TMI Blog2017 (5) TMI 916X X X X Extracts X X X X X X X X Extracts X X X X ..... d have no application. As against this there are decisions of Hon’ble Karnataka High Court which are in favour of revenue. In this regard we note that Hon’ble Apex Court in the case of vegetable products [1973 (1) TMI 1 - SUPREME Court] had held that if two constructions are possible one in favour of the assessee should be adopted. Accordingly respectfully following the precedent we follow the Hon’ble Delhi High Court decision. Accordingly we set aside the order of authority below. We hold that the transfer / sale of software in this case is not taxable as royalty. Hence the assessee was not liable to deduct tax at source u/s 195 of the Income-tax Act, before remitting the money to the US supplier. - Decided in favour of assessee. - ITA no.7735/Mum./2011 - - - Dated:- 18-5-2017 - SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER, AND SHRI RAVISH SOOD, JUDICIAL MEMBER For The Assessee : Shri. Arvind Sonde For The Revenue : Shri. Jasbir Chouhan ORDER PER : SHAMIM YAHYA This appeal by the assessee is directed against order of Ld. CIT-A dated 30.08.2011 and pertains to assessment year 2008-09. 2. The grounds of appeal read as under: 1.(a) on the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct TDS u/s. 195 to the extent of ₹ 43,551/- @(10.56%) on payment made to acquire software of ₹ 4,12,413/-. 4. Upon assessee s appeal Ld. CIT-A elaborately considered the issue. He referred to the various decisions including that from Federal Court of Australia. He concluded as under: In a recent judgment dated 12th April, 2011, Federal Court of Australia in case of International Business Machines Corporation v. Commissioner of Taxation [2011] FCA 335, has in respect of Australia USA DTAA had held that the full amount of payments made by IBM Australia to parent IBM is royalty. The definition of royalty in Australia- USA DTAA is almost similar to the definition of royalty in DTAA between India-USA and includes consideration for the use of right to use of any specified IP right or other like property or right. The clause 2(iii) of SLA includes the rights to use IBM programs internally. It has been held in Para 43-45 of the order that IBMA has the non-exclusive rights to do the matters set out in limbs (i) to (v) of clause 2 and it is held as use of IP rights. The payments to the extent they are granted by clause 2 fall within article 12(4)(a)(i) of the treaty i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. Counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by decision of Hon ble Delhi High Court. He further referred to several other case laws of tribunal in favour of the assessee. The submissions of the Ld. Counsel of the assessee which were also before the Ld. CIT-A in brief are as under: The appellant has purchased software for the internal use and is operational software. The appellant was granted non-exclusive perpetual license to use the software enumerated in the agreement solely for internal operation. The general terms and conditions and the restrictions under which the said software is provided to the appellant, under the license agreement are as follows: (i) The appellant has no right to use, copy, duplicate or display the software except as specifically provided in the agreement. (ii) The appellant cannot make more copies of the software than what is specified in the agreement. (iii) The appellant cannot provide access to the software to anyone, other than appellant's employees, contractors or consultants under a written contract by which all of them would be bound by the terms and conditions as are appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i). In the instant case nonexclusive and non-transferable license has been granted to the appellant. As licensee, the appellant is allowed to use the software only for its own business without any liberty to loan, rent, sell, sublicense or transfer the said software or any rights therein. Therefore, it cannot be said that there is any transfer of all or any rights in the software purchased by the appellant. The definition of the term Royalty under the Indo-USA D.T.A.A. is as under: The term Royalties as used in this Article 12(3) means: a) Payments of any kind received as consideration for the use of, or right to use, any copyright of a literary, artistic to use, any copyright of a literacy, artistic or scientific work, including cinematograph, films or work on films, tapes 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, including gains derived from the alienation of any such rights or properly which are contingent on the productivity, or use or disposition thereof, and (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs Nokia Networks QY (358 ITR 259) (Del He) (c) DIT vs Ericsson A. B. (343 ITR 470) (Del He) (d) CIT vs Halliburton Export Inc (ITA No 363 of 2016) (Del He) (e) DDIT vs Reliance Industries Ltd (159 ITO 208) (Mum ITAT) (f) Capgimini Business Services (India) Ltd Vs ACIT (158 ITD 1) (MUM ITAT) (g) ADIT vs. Baan Global BV (ITA No 7048/Mum/2010) (Mum ITAT) (h) Galatea Limited vs CIT (157 ITD 938) (Mum ITAT) (i) ADIT (IT) vs First Advantage (P) Ltd (77 taxmann.com 195) (Mum ITAT) 9. Per contra Ld. DR submitted that though the Hon ble Delhi Court has decided the similar issue in favour of the assessee there are Hon ble Karnataka High Court decisions which are in favour of the revenue. He submitted that the Hon ble Karnataka High Court has decided the issue in favour of the revenue in the cases of CIT V. Synopsis International Old Ltd., 212 Taxman 0454 (Kar.HC), dated:03-08-2010, CIT V Samsung Electronics Co. Ltd. Others, (2011) 345 ITR 0494, Kar HC, dated:15.10.2011, CIT V. Wipro Ltd. (2011), 355 ITR 0284(Kar)/ 203 Taxman 621 (Kar.) HC, dated: 15.10.2011 and CIT Vs. CGI information Systems and Management consultants (P) Ltd., (2014) 48 Taxmann.com 264 (KAR), d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions and perused the records. Before proceeding further we may refer to the relevant law and clauses of DTAA Section 9(1)(vi) : The following income shall be deemed to accrue or arise in India. Income by way of Royalty payable by ( a ) the Government ; or ( b ) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or ( c ) a person who is a non - resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 licence) 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 consideration for the sale, distribution or exhibition of cinematographic 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 3 .-For the purposes of this clause, computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device and includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re similar item and same DTAA with USA was under consideration. The tribunal vide order dated 11.01.2017 had held as under, in favour of the assessee We have heard rival contentions and perused the record . The Ld D . R placed his reliance on various case laws including the decision rendered by Hon ble Karnataka High Court in the case of Cit Vs . CGI Information Systems Management Consultants ( P ) Ltd ( 2014 )( 275 CTR 72 ) , Synopsis International Old Ltd ( 2013 )( 212 Taxman 0454 ) and CIT Vs . Samsung Electronics Co Ltd ( 2011 )( 245 CTR 0481 ) in order to support the order passed by the AO . On the contrary, the Ld A . R submitted that the assessee has obtained only license to use the software . He submitted that the assessee is entitled to use the software for its internal business operations only ( Clause 1 of the agreement ). He submitted that the clause 2 ( b ) of the agreement curtails the rights of the assessee and reads as under : 2 ( b ) Licensee may not ( i ) ( other than accessing the Software as contemplated by this Agreement ) attempt to circumvent any security device or licensing restriction contained in the software; ( ii ) assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions, perused the relevant finding given in the impugned order and also the various decisions, cited before us . The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of royalty or business income . In case, if it is a business income, then admittedly, assessee being a non - resident company with no permanent establishment in India, the same will not be taxable in India and if it is a royalty , then it has to be taxed at the rate of 15 % as provide under the treaty . Thus, the only issue for consideration is, whether the said payment falls within the terms of royalty under Article 12 ( 4 ) of India - Netherland DTAA or under 9 ( 1 )( vi ) of Income Tax Act . Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the treaty provisions . Briefly recapitulating the relevant facts for the purpose of our adjudication emanating from the impugned order is that, Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, 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 patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience . Thus, in order to tax the payment in question as royalty , it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12 . The main emphasis on the payment constituting royalty in Para 4 are for a consideration for the use of or the right to use any copyright .......... The key phrases for the use or the right to use any copyright of ; any patent ....... ; or process , or for information ......... , ; or scientific experience , etc . , are importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramme, - ( 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 being copies already in circulation; ( iv ) to include the work in any cinematograph film; ( v ) to make any adaptation of the work; ( vi ) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub - clauses ( i ) to ( iv ) ; ( d ) In the case of cinematograph film, ( i ) to make a copy of the film, including a photograph of any image forming part thereof; ( ii ) to sell or give on hire, or offer for sale or hire, any copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty as given therein should be read into the DTAA . We are unable to appreciate this contention of the Ld . DR because the retrospective amendment brought into statute with effect from 01 . 06 . 1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of royalty . The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of royalty in the same line . The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable . Here in this case, the royalty has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA . A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision . Thus, we do not find any merit in the contention of the Ld . DR that the amended and en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon the user of the copyright and not a lump sum payment as was the position in the present case. Once the payment in question was not royalty which would come within the mischief of clause (vi) the Explanation to section 9(1) would have no application. The payment received by the assessee was towards the title and GSM system of which soft- ware was an inseparable part incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment, therefore could be classified as payment towards royalty. 16. From the above case laws it is amply clear that it has been held that the software sold by M/s. Minitab Inc USA to the assessee fell into the category of copyrighted article against acquisition of copyright which qualified as royalty payment. Furthermore Hon ble Delhi High Court had held that even if the item was regarded as royalty payment as defined in explanation to Section 9(1)(vi) nevertheless the DTAA would prevail where royalty is dependent upon the use of the copyrights and not a lump sum as was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the owner s copyright. (TCS vs. State of AP distinguished as being in the context of sales-tax); 18. We have also noted the submission of the Ld. DR that the seller of the software has a copyright upon it. That distinction between copyright and copyrighted article was originally coined by the US Internal Revenue Service. He had also submitted that this interpretation is supportive of internal revenue of the USA as majority of the software and the copyrights originate from USA. By terming such transfer of software which are under copyright in the USA as copyrighted article the software sellers of the USA where taken out of the ambit of taxation of the other countries which were purchasing/acquiring the software. Furthermore Ld. Counsel of the assessee has pleaded that after the insertion of explanation iv to Section 9(i)(iv), this software sale has also come under the ambit of royalty. However Hon ble Delhi High Court has applied the static approach under which domestic law as at the time of the entering of the DTAA is applied and not the domestic law as prevailing as which the ambulatory approaches mandates. He has further submitted that eminent author Klaus vogel has al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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