THAT on the facts and circumstances of the case in law, the Ld. AO/DRP erred in levying the interest under section 234B of the Act. 5. Based on above grounds of appeal it is apparent that for all the three appeals facts, Assessment order and order of DRP is similar and therefore the grounds of appeal of assessee are similar. Hence we first take up the appeal of Assesseefor 2007-08, discuss facts of the case, rival arguments and our decisions and reasons therefore. Then we will follow the same for respective subsequent two years i.e. A. Y. 2008-09 and 2009-10. 6. Hence, Ground 1 to 3 of the appeal of the assessee are taken up first and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance Agreement between India and Finland ( DTAA/ Treaty‟). 11. Therefore, it is important to analyze the nature of software in consideration. This was explained by the assessee and there is no dispute about that which is as noted by ld. AO as under :- 3. Nature of the Software licenses granted to parties in India : As per the website of the assessee, Comptel Dynamic OSS (Operations Support Systems) products and solutions focus on fulfillment, resource management, convergent mediation and charging. Our expertise allows Communications Service Providers (CSPs) to focus on their core business: developing and delivering innovative and profitable services, collecting usage information and charging customers . Comtel s products and solutions are designed to adapt to all common telecoms network and IT environments and to evolve to meet the demands of future services . 3.1 The software is delivered at the site of the end customer. The assessee, regarding the nature of software, on 07.10.09 submitted the following: Meaning of Mediation Software s Comptel Mediation and Charging Solutions collect the convergent real time usage data to ensure accu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accurate and timely billing cycles thanks to the immediate creation of subscriber bills on the basis of the collected real-time usage data Moreover, the solution allows various charging options, meaning that billing can be based on volume, content value, QoS (Quality of Service) or lime, or any combination Of these. Comptel Instant Link release 6 introduces a new combination of customer-driven enhancements and innovative product features It also includes a renewed provisioning logic configuration tool Instant Link Business Service Tool 3, which provides an easy-to-use front-end for flexible ^ service creation and management For example, the superior configuration ability provided with Instant Link Business Service Tool 3 gives operators the much-needed flexibility for competitive reactions, differentiation in service launches Furthermore, the variety of usability, and maintenance improvements now introduced are based on the continuous dialogue with our customer base and targeted to personnel responsible for daily operational tasks. The further, description of the software as per the website of the assessee are: 1. Comptel Convergent Mediation is the scalable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up to 80 million subscribers in one installation. Comptel Charging is built on top of Comptel's award-winning, patented Mediation and Charging Platform used by over 1 80 customers around the world. It has a proven track record of providing communications service providers with a future-proof solution for all 3G, NGN and IMS services. 4. Business Model: The assessee has submitted a detailed note on the business model along with the arguments on taxability built in on 07.10.09. The same is reproduced betow: The Assessee has already submitted that for the purpose of selling the softwares, it has entered into an agreement with IBM United Kingdom Ltd, which is the Channel Partner of the Comptel for the purpose of Sale and delivery of the mediation softwares. The agreements in this regard have already been filed by the assessee as hereunder: -Base Agreement dated February 1, 2003 -Master Statement of Work dated February 1, 2003 -Statement of Work between IBM Global Services India Pvt Ltd and Comptel Corporation effective from November 22,2004 to November 21 ,2013 Relevant clauses of the agreements and interpretation thereof is provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Services hereunder) as well as rights pertaining thereto, including but not limited to paten!, copyright and trademark rights or any other legally protected proprietary right, shall belong to and remain exclusively with Supplier. Buyer acquires only the right to transfer the EULA in respect of the Program Products to Customer strictly in accordance with this Agreement, and does not acquire any right of ownership, title or interest in the Program Product by virtue of such transfer. All rights not expressly grouted to Buyer are reserved by Supplier. Buyer acknowledges that the Program Products and its sequences, structure and organization are property of Supplier, that Supplier retains exclusive ownership thereof, as set forth above, and that ihe same constitutes Confidential Information of Supplier that shall be subject to (he undertakings as !o confidentiality and non-use set forth in the AECI. A perusal of the aforementioned clause makes it obvious that all the intellectual property rights along with title and interest m the program products are the property of the assessee the buyer only acquires a right to transfer the EULA to its end customers. End User License Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the contract. Therefore, what the customer is getting is a machine readable copies of a standard software which can be used for the internal operations in the business of the customer. The above mentioned clause provides that at no point of time the assessee has transferred the Intellectual Property Rights in the nature of patent, copyright and trademark etc. and ownership of the same remains with the assessee only. What the customer has got is only a right to use a copyrighted article which is a standard software? This fact is also evident from the restrictions put by (he assessee on the customer to use the standard software as hereunder: Quote 1. Restrictions The End User acknowledges and aggress not to, and not to permit others to (unless, and to the extent only as, permitted by a express provision contained in these Terms and Conditions): (a) reproduce, copy, publish, display, disclose, rent, lease, sub-license, modify', loan, distribute or create derivative works based on she licensed Standard Software, or any part thereof ; (b) translate, reverse engineer, decompile, disassemble, re-engineer or otherwise attempt to discover the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inventions means ideas, designs, concepts, techniques, inventions, discoveries or improvements, whether or not patentable, conceived or reduced to practice by Supplier Personnel in Performance of this Agreement. Joint Inventions means inventions made by Supplier Personnel jointly with Buyer Personnel. No Invention shall be regarded as a joint Invention unless the Personnel of both Parries have contributed significantly thereto Unless the Buyer is able to produce sufficient evidence to the contrary, all inventions in relation to the Program Products shall be regarded as having been made solely by the Supplier or its Personnel and shall vest exclusively in the Supplier. Participation Agreement or PA means an agreement signed by one or more Affiliates which in cooperates by reference the terms and conditions in this Base Agreement, the SOW attached hereto, and other attachments or appendices specifically referenced in the P.A. Services means work that Supplier performs far Buyer as described in a SOW for Customer, Statement of Work or SOW means either (A) the document attached to this Base Agreement which describes the Deliverables and Services, incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs the rights in this sublicense all to the extent as is necessary to support the relevant customer as aforesaid. 8.3 Tools Supplier will not include Tools in Deliverables unless they are listed in the relevant SOW, For the sole purpose of supporting the Customer as expressly specified in the relevant SOW, Supplier grants Buyer nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared derivative works of such Tools as have been prepared by it and to use, have used, execute, reproduce, transmit, display, perform, transfer, distribute, and sublicense such Tools or their derivative works, and to grant others the rights granted in this Subsection all to the extent as is necessary to support the relevant Customer as aforesaid. 8.4 Invention Rights Supplier owns Inventions. Supplier grants to Customer an irrevocable, nonexclusive, worldwide, perpetual, paid-up license under Inventions (including any patent applications filed on or patents issued claiming Inventions) to use the relevant Deliverables in accordance with and subject to the End User License Agreement, For the sole purpose of supporting the Customer as expressly spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor liable for violations. Buyer may install and test Program Products for Customer without additional license charge. For recurring charge licenses, Buyer will notify Supplier when to begin invoicing Customer, if applicable AH title to, ownership of and interests in the Program Products shall belong to and remain exclusively with Supplier, as more in detail defined in the MSOW The Program Products supplied and licensed hereunder shall be limited to Object Code (such term being defined in the MSOW), 9.3 Exceptions to Indemnification Supplier shall not be liable to Buyer, Buyer's personnel or Customer, and shall have no obligation to indemnify Buyer, Buyer's Personnel or Customer not taken any other action as set out in Section 9-2 for Infringement: 1 . in case Buyer, its personnel or Customer make any authorized changes or modifications to the Deliverables when (he claim would not have occurred but for such changes or modifications; 2. which are based upon use of the Deliverables, or any part thereof, in combination with software not supplied by the Supplier would have been avoided in the absence of such combination, or any use of the Deliverables in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, including property owned by third parties but provided to Supplier Personnel by Buyer ( Buyer Assets ), Supplier Personnel: 1. will not remove Buyer Assets only from Buyer's or Buyer's Customer's premises without Buyer's authorizations; 2. will use Buyer Assets only for purpose of this Agreement and reimburse Buyer for any unauthorized use; 3 . will only connect with, interact with or use programs, tools or routines that Buyeragrees are needed to provide Services; 4. will not share or disclose user identifiers, passwords, cipher keys or computer dial port telephone numbers; and 5 in the event the Buyer Assets are confidential, will not copy, disclose or leave such assets unsecured or unattended., Buyer may periodically audit Supplier's dam residing on Buyer Assets. 12.5 Supervision of Supplier's Personnel Supplier will provide continual supervision of its personnel provided under this agreement, at no additional cost to buyer. Supplier s supervisor shall have full supervisory authority over all day to day employment relationship decision relating to supplier s personal including those decision relating to wages, hors, te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer (referred to generally in this SOW as SOW for customer ), detailing the specific Deliverables and Services and other terms as may apply for the specific Customer that have been identified in the relevant SOW for Customer. A SOW for Customer will always include as an integral part the Supplier's Standard Statement of Work ( STOW ), a template of which is attached hereto as Attachment , 4. Subject to Section S5.10 ( Prior Communications and Order of Precedence ), of the Base Agreement except as otherwise explicitly slated in such a SOW for Customer the terms of this SOW and the Base Agreement shall be deemed to be incorporated in that SOW for Customer, 2. DEFINITIONS Acceptance Criteria means the criteria specified in an Acceptance Test Specification,which criteria the Deliverables shall be required to meet during an Acceptance Test Acceptance of Functional Specifications means Buyer's review and acceptance of the Functional specification in accordance with Section 4.4 hereof. Acceptance Tests means the tests proposed by Buyer and accepted by Supplier whereby Buyer shall establish whether the Deliverables substantially fulfill the Acceptance Crit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and other marketing sales literature provided by Supplier to Buyer for Buyer's use in performance of marketing activities. Buyer's use of Marketing Materials may include transmission of them through electronic marketing services. Productive Use means use of the deliverables in Customer's ordinary operating environment (other than in connection with an Acceptance Test). Ready For Acceptance1' or RFA means a written notification by Supplier to Buyer thai the Deliverables are ready for the Acceptance Tests. Ready For Installation or RJFI means a written notification by Buyer to Supplier of Buyer's having satisfied the conditions specified herein and in SOW for Customer (including the STOW), such (hat Customer's Systems are in a ready for installation stale. Supplier Maintenance Support means the services described in Attachment in which are based on Supplier's standard maintenance and support services to be provided lo Customer. The terms set out in Attachment 3 may be changed by the Supplier from time-to-time, as the Supplier shall in its sole discretion deem fit. Except as may be otherwise agreed in writing by b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort tasks to ensure the successful and timely deployment of Program Products for testing by Buyer and/or Customer 4.6 Training Services lo Buyer Upon Buyer's request. Supplier will provide training in Helsinki, Finland or oilier locations as may be agreed by the parties, to Buyer and such Buyer Personnel that the parties agree as having a need support the basic sales, implementation and support of program products, at no additional charge. a) At least two training sessions for Program Products stated herein; and b) At least one fining session for each Major Enhancement release of a Program Product The parties shall review find agree training requirements for Program Products upon execution of this SOW Any further training sessions shall be agreed to in each P,A. Upon Buyer's reasonable request, supplier also agrees to provide without charges, training to buyer on the implementation and systems integration of program products, including customization or modification of program products to support customer s systems as has been agreed in an SOW for customer and/ or STOW. Unless otherwise agreed by the parties, Supplier's obligation to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormity with the Functional Specification for a Deliverable or sets of Deliverables, and submit for Supplier's preview and acceptance within (unless otherwise specified in the relevant SOW for Customer) a period not less than six (6) weeks prior to the date of issue of the RFA in respect of a Deliverable or sets of Deliverables agreed in the relevant SOW for Customer Supplier shall notify Buyer in writing of its acceptance (or rejection) of Acceptance Test Specification no later than five (5) business days thereof If the Supplier rejects the Acceptance test Specification proposed by Buyer, then the notice shall include a detailed description of the portions of the Acceptance Test Specification not accepted and the reason for the rejection. In case Supplier has not Buyer of its rejection of the Acceptance Test Specifications within the relevant, then they will be deemed accepted by Supplier. Acceptance Test Failure IF, during any Acceptance Tests, the Deliverable fails to meet the Acceptance Criteria, Buyer shall promptly provide written notice to Supplier of such Failure, listing the Errors in reasonable detail Supplier, with appropriate support from Buyer, shall use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of providing the Buyer's relevant personnel with the requisite skills so as to enable the Buyer to supply certain Program Products to Customers designated by the parties. Program Product Evaluation License for Customers Supplier shall upon Buyer's reasonable request and subject to a relevant SOW for Customer, grant Buyer the right to offer a non-charge and limited period evaluation license to potential Customers, subject to the terms and conditions of the then current Supplier software evaluation license agreement End User License Agreement Program Products provided by Buyer to Customers will be subject loan EULA. Buyer will provide Program Products to customers under the terms of tie EULA Supplier shall be entitled to refrain from delivering Program Products to a Customer until relevant Customer has signed the EULA and furnished such signed copy to Supplier The current version of Supplier's EULA is as appended hereto as Attachment 1 Buyer is not a party to the EULA and does not assume any obligation for violations of it In the event Buyer reasonably requests that Supplier modifies the EULA to comply with compelling legislation of a country in the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Buyer shall not and shall not permit others to, save as expressly set out in this Section 6, (i) reproduce, copy, publish, display, disclose, rent, lease, sub-license, modify, loan, distribute or create derivative works based on Program Products, or any part thereof; (Si) translate, reverse engineer, decompile, disassemble, re-engineer or otherwise attempt to discover the Source Code or the structural framework of Program Products, or any portion thereof. Buyer shall reproduce all copyright, trademark and other proprietary notices affixed to the Program Products, and/or any portion thereof; as applicable, on all copies made pursuant to the Agreement, Buyer agrees never to remove any such notices or any other form of product identification. Program Products The parties hereby agree that all title to, ownership of and interests in all or any portion or component of the Program Products (whether Deliverables or not and including all updates, upgrades, modifications and enhancements thereto, and related documentation therefore, if any, whether licensed heralds or provided in connection with the provision of any Services hereunder) as well as all rights pertaining theret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out published or established license fees For Program Products in respect of which Supplier has no published or established license fee Program Products for new implementations, new offerings and certain licensing configurations as may be determined by Supplier, Supplier shall provide Prices for such Program Products in its response to Buyer's request for proposals and quotations to support specific Customer bids. Supplier agrees that the Prices for such Program Products shall in any event not be less favourable than the rate that it offers to other similar companies with similar engagements. Notwithstanding the above, in the event that Prices for Program Products do not facilitate Buyer's ability to offer competitive pricing for Customer bids that the parties have agreed to be significant bids. Supplier agrees to consider, whether it would be commercially viable lo provide additional discounts or reductions to Prices, to enhance or facilitate Buyer's ability to offer more competitive pricing to Customer. Unless otherwise agreed by die parties in writing, any changes to Prices above for such significant Customer bids shall only apply for the specific Custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as defined in the specific SOW for Customer, consistent with quotations submitted by Supplier or as may be subsequently agreed by the parties. Where Services relate to provision of STOW, the Price for such Services shall be charged on a time and material basis. In the event that Buyer requires significant Services for a Customer engagement and where use of Supplier's standard services rates substantially limits Buyer's ability to be cost competitive in Buyer's pricing proposals to Customer, Supplier agrees to review Prices offered for such Services and consider providing discounts off its standard professional service rates, provided, however, that the Supplier is not obliged to provide any discounts that it does not see as commercially viable. 11-4 Buyers Terms of Payment Except as otherwise stated in a SOW for Customer, Buyer's payment shall be made net forty-five (45) days from date of receipt of invoice by Buyer shall be deemed to have received each invoice latest on the dale that the relevant invoice is sent per facsimile to Buyer, as confirmed by the transmission report of the facsimile machine. Title: Statement of Work Mater Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ER charging interface (implemented by Cornprel according to Ericsson Diameter Specifications) o Comptel Online Link provides Usage Detail Records (UDRs) to HSS/BMS. The UDRs are generated by OL according to default foimat, Further mediation is a responsibility of receiving system. Coraptel Online Link NS Lookup interface - this does not include configuration of DNS Server and MS Lookup utility and DNS data population. Configuration of tables for the Lookup Server - this does not include population Ihese tables. Any other items that Comptel may require to provide this that are not included ID IBM's responsibilities, 3.0 DESCRIPTION OF DELIVERABLES AND SERVICES The following Deliverables shall be supplied by the Supplier lo the Buyer: Comptel Licenses, as detailed in Exhibit C: Coinptel Online Link Basic License o Lookup Server License Comptel Online Link NE Interface to D2CP Volu BiU e Comptel Online Link NE Interface to Ericsson IN (Diameter) Compte! Documentation, as detailed in Exhibit A: Comptel Online Link 2.2 Customer Library TOC Comptel Onlbe Link 1.2 Release Notes Comptel Online Lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within Buyer and Customer organizations in a timely fashion. 6.2 The Buyer agrees lo provide timely review and approval of project deliverables, and to facilitate timely review and approval of project deliverables by the Customer. 6.3 Prompt notification of problems and issues that will impact conformance to the Buyer's obligations stated in this SOW or in the Agreement. 6.4 Provide the end customer (Bharti Tele Ventures Ltd) with the 1 line support services, as further defined in Exhibit D. 7,0 MUTUAL RESPONSIBILITIES No changes can be made lo this SOW without the prior written agreement of both parties. The detailed responsibilities are illustrated in Exhibit A 8.0 DELIVERY SCHEDULE/PROJECT PLAN This is attached in Exhibit A, 9.0 PRICE AND PAYMENT SCHEDULE The Bill Material and indicative Pricing, based on projected growth over the Gamine 10 years, is attached as Exhibit C Please note that the years given in Exhibit C are calendar years, with year 1 being 2004. The Comptel product licenses and delivery services provided for year 1 arc sold at a fixed price, in Euros. It is important to note that while Comptel in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate ruling on the day of invoice, The applicable withholding tax will be deducted from the amount payable to Comptel And TDS certificate will be released on regular frequency. 11.0 TRAVEL EXPENSE GUIDELINES As per the Agreement 12,0 OTHER CLAUSES Outsourcing License Subject to the due payment by buyer of all agreed consideration defined in this SOW, Supplier grants to Buyer a non-exclusive, non-transferable (except as defined herein below), non-sub licensable and personal right and license to use the Program Products for the performance of outsourcing services for the exclusive benefit of Bharti Tele Ventures Ltd.(outsourcing services) Subject to the preceding sentence the terms and conditions of the supplier s EULA (attachment to the Master Statement of Work) shall be applicable to buyer (as if buyer were the customers) Buyer shall have the right to assign the license to use the program products to its customer at no additional cost, provided that buyer gives supplier thirty (30) days prior written notice of its intent to assign such rights and provided further that buyers customer signs supplier s end user license agreement (EULA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of shrink wrapped software is not taxable in India by stating that the licensing of computer software involves limited right to use 'copyrighted' material does not give rise to any royalty income. For this, he submitted a chart demonstrating the facts before the Honourable Delhi high court are on identical issue. Therefore he submitted that Accordingly, in all circumstances, the case of the Appellant is covered by the judgment of Hon‟ble Jurisdictional High Court wherein the Hon‟ble High Court on similar facts held that receipts are not in the nature of royalty and not taxable in India. S.No. Facts Comptel OYJ Infrasoft Ltd. 1. Subject matter of transfer is a standard software used for a particular industry Used for Telecom industry Used for civil engineering work 2. Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be used in accordance with the Agreement 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Act or under the Treaty; rather it is business income of the appellant. e) His next argument was the an income to be categorized as royalty, twin conditions should be satisfied i.e. there has to be consideration and this consideration should be for transfer of all or any right (including the granting of the license) in respect of the copyright, patent, invention, design, secret formula or process, scientific work. Accordingly, unless the payment is made for acquisition of a right to use a copyright , the payment cannot be regarded as royalty under Explanation 2 to section 9(1) (vi) of the Act. According to him, the payment received by the Appellant is not for acquisition of a right to use a copyright , but is for acquisition of a copyrighted article and, therefore, the consideration cannot be assessed as royalty. f) On the aspect of definition of Royalty as per Indo FINLAND DTAA he submitted that definition of royalty as per article 13(3) of the Treaty is narrower than the definition contained under section 9(1) (vi) of the Act. According to him under the Treaty the income of the Appellant should have been generated by the use of or the right to use of any copyrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axmann.com 225 (Delhi) Director of Income tax v. Nokia Networks OY where honorable high court has considered the retrospective amendment in section 9 of the Income tax Act for and held that amendment cannot be read in to the treaty. 18. We have carefully considered the rival contentions. We have also perused the decision of Honorable Delhi High court in case of [2013] 39 taxmann.com 88 (Delhi) Director of Income taxv. Infrasoft Ltd. In that decision, also the assessee was developing customized software to be used for designing highways, railways, airports, ports, mines, etc. The software so customized was licensed to an Indian customer and the branch office of the assessee in India performed services involving interface to peripheral installation and training etc. On the sale of software revenue raised similar objection which are as under :- 11. With regard to the definition of royalty as given in Section 9 (1) (vi) of the Act as well as Article 12 of the DTAA, the AO came to the conclusion that the amount received by the Assessee company from sales/licensing of the software was royalty in terms of the said definition. The reasoning of the AO to arrive at this conclusion is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther exploits for commercial purposes. This clearly falls under definition of 'royalty'. 19. In that decision honorable Delhi high court has held that the consideration of sale of software is not royalty as under :- 84. To further elucidate the nature of the transaction in the case of the Assessee it is necessary to examine some of the clauses of the Licensing software agreement entered into by the Assessee with its customers: INFRASOFT LICENCE AGREEMENT. 2. GRANT, SUPPLY AND USE OF LICENSE Infrasoft grants Licensee a non-exclusive, non-transferable license to use the software in accordance with this Agreement and the Infrasoft License Schedule. The license is perpetual unless identified as being for a specified term in the Infrasoft License Schedule. Any third party software incorporated in the software is licensed only for use with the software. Infrasoft will supply one copy of the software for each site and, when applicable, one set of support information to the Licensee. Licensee shall pay Infrasoft a fee for additional copies of any printed support information supplied by Infrasoft. Licensee may make one copy of the software an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty or use), import or other duties and whether levied in respect of this Agreement, the Software its use or otherwise. All such taxes shall be the responsibility of the Licensee and shall be payable in addition to the license fee. Infrasoft advises the Licensee that the Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. 4. ** ** ** 5. OWNERSHIP, INTELLECTUAL PROPERTY AND INDEMNITY All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. Infrasoft warrants that it has the power to grant the license rights contained in this Agreement. 85. The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including license in respect of copyright. Copyright or even right t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. 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. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere 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 either under the Income-tax Act or under the DTAA. 92. The licensees are not allowed to exploit the computer software commercially, they have acquired under license agreement, only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nourabel Delhi High court. They are similar as to non-exclusive, non-transferable and user restrictions of the software i.e. the software has to be used in accordance with the Agreement, all the intellectual property rights in the form of patent, copyright, trademark etc. are the property of the seller only and at no point of time same has been transferred to either the buyer/ customer, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. The Agreement categorically restricts the user to copy, publish, display, disclose, modify, merge etc. the software except for archival purposes and not allowed to exploit the computer software commercially. On identical facts and circumstances, honourable Delhi high court has held that what is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article, which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, 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 transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersy in 25 taxmann.com 225 (Delhi) Director of Income-tax v. Nokia Networks OY* as under:- 23. It will be of relevance to point out that Section 9 of the Act has been amended vide Finance Act, 2012. The following provisions have been added to Section 9 of the Act vide sub-Section (b) of Section 4 of the Finance Act, 2012 seeking to clarify the scope of clause (vi) of sub-Section (1) of Section 9 of the Act:- Explanation 4:- For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, properly or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not - (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly by the payer; (c) The location of such right, property or informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information is in India (iii) To amend section 9(1)(vi) to clarify that the term 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. These amendments will take effect retrospectively from 1st June, 1976 and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years. On the basis of this amendment made effective from 1.6.1976, Mr. Parasaran argued that the above amendments are only clarificatory in nature depicting the Parliament intention viz; (i) the medium through which the software is transferred itself will not affect the taxability of the royalty payments made for the transfer of right to use or actual use of the software in India by a non-resident. (ii) It is not necessary that the actual software be transferred to an Indian user or in fact used in India so long as the right to use has been transferred to a resident taxpayer for valuable consideration. He, thus submitted that the question of copyrighted arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite , when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 26. In the above decision of Honourable High court decision of Honorable Madras High court in case of Verizone Communication Singapore Pte 361 ITR 575 was considered and not followed holding that:- 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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