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2017 (3) TMI 142 - ITAT KOLKATA

2017 (3) TMI 142 - ITAT KOLKATA - TMI - Tds U/S 195 - Grant of license - P.E. in India - whether the sums paid by the Appellant to NPL is in the nature of “Royalty” chargeable to tax in India has to be decided - Whether the definition of ‘Royalty’ as provided under the Income Tax Act is to be taken or that which has been provided in the DTAA between India and Singapore? - Held that:- We have to clarify that Explanation-4 to Sec.9(1)(vi) of the Act was inserted by the Finance Act, 2012 w.r.e.f 1- .....

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ses a tax burden on NPL. The question whether Explanation-4 to Sec.9(1)(vi) which was enacted after the DTAA can override the provisions of the DTAA is another question which will be discussed later. Therefore the definition of “Royalty” as given in the DTAA has to be adopted. - whether the term ‘literary work’ as mentioned in the definition of royalty in the treaty would include ‘software’ or not? - Held that:- We are of the view that the view expressed by the Hon’ble Delhi High Court in th .....

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there is no dispute raised by the revenue that NPL was not a tax resident of Singapore and that the benefits of DTAA between India and Singapore cannot therefore be available to the appellant. - The amount paid by the appellant to NPL is not in the nature of royalty within the meaning of the DTAA between India and Singapore and therefore the amount received by NPL would be in the nature of business income which would be chargeable to tax in India under Article 7(1) of the DTAA only if NPL h .....

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tral Government u/s.201(1A) - Decided in favour of assessee - I.T.A No. 673/Kol/2013 - Dated:- 1-3-2017 - Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM For The Appellant : Shri J.P.Khaitan, Advocate For The Respondent : Shri N.B.Som, JCIT. Sr.DR ORDER Per N.V.Vasudevan, JM This is an appeal by the Assessee against the order dated 04.01.2013 of CIT(A)- VI, Kolkata relating to A.Y.2010-11. This appeal arises out of order passed by ADIT (International Taxation)-2 (1), Kolkata u/s 201 (1) and 2 .....

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t. 3. Under an agreement dated 15.12.2008 between the appellant and NPL it was agreed that NPL would grant licence to the appellant herein, a perpetual, non transferable non exclusive non sub licensable right in respect of those components of the software set out in Schedule-I to the said agreement. The preamble to this agreement refers to the fact that NPL is a developer and owner of copyright in respect of various software packages and that the appellant herein is desirous of using the NPL sof .....

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right: 3.1.1 in respect of those components of the Software (together with any Customisations thereof) licensed by reference to the number of users, for up to the Designated Number of Users to Use the specified Version of the Software; and 3.1.2 in respect of those components of the Software (together with any Customisations thereof) licensed by reference to the number of installations permitted, for ITC to install and Use up to the Designated Number of Installations of the specified Version of .....

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allow its customers and contractors to use the Software Licence for this purpose only. NewsPage retains all rights, title and interest in the Software. Source code is not provided with the Software. 3.3 Newspage shall provide ITC all updates to the Software as maybe made available to its customers commercially from time to time. ITC may apply and use any update which NewsPage shall be obliged to provide in respect of the Software at any time, and unless NewsPage prescribes otherwise, the terms .....

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nic means and various other modes and these modes are set out in the said clause. Clause 4 of the agreement regarding other services to be provided by NPL reads as follows :- 4. Services 4.1 Subject to the terms of this Agreement, NewsPage shall provide to ITC the Services more particularly described in Schedule 2 hereto upon the terms therein set forth, and provided always that ITC shall have paid to NewsPage the Charges in connection with the provision of such Services as specified in Schedule .....

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e for the Services provided by such sub- contractors. Clause-5 of the Agreement provides for consideration payable by the appellant to NPL for the rights conferred under the Agreement and the mode of payment of consideration and are not very material for rendering a decision on the issue that arises for consideration in this appeal. Clause 8 of the agreement deals with the intellectual property rights that are conferred under the agreement and it reads as follows :- 8. Intellectual Property Righ .....

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hall be granted to ITC by implication, estoppel or otherwise. All rights, title and interest in and to the Agreed Customisation(s) and Customisation, otherwise commissioned by ITC, including without limitation, any patent, copyright, registered design, trade mark, goodwill or other industrial or intellectual property rights in connection therewith ("ITC IP") shall vest solely and absolutely in ITC and no additional right or license shall be granted to NewsPage by implication, estoppel .....

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oftware; (iv) reverse engineer, decompile, disassemble, or otherwise attempt to derive the source code for the Software, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation (but in such instance only upon prior notification to NewsPage); or (v) otherwise use or copy the Software except as expressly allowed under this Agreement. NewsPage may audit compliance with these terms during normal Business Hours and upon giving at least .....

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ts communication material or any manner whatsoever. NewsPage may cite the performance of the Services to its clients and prospective clients as an indication of NewsPage's experience, without prior approval of ITC, unless ITC and NewsPage specifically agree otherwise in writing. Clause 9 of the agreement regarding confidentiality of information provides that the appellant herein shall maintain confidentiality of information in the form of software it receives under this agreement and it prov .....

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. NPL is a foreign company and is a tax resident of Singapore. Under section 4 of the Act, the charge to tax is on the total income of every person. Section 5 of the Act explains the scope of total income of every person. Section 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received in India and any income which accrues or arises in India or is deemed to have, accrued and arisen in India shall be included in his total income. .....

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d on the terms of the treaty between India and the other country, in this case Singapore. Section 90 of the Act provides that Central Government may enter into an agreement with the Government of any country outside India for avoidance of Double Taxation of income under the Act and under the corresponding law in force in that country. Section 90(2) provides that where such agreement exists with any country outside India, then in relation to an assessee to whom such agreement applies, the provisi .....

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ty the amount paid by the appellant to NPL is not in the nature of royalty then the same, even though it might be in the nature of royalty under the Act, yet would not be chargeable to tax in India by reason of the treaty provisions being more favourable. In such event the amount received by NPL would be in the nature of business income, if arises in the course of NPL s business. Business income would be chargeable to tax in India under Article 7(1) of the DTAA only if NPL has a Permanent Establ .....

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also clarify here that there is a vague reference to the payment in question being in the nature of Fees for Technical Services rendered in para 21 of the CIT(A) s order but the case of the AO as well as the CIT(A) is as to whether the payment in question is in the nature of Royalty and therefore that will be the only issue that arises for consideration in this appeal. 6. The definition of royalty as given in Article-12(3) of the DTAA is as follows: Article 12(3): The term "royalties" .....

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ormation; (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. 7. The stand of the Assessing Officer (AO) was however that the key features of the software that were licenced to NPL showed that the same was for smooth functioning of the business of the appellant and effective management and monitoring of its field formation. According to the AO the software helps in the day to day ad .....

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hereafter formulated the following issues for consideration :- a) What is the concept of royalty? b) Definition of Royalty under domestic law c) Whether sale of copyrighted article or transfer of copyright? d) Position under the treaty law. 8. On the issue of what is the concept of royalty, the AO concluded that consideration paid to a person who has exclusive right over a thing or intellectual property for allowing others to use the thing or intellectual property had to be regarded as royalty. .....

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here that computer software is not specifically set out in section 9(1)(vi) of the Act and it was only by the Finance Act, 2012 w.r.e.f. 1-6-1976 that Explanation 4 was inserted which makes a reference to Computer Software. The discussion of the AO on this aspect is not very important because what is important is to see if the payment in question falls within the definition of Royalty as given in the DTAA as discussed in para-5 of this order and for other reasons that will be set out later. 10. .....

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scientific work including cinematograph films. According to him, mere use in the case of first three categories was royalty and in case of fourth category alone it was necessary that there should be use of copyright right. According to him, the minor differences were- 1) in case of first category, instead of transfer of any right, the treaty uses the word 'right to use' 2) the treaty uses specific words 'copyright of literary, artistic or scientific work' whereas domestic law sa .....

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respect of software once they are classified as process. They are also secret because the source code is not given to the user. The use of secret process implies use of a process which is secret, i.e, not available in public domain. It is not necessary that the secret should be divulged to the user. In the present world of technology, it is possible to allow others to use a process without disclosing the secrecy of the process. For instance software to determine whether a number is prime number .....

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argued that in the case of a book, when the books are sold, it is the sale of copyrighted item but when a right to copy is given to a distributor who in turn makes copies and sales books, it is said that distributor has acquired a copyright right. The payment for copyright rig ht is royalty and not for copyrighted item. According to the AO, the above statement would be correct when dealing with tangible properties like books, paintings, model etc because these are the end products in themselves .....

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ut it does not qualify as a tangible property or a copyrighted item. It comes under the know-how royalty. Similar is the case of software. Even the standardized software will fall under the category of know how royalty. The AO further observed that even if it is presumed that software on carrier media disks or tapes is an copyrighted article and not an intangible property, then sale of software on a CD will not be royalty but if the same software is downloaded on internet with the permission of .....

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yalty and that the appellant ought to have deducted tax at source at the time of making payment to NPL. Consequently the appellant was held as an Assessee in default in respect of the tax that ought to have been deducted at source and consequent liability for tax and interest thereon was imposed u/s.201(1) & 201(1A) of the Act. 13. On appeal by the Appellant, the CIT(A) concurred with the view of the AO. The CIT(A) s conclusions, were similar to the conclusions reached by the AO and hence no .....

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208 (Mumbai) wherein on identical facts, the Hon ble Mumbai Bench of the ITAT held that the payment was not in the nature of Royalty . The learned DR s arguments were on the lines set out by the AO in the order passed u/s.201(1) of the Act. He placed reliance on the decision of the ITAT Bangalore Bench in the case of Vodafone South Ltd. Vs. DDIT(International Taxation), Circule-1(1), Bangalore (2015) 53 taxmann.com 441(Bangalore) for the proposition that as tax deductor, the person making paymen .....

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the payment in question is in the nature of Royalty and therefore this decision in our view will not be of any assistance to the case of the revenue. We will deal with specific arguments in the following paragraphs 15. 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 which has been provided in the DTAA between India and Singapore. So far as the definition of royalty as provided under .....

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ntion, 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 .....

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ographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to (iv), (iva) and (v). 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 (including granting of a licence) irrespective of the medium through which such right is transfe .....

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process, or for information concerning industrial, commercial or scientific experience, including 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. A comparison of the definition of royalty as provided under the DTAA, as reproduced above, with the definition of royalty as provided under the Act shows .....

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uced as under: Art 3. (2.) As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State concerning the taxes to which the Agreement applies. The expression computer software was not specifically defined in the Act or the DTAA prior to insertion of Explantion-4 to Sec.9(1)(vi) of the Act. Therefore prior to such insertion, one has to look at the provisions o .....

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tic, scientific work including. In view of Sec.90(2) of the Act NPL can opt to be governed by the DTAA which is more favourable rather than Explanation-4 to Sec.9(1)(vi) of the Act which imposes a tax burden on NPL. The question whether Explanation-4 to Sec.9(1)(vi) which was enacted after the DTAA can override the provisions of the DTAA is another question which will be discussed later. Therefore the definition of Royalty as given in the DTAA has to be adopted. 18. The next question before us, .....

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by NPL under the agreement dated 15.12.2008 and whether the said right can be said to right to use copyright in computer software. Section 14 of the Copyright Act, 1957 explains the meaning of Copyright 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 substantial part thereof, namely: (a) in the case of a literary, dram .....

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lation 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 programme itself is not the essential object of the rental. 20. .....

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l use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. A combined reading of clause-3 and clause-8 of the Agreement dated 15.12.2008 between the appellant and NPL, clearly shows that the Appellant had only a right to use the computer software and did not have right to use copyright in the computer software. In other words none of the rights as is envisaged under Sec.14(a) or (b) of the Copyright Act, 1957 was conveyed by the agreement dat .....

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have to be included in the term literary work but to constitute royalty under the DTAA, the consideration should have been paid for the use of or the right to use the copyright in the literary work and not the right to use literary work itself. 21. What is the effect of insertion of Explanation-4 in the definition of Royalty in Sec.9(1)(vi) of the Act by the Finance Act, 2012, w.r.e.f. 1-6-1976. The Hon ble Delhi High Court in the case of DIT vs Nokia Networks OY [2012] Taxmann.com 225 (Delhi) .....

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ments to the Act. The relevant findings of the Hon ble Delhi High Court as given in para 23 of the said decision, for the sake of convenience are reproduced as under: However, the above argument misses 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 .....

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declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument affected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instr .....

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Act, 1957. 23. The learned counsel for the Assessee also addressed arguments to the effect that the right to use the software in the present case is akin to sale of copyrighted article rather than sale of copyright. Reference was made to the decision of the Hon ble Delhi High Court in the case of Director of Income Tax Vs. Ericsson A.B., New Delhi ITA No.504/2007 dated 23.12.2007 wherein it was held that the license granted to the licensee permitting him to download the computer programme and s .....

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ct 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 further held that what is transferred is neither can be right in the software nor the use of the copyright in the software, but is the right to use copyrighted material or article which is clearly distinct from the rights in a copyright and the same does .....

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inued to be the owner of the copyright and all other intellectual property rights; license is granted for making use of the copyright in respect of software under the respective agreement and that the same would amount to transfer of part of the copyright. The learned counsel for the Assessee submitted that there is no decision of the Hon ble Calcutta High Court rendered on the issue and therefore where two views are possible on an issue, the view favourable to the Assessee should be followed. I .....

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We are of the view that the view expressed by the Hon ble Delhi High Court in the case of DIT Vs. Ericsson AB, New Delhi (Supra), which is favourable to the Assessee, should be followed and therefore we hold that the consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a .....

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in the context of dispute raised by the revenue that the payee was not tax resident of a country, the benefits of DTAA between India and the said country were sought to be pressed into service by the payer. This is clear from a complete reading of paragraph 37 of the said decision. In the present case there is no dispute raised by the revenue that NPL was not a tax resident of Singapore and that the benefits of DTAA between India and Singapore cannot therefore be available to the appellant. We a .....

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