TMI Blog2017 (4) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... ause no such rights has been given by the assessee to the IT Service providers. Further by making use or having access to the computer programs embedded in the software, it cannot be held that either WIPRO/IBM are using the process that has gone into the software or that they have acquired any rights in relation to the process as such. The software continues to be owned by the assessee and what WIPRO/IBM is getting mere access to the software. The source code embedded in the software has not been imparted to them. Hence, there is no use or right to use of any process as held by the learned AO. Hence, the finding of the learned CIT(A) that the payment in question cannot be reckoned as “royalty” is factually and legally correct and the same is upheld. Thus, we hold that for all the years the payments received by the assessee from WIPRO/IBM in pursuance to the MSA cannot be treated as “royalty” under Article 12(4) of the India-Netherland DTAA. Thus, the matter is decided in favour of the assessee and against the revenue - ITA No.5051/Mum/2009, ITA No.3818/Mum/2011, ITA No.729/Mum/2012 - - - Dated:- 15-3-2017 - Shri Amit Shukla, JM Shri Ashwani Taneja, AM For The Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any application software, emails, computer repairs and maintenance etc., desktop, laptop and workstation support; - Services related to Wide area network (WAN) and Local area network (LAN) for connection to the global servers; and - Facilitating teleconferencing and video conferencing services. 4. The assessee company had entered into Master Service Agreement (MSA) with certain IT service providers viz., WIPRO IBM. Pursuant to such agreement, these IT service providers could enter into separate agreement to provide IT services to Shell Group entities including its entities in India. In order to provide such IT services by WIPRO IBM, they were required to have access to network and software of the assessee company. Before the AO, the assessee vide letter dated 04.12.2008 have made elaborate submission on services rendered by the assessee and why the payments received by the assessee for such provision of services is not taxable as royalty in India. For better understanding the same is reproduced herein below:- 3. Detail submissions describing whether the services rendered by SITI BV can construe to fall within the definition of royalty or fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -resident for Indian tax purposes. Accordingly, SITI BV could be assessed as per the provisions of the Act or as per the Treaty, whichever is more beneficial to SIT/ BV. In view of the same, the non- taxability of the services rendered SIT/ BV has been examined under the provisions of the Treaty. 3.5.4 Article 12(4) of the Treaty defines the term royalty as follows: payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 3.5.5 As discussed above, SITI BV is engaged in providing IT services to Indian entities. It does not provide any right to use any copyright of literary artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experience. 3.5.6 Even under the agreements entered into with WIPRO and IBM, SITI BV only provides them access to the softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is software is a process used by a computer to achieve desired results and to arrive at this conclusion he referred to the decision of ITAT, Delhi Bench in the case of Asia Sat. He also held that if software is classified as a process , it will also be secret because the source code is not given to the user. Thus, the payment for use of software is, in fact, use of secret process . Lastly, he held that the basis structure of the term royalty under the treaty is the same as in domestic law and, therefore, use of software could continue to be a process. In a way he tried to cover up the concept of royalty on software under all the possible limbs and scope of definition as enshrined in article 9(1)(vi) read with Explanation 2. Accordingly, he taxed the entire payment as royalty and since the tax rate under the DTAA was 10%, therefore, he taxed the royalty @10%. 7. The learned CIT(A) after considering the entire gamut of facts and submissions made by the assessee, observed that the agreement for supply of software provided to WIPRO/IBM was for mere use and access the copy righted software of the assessee. The assessee does not provide them the right to use the copy right e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal. 8. We have heard the rival submissions made by the parties before us and also perused the relevant finding given in the impugned orders as well as the material referred before us at the time of hearing.As stated earlier, the assessee had entered into service agreement (MSA) with WIPRO/IBM to provide IT services to various Shell Entities. Under this agreement, the assessee provides restricted software / network access and related IT support services to WIPRO/IBM. Before us, the learned counsel submitted that the relevant articles and clauses given in the Master service agreements are very relevant to understand the nature and concept of software services provided as well as to examine, whether there is any payment received, which can be reckoned as royalty within the terms of Article 12(4) of India Netherland DTAA, because the assessee has sought benefit under the treaty in terms of section 90 of the IT Act. The relevant terms of service agreement, copy of which are appearing in pages 35 to 40 of the paper-book are reproduced here under: Preamble WHEREAS A. SITI and IT Service Provider have entered into a MSA ('as defined' below) under which IT Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is not practical to Include a list to this Agreement of all the mandatory GI client software that may be provided by SITI as part of the GI Services, because the list of mandatory GI client software is subject to regular change, however the mandatory GI client software provided to the IT Service Provider shall be the same as the mandatory GI client software provided by SITI to other Shell Companies that use the same equipment as used by the IT Service Provider in order to provide the MSA Services. STO Services shall mean the services as specified in Exhibit A, section II ARTICLE 3. PROVISION OF SERVICES. SITI shall provide the IT Service Provider with the Services. SITI shall at its sole discretion be entitled to subcontract any part of the Services to a Third Party orThird Parties, but S117 shall remain solely responsible for the provision the Services. The IT Service Provider shall not subcontract nor delegate any of its rights and/or responsibilities under this Agreement to a Third Party without SITPs prior written consent. In the event of delegation or sub-contracting by the IT Service Provider the IT Service Provider shall remain solely responsible for its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice Provider fromaccessing and/or using certain Optional Software or request the Service Provider to stop accessing and/or using certain Optional Software. SI71 also reserves the right to unilaterally amend the specific terms and conditions for access and/or use of the GI software and/or Optional Software, as may be set out in Exhibit A, section III. In the event that SUL at its sole discretion, stops the IT Service Provider from accessing and/or using certain Optional Software, or requests the IT Service Provider to slop accessing and/or using certain Optional Software, and the IT Service Provider does require such Optional Software in order to be able to provide MSA Services, SITI shall use reasonable endeavours to provide the IT Service Provider with sufficient prior notice in order to enable IT Service Provider to acquire a license or any other permission from the applicable Third Party licensor to access and use such Optional Software or a substantial equivalent, so that the IT Service Provider shall continue to be able to provide MSA Services. In the event that SITI requests the Service Provider to slop accessing and/or using certain Optional Software (unless Optiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Service Provider's and/or the Service Personnel s .failure to use corrections or enhancements made available directly or indirectly by SITI; or (c) the IT Service Provider's and/or the Service Personnel s use of the GI software or Optional Software otherwise than in accordance with this Agreement. Provided the exceptions of the foregoing paragraph do not apply, if the IT Service Provider's and/or the Service Personnel's access or use of the GI software or Optional Software in SITI's reasonable opinion are likely to be held to be infringing, SITI shall at its option and expense take one or more of the following actions in order to procure the right for the IT Service Provider and the Service Personnel to continue to use and/or access the GI software or Optional Software in question; I. replace the GI software or Optional Software in question with a noninfringing equivalent. i.e. having substantially equivalent functionalities and features, provided however that such non-infringing equivalent will continue to enable the IT Service Provider to provide MSA Services; or 4. modify the GI software or Optional Software ui question to make it noninfringin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all return to SITI as soon as reasonably possible all the GI software and all Optional Software together with the associated documentation, including ('but not limited to) manuals relating to the GI software and Optional Software, license certificates etcetera, which are in the IT Service Provider's possession. 8.3. Termination, of Provision of a Sub Service. In the event that the IT Service Provide,' no longer requires a certain Subservice provided under this Agreement in order to provide MSA Services, the IT Service Provider shall inform SITI there and the provision of such Sub-service will be terminated and the IT Service Provider shall n longer be charged to Fees applicable to the Sub-service iii quest/u/i. If provision by SIT! to the IT Service Provider of access to and/or use a/UI software and Optional software is terminated, the IT Service Provider shall, unless the UI software and all Optional Software has already been remotely removed by SITI, return to SITI as soon as reasonably possible all the GI software and all Optional Software together with the associated documentation, including (but not limited to) manuals relating to the GI software, or Optional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Services by SITI to the IT Service Provider. In the event that Service Personnel encounter problems while using the Services the Service Personnel shall follow the problem management procedures/instructions as provided by SITI. Section II STO Services STO services are the end-to-end connectivity services provided by SITI, by means of which the IT Service Provider shall be provided with a connection to (certain parts of) the IT network of Shell Companies. Section III In addition to the terms and conditions stated in this Agreement the following specific terms and conditions of access and/or use apply: Al the date of signature of this Agreement, other than the provisions already set out in this Agreement, no specific terms and conditions of access and/or use the GI software and Optional Software provided by SITI there under apply. 9. From the aforesaid articles of the Master Service Agreement, learned counsel submitted that from the reading of Article 3 it can be noted that right granted to WIPRO/IBM shall not be passed on/transferred to any other person and only WIPRO/IBM are legally permissible to exercise those rights. Article 4 merely grants right to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be said that WIPRO/IBM are using the process the process that has gone into the software or that they have acquired any rights in relation to the process as such. Lastly, he contended that access to software/network is not the use of copyright but the use of copyrighted article and, further referring to the relevant definition in section 13 14 of the Copyright Act, he submitted that there is no use or right to use of any copy right and does not fall within the ambit of royalty as covered under DTAA. In support he relied upon the following decisions before us:- DIT v. Infrasoft Ltd [2013] 39 taxmann.com 88 (Del- HC) ADIT v Baan Global B V [2016] (ITA 7048/Mum/2010 CIT v. Halliburnton Export Inc. [2016] ITA 363/2016 (Del-HC) DIT v. Nokia Network OY [2012] 25 taxmann.com225 (Del-HC) DIT v. Ericsson A.B. [2012]246 CTR 422 (Del HC) DDIT v. Solid Works Corpn [2012] 18 taxmann.com 189 (Mum Tri) Galatea Ltd. v. DCIT [2016]67 taxmann.com 190 (Mum- Tri) Capgemini Business Services (India) Ltd. vs. ACIT [2016] 68 taxmann.com 36 (Mum-Tri) DDIT v. Reliance Industries Limited [2016] 69 taxmann.com 311 (Mum- Tri) Aspect Software Inc. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Act 1976 and thereaf ter, Explanation 3 to 6 and explanation below S.9(2) are only clarificatory provisions inserted subsequently. vi) For the purpose of the present appeal, the def inition of royalty as applicable has been defined both under the DTAA as well as I.T. Act and the issue is regarding the application of Explanations (clarif icatory provisions) inserted in the Act into the DTAA by virtue of article 3(2) of the DTAA. vii) The said decision in the case of Siemens AG, supra was rendered in 2008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act 2007 doing away with the requirement of PE for Royalty etc. viii) In the case of Siemens AG, supra, the basic question before the Hon'ble HC was whether the def inition of Royal ty as per Explanation 2 to S.9 inserted by the Finance Act 1976 w.e.f. 01-06-1976 could be imported into the old DTAA (1960) when at the relevant point of time of application of treaty, Royalty was not def ined both under the then DTAA and the I.T. Act and what was the character of payment under the DTAA. ix) It is not disputed by the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n provided to the UT service provider for its own business purpose and they do not get any right in the said software. The access to software is not for use of any copyright albeit for a copyrighted articles during the course of providing service. The agreement clearly envisages that WIPRO/IBM shall use the software only for providing services to Shell entities and cannot alter or modify the software. Since the assessee is a resident of Netherland therefore, such a payment has to be seen in terms of Article 12(4) of DTAA, which reads as under:- The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. From the plain reading of the article it can be inferred that, it refers to payments of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work including cinematograph films, any pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (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. (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to them. Hence, there is no use or right to use of any process as held by the learned AO. Hence, the finding of the learned CIT(A) that the payment in question cannot be reckoned as royalty is factually and legally correct and the same is upheld. 15. Apart from that now there are various decisions of Hon ble High Court including that of Hon ble Delhi High Court in case of DIT vs. Infrasoft Ltd., reported in [2013] 39 Taxmann.com 88, wherein host of other decisions have been referred and relied upon. In the A.Y. 2008-09, the learned CIT (A) has relied upon the decision of Hon ble Karnataka High Court in the case CIT vs. Samsung Electronics Co. Ltd. [2013]345 ITR 494 and some other decisions of the Tribunal. We find that the Hon ble Delhi High Court has taken note of this fact and also analysed the payment of software within the ambit of royalty as defined under Article 12 of the India US Treaty. The relevant observation and finding of the Hon ble High Court is as under: 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 licence) in respect of copyright of a literary, artisti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Court in Director of Income Tax V. Ericsson A.B. (2012) 343 ITR 470 wherein identical argument with respect to whether consideration paid towards supply of software along with hardware rather software embedded in the hardware amounted to royalty. After noticing several contentions of the revenue, this Court held in Ericsson A.B. (supra) as follows: 54. It is difficult to accept the aforesaid submissions in the facts of the present case We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any of the copyrights referred to in Section 14 (b) of the Copyright Act, 1957. 55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income -Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and proposition laid down by the Hon ble Delhi High Court. Thus, in view of the finding given above, we uphold the order of the CIT(A) that the payment received by the assessee for sums amounting to ₹ 3,75,25,291/- does not amount to royalty within the meaning of Article 12(4) of Indo-Netherland DTAA and accordingly, the same is not taxable in India. Since, admittedly, the assessee has no PE in India; therefore, same cannot be taxed as business income under Article 7. Accordingly, ground raised by the revenue stands dismissed. The aforesaid decision clearly clinches the issues in favour of the assessee. 16. So far as the reading of amended definition of royalty as given in section 9(1)(vi) into treaty as contended and argued by ld. CIT DR, we find that, Hon ble Delhi High Court in its latest judgment in the case of DIT vs. New Skies Satellite, reported in [2016] 95 CCH 0032,wherein their Lordships shave discussed the issue threadbare and came to the conclusion in the following manner:- 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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