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National Stock Exchange of India Ltd, Versus DDIT (IT) RG 4 (2) , Mumbai

[2017] 57 ITR (Trib) 514 - TDS u/s 195 - payment made to M/s. Minitab Inc., USA for acquisition of software by treating the same as ‘royalty’ - DTAA between India and USA. - whether purchase of computer software does not amount to business receipts? - Held that:- There is a direct Hon’ble Delhi High Court decision in the case of DIT vs Ericsson [2011 (12)91 - Delhi High Court ] which is in favour of the assessee. From the above case laws it is amply clear that it has been held that the software .....

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which would, within the mischief of clause (vi) the explanation to section 9 (1) would 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)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 Hi .....

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nue : 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 the circumstances of the case and in law, the Ld. CIT-A erred in holding that the appellant was liable to deduct tax at source u/s. 195 of the Income Tax Act, 1961 on payment made to M/s. Minitab Inc., USA for acquisition of software by treating the same as .....

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ouble Taxation Avoidance Agreements between India and USA. The appellant craves leave to add, amend, alter, modify and/or delete any of the above grounds of appeal on or before the date of hearing. 3. The assessee for financial year 2007-08 has procured a software product on which Minitab Inc. of USA has a copyright. No TDS was deducted by the appellant in terms of Article 7 of the DTAA between India and USA. Subsequently a notice u/s. 201(1) was issued for non deduction of TDS u/s. 195(1). It w .....

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the licence to use software amounts to royalty within the meaning of section 9(1)(iv). The Ld. AO also held that software can be termed a secret formula or process. Thus the Ld. AO held that the software is an intellectual property and falls in the category of copyrights, patents, designs, trademarks, formula, process, commercial/scientific knowledge and therefore. The A.O thereafter referred to definition of royalty in Article 12(3) of the Indo-USA DTAA and held that payment for the license of .....

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ia 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 t .....

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ts binding force in India. The present case is a case of import of software and the consideration for the acquisition of software is not indeterminate. Hon'ble ITAT, Delhi in the case of Gracemac (supra) has distinguished the special Bench judgment in Motorola and has held consideration for software acquisition is taxable as royalty. Hon'ble Bangalore ITAT in the case of ING Vysya (supra) has also held that payment for acquisition of software to use hi business is royalty. The facts of t .....

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assessee to USA to purchase a shrink wrapped software for use in India under a non-exclusive and nontransferable license together with the right to receive technical services, updates and maintenance of the software, is taxable as royalty u/s. 9(1)(vi) of the Incometax Act and also under clause 12(3) of Indo-US DTAA. Therefore, the assessee was liable to do TDS u/s. 195 of the Income-tax Act before remitting the money to the US supplier. Hence, the A.O. is justified in treating the assessee as a .....

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ng an opportunity to the assessee. Therefore grounds (a) to (d) of the appeal are dismissed. 5. Against the above order assessee is in appeal before us. 6. We have heard both the counsel and perused the records. 7. 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 we .....

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splay 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 applicable to the appellant on purchase of software. (iv) The appellant cannot sell license, distribu .....

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tware" which is specialised and exclusively custom made to cater to the needs of individual clients, and "Branded software" or "off-the-shelf software" which is standardised and marketed as such. When off-the-shelf software is sold there is no doubt that the essence of such transaction is an outright sale. The said software purchased by the appellant company is "off the shelf" software/Shrink wrapped Software. The appellant company is authorized to use only the .....

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y and it is provided with Activation code only for installation. Therefore, the appellant company does not have any copyright to give it forward to any other person to use. The transfer of licensed software cannot be considered as 'Royalty' within the meaning of Article 12(3) of the India-US Tax Treaty. As per the provisions laid down in clause (v) of Explanation (2) to section 9(1)(vi), the consideration for transfer of all or any rights (including the granting of a license), inter-alia .....

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ts 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 .....

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or use or disposition thereof, and (b) Payments of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in Para 1 or article 8 (Shipping and Air Transport) from activities described in Para 2(c) or 3 article 8. This definition is much narrower and restricted than the definition of "Royalty" under the Income-tax Act. In the case of Samsung Electronic Co. Ltd. (s .....

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xclusive rights for use, though it is short of full ownership, it will nevertheless be a case of sale of software. In such cases, the transaction will be outside the tax net in India as the said transaction will give rise to business income and in the absence of Permanent Establishment (PE) in India of Minitab Inc. Of U.S.A, business income are not be chargeable to tax in India as per Article 7 of India -USA DT AA. There is no acquisition of the software rights in the present case and that the c .....

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efore, no operations have been carried in India i.e. no part of the business activities is carried in India by the non-resident sellers. Therefore, the income does not accrue or arise in India and hence there being no liability to income-tax in India, there is no withholding tax liability on such payments. 8. Various decisions relied upon by the Ld. Counsel of the assessee are as under: (a) DIT vs Infrasoft Ltd. (264 CTR 329) (Del He) (b) DIT vs Nokia Networks QY (358 ITR 259) (Del He) (c) DIT v .....

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cided 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, .....

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f the Hon'ble High court have been reaffirmed. 10. Ld. DR further submitted that it s that explanation 4 inserted section 9(1)(vi), has to be given retrospective effect, in as much as it is clarificatory in nature. In this regard he submitted that whether amendment/explanations inserted in the Income Tax Act can be read into the DTAA or not has to be considered on the anvil of ambulatory approach to interpretation of treaty, as against static approach adopted by the Hon ble Delhi High Court. .....

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te of entering into of Treaty. 11. Ld. DR further submitted that in a recent decision in the case of DIT Vs. New Skies Satellite BV & Others, 382 ITR 0114, dated: 08-02-2016, the Hon'ble Delhi High Court in paras 48 to 50 of its order seems to have corrected its earlier stand regarding decision of Bombay High Court in the case of Siemens AG, supra and acknowledged that the Bombay High court has followed Ambulatory approach to interpretation of treaties. (Paras). That the Hon'ble Delh .....

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considered the submissions 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 .....

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oyalty 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 relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : Provided further that nothing contained in th .....

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or the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section ( .....

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greement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump 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 licence) in respect of a patent, invention, model, design, secret formula or process or trade .....

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ommercial 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 i .....

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des 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 .....

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oyalty has been defined in Article 12(3) of the INDO-USA DTAA as under:- 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 co .....

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3 article 8. We find that identical issue was considered by this tribunal in ADIT (IT) Vs. First Advantage P. Ltd (77.Taxmann.com 195). Where 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 .....

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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) assign, loan, rent, lease, sublease, license, sublicense, encumber, mortgage, translate, modify, alter, adapt, decompile, or disassemble the software or create derivate works based on the software or otherwise reverse engineer the s .....

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except the license to use the software as expressly granted under the agreement. The Ld A.R submitted that the assessee has obtained only copyrighted article from the US company and not the copyright in the software. Accordingly he submitted that the payment made by the assessee to a copyrighted article, which is akin to off the shelf software is not royalty. He submitted that the Hon ble Delhi High Court, in the case of DIT Vs. Ifrasoft Ltd (264 CTR 329) has taken its view in favour of the asse .....

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M/s Baan Global B V (now known as Information Global Solution (Barneveld) BV) has considered an identical issue under the provisions of Income tax Act as well as India-US DTAA and has decided the issue in favour of the assessee. He further submitted that the provisions of DTAA will prevail over retrospective amendment made in the Income tax Act. We notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V (supra) has considered an identical .....

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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 .....

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unctions as a distributor of computer software. So far as payments received from other general services of Rs.4,79,36,944/-, same has been offered to tax in India as fee for technical services on which there is no dispute. The dispute is with regard to the payment of Rs.3,75,25,291/-received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold off shelf which is mainly used by the Indian customer in their business for financial a .....

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payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the departme .....

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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, .....

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ght to use any copyright of ; any patent.......; or process , or for information........., ; or scientific experience , etc., are important parameter for treating a transaction in the nature of royalty . If the payment doesn t fit within these parameters then it doesn t fall within terms of royalty under Article 12(4). The computer software does not fall under most of the term used in the Article barring use of process or use of or right to use of copyrights Here first of all, the sale of softwa .....

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to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the various Courts have consistently opined that the definition of copyright as given in the Copyright Act, 1957 has to be taken into account for understanding the concept. Section 14 of the said Act defines the copyrights to mean as under:- 14.Meaning of copyright -For the purposes of this Act, "copyri .....

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he 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 ofthe 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 offe .....

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e 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 the film, regardle .....

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h has been sold once shall be deemed to be a copy already in circulation . Thus, the definition of copyright in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use c .....

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ense or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT(A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of shrink wrapped software off the shelf and hence, cannot be considered as a royalty within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any cop .....

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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 thi .....

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e following cases also:- (a) M/s Quaolcomm India P Ltd Vs. ADIT (ITA Nos. 1664 to 1667/Hyd/2011) (b) Reliance Industries Ltd & Ors (47 CCH 94)(Mum-Trib) (c) Capgemini Business Services (India) Ltd (46 CCH 253) (Mum- Trib) We notice that the above said decisions have been rendered in favour of the assessee by following the decision rendered by Hon ble Delhi High Court in the case of Infrasoft ltd (supra) and other decisions rendered by Hon ble Delhi High Court. Accordingly, by following the d .....

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s (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. Section 2(0) of the Copyright Act, 1957, makes it clear that a computer programme is to be regarded as a literary work. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. This was not established. It was not even th .....

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ded as royalty within the meaning of the term in article 13, paragraph (3) of the DT AA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment 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 p .....

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at 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 in the present case. That once the payment in question was .....

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the payments were assessable to tax as royalty u/s 9(1)(vi)/ Article 12 and that the assessee was liable to pay the tax u/s 201. On appeal, the Tribunal relied on the judgement of the Supreme Court in Tata Consultancy Services vs. State of AP 271 ITR 401 (SC) and held that the assessee had acquired a copyrighted article but not the copyright itself and so the amount paid was not assessable as royalty . On appeal by the department, HELD reversing the Tribunal: (i) U/s 9(1)(vi) of the Act & Ar .....

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have been an infringement of the copyright. Accordingly, the argument that there is no transfer of any part of the copyright and the transaction involves only a sale of a copyrighted article is not acceptable. The amount paid to the supplier for supply of the shrink-wrapped software is not the price of the CD alone nor software alone nor the price of licence granted. It is a combination of all. In substance unless a licence was granted permitting the end user to copy and download the software, t .....

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he 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 coun .....

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