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TMI Blog2017 (8) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. In these appeals, the issues involved are interconnected and thus all these appeals were heard together and disposed of by this consolidated order for convenience and brevity. 2. First we take up the appeal of the Revenue having I. T. A. No. 1182/Delhi/2012 and the appeal of the assessee in I. T. A. No. 1225 related to the assessment year 2007-08. The grounds raised by the Revenue and the assessee in their respective appeals are reproduced as under : Grounds of appeal of the Revenue in I. T. A. No. 1182/Delhi/2012 (i) Whether on the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) had erred in characterising income from supply of off-the-shelf software and services ancillary and subsidiary thereto squarely covered in the definition of section 9(1)(vi) of the Act and article 12 of the Indo-Canada Double Taxation Avoidance Agreement and taxable as royalty, as step-in-aid to actual mining of mineral oils and thus chargeable under section 44BB ignoring the distinctive scheme of taxation of royalty in the Act. (ii) Whether on the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) has erred in holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts and papers as may be considered necessary either at or before the appeal hearing. 3. The facts in brief as culled out from the orders of the lower authorities are that the assessee, a firm constituted under the laws of Alberta Canada, is a resident of Canada. During relevant period, the assessee supplied software for seismic data processing and geological data interpretation to the companies involved in exploration and production of mineral oil. The assessee was also engaged in upgradation and maintenance of software already supplied for the purpose of exploration and production of mineral oils. For the year under consideration, the assessee filed return of income on October 30, 2007 declaring a total income of Rs. 8,09,010. The assessee offered receipts amounting to Rs. 80,90,071 from upgradation and maintenance services under section 44BB of the Income-tax Act, 1961 (in short "the Act") and the receipts amounting to Rs. 6,39,25,481 from supply of software was treated as sale of a copyrighted article and not offered to tax, claiming to be not subjected to tax in India. In the scrutiny assessment completed under section 143(3) of the Act dated December 31, 2009, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he recipient, were in the nature of royalty under the provisions of section 44D/44DA read with section 115A of the Act. In respect of grounds raised in the assessee's appeal, the learned senior Departmental representative relied on the order of the Assessing Officer. 5. On the other hand, the learned counsel for the assessee submitted that the assessee during the course of the year under consideration, supplied software for the purpose of seismic data interpretation for their own business and at no point of time, the "copyright" or any other "intellectual property right" has been transferred to the purchaser of software. He further submitted that the issue of sale of software and taxability as royalty thereon, is no more res integra in view of the judgments of the hon'ble High Court of Delhi in the case of DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi), DIT v. Ericsson A. B. [2012] 343 ITR 470 (Delhi) and DIT v. Infrasoft Ltd. [2014] 3 ITR-OL 333 (Delhi) ; [2014] 264 CTR (Delhi) 329, wherein the hon'ble High Court has held that sale of software is akin to supply of "copyrighted article" and cannot come within the purview of royalty. The learned counsel further sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 2 to section 9(1)(vi) are reproduced as under : "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-. . . (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 ;" 9. The learned Commissioner of Income-tax (Appeals) after taking into consideration the submission of the assessee that the consideration received for sale of the software by the assessee was for sale of the "copyrighted product" and following the decisions relied on by the assessee including the decision in the case of Ericsson Radio Systems A. B., Motorola Inc. and Nokia Corporation v. Deputy CIT [2005] 95 ITD 269 (Delhi) [SB]. The relevant finding of the learned Commissioner of Income- tax (Appeals) on the issue in dispute is extracted as under : "4.2 The learned authorised representative is seen to have relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erminative factor would be as to where the property in goods passes. In the present case, the finding is that the property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) (supplies) to be segregated from the installation and only then would question of apportionment arise having regard to the express language of section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arise in India. 11. In the case of DIT v. Ericsson A. B. [2012] 343 ITR 470 (Delhi) also the hon'ble High Court held that since the transaction relates to supply of goods and both the transfer of property in goods and risk passed outside India, no taxable event took place in India. The hon'ble High Court further agreed with the submission of the learned counsel for the assessee that even assuming the payment made by the cellular operator is regarded as payment by way of royalty as defined in Explanation 2 below section 9(1)(vi) of the Act, never ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted by the assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with article 7. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the licensee to whom the assessee-company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub- licence or transfer the copy of software to any third party without the consent of Infrasoft. The licensee has been prohibited from copying, de-compiling, deassembling, or reverse engineering the software without the writ ten consent of Infrasoft. The licence agreement between the assessee- company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorisation device to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi) as not amounting to acquiring a copyright in the software. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. The question of law is thus answered in favour of the assessee and against the Revenue that the Income-tax Appellate Tribunal was right in holding that the consideration received by the respondent-assessee on grant of licences for use of software is not royalty within the meaning of article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er : "49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD-ROM which can be said to be sale of 'goods' by the owner. The consideration paid by the assessee thus as per the clauses of the Double Taxation Avoidance Agreement cannot be said to be royalty' and the same will be outside the scope of the definition of 'royalty' as provided in the Double Taxation Avoidance Agreement and would be taxable as business income of the recipient. The asses see is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a licence provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act, 1957." 17. Thus, respectfully following the above decision of the Tribunal in the case of Reliance Industries Limited (supra), we hold that the receipt from sale of software by the assessee from outside India is not tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of mineral oils. For examining this proposition help is taken of certain case laws which would be discussed later 4.6 The principles contained in the following case laws will also be used to determine the issue of nexus of appellant's business with activities allowed for computing income under section 44BB of the Act : (1) ONGC as Agent of Sea House Inc v. IAC reported in [1989] 29 ITD 422 (Delhi) (2) CIT v. ONGC Ltd. (No. 1) reported in [2009] 309 ITR 244 (Uttarakhand) (3) ARB Inc. v. Joint CIT reported in [2005] 277 ITR (AT) 209 (Delhi) ; [2005] 93 ITD 520 (Delhi) (4) ONGC v. Asst. CIT reported in [2007] 9 SOT 8 (Tri.-Delhi) ; [2007] 107 TTJ (Delhi) 551 ) (5) OHM Ltd., In re reported in [2011] 335 ITR 423 (AAR) ; [2011] 200 Taxman 7 (AAR-Delhi) Furthermore, Instruction No. 1862 dated October 22, 1990 may also be reproduced for understanding the nature of receipts which can be classified as fees for technical services (FTS) :- 'Definition of fees for technical services' in Explanation 2 to section 9(1)(vii)-Whether prospecting for, or extraction or production of, mineral oil are 'mining' operations 1. The expression 'fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vide his letter dated November 30, 2011, is applicable on the facts of this case. 4.8 Thus, it is held that all receipts from sale of software to the provision of maintenance, training, etc. are covered under section 44BB of the Act and will be taxed as such considering the law laid down as per the cases mentioned in paragraph 4.1 supra." 19. In the grounds raised before us, it is contended by the Revenue that income by way of royalty taxable under the provisions of section 44D/44DA read with section 115A, could not be covered under the provisions of section 44BB of the Act as clarified in the proviso thereto. 20. The relevant proviso below section 44BB of the Act reads as under : "Provided that this subsection shall not apply in a case where the provisions of section 42 or section 44D or section 44 DA or section 115A or section 293A apply for the purposes of computing profit and gains or any other income referred to in those sections." 21. In above proviso, the word "section 44DA" has been inserted by the Finance Act 2010, with effect from April 1, 2011. 22. We find that the issue of taxability of income under section 44BB viz-a- viz section 44D came up before the hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement commends to us as reasonable for acceptance. Equally important is the fact that the Central Board of Direct Taxes had accepted the said test and had in fact issued a circular as far back as October 22, 1990 to the effect that mining operations and the expressions 'mining projects' or 'like projects' occurring in Explanation 2 to section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non- resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the court is corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d overhauling of turbines. 26 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines. 27 1522 Replacement of choke and kill consoles on drilling rigs. 28 1521 Inspection of gas generators. 29 1515 Inspection of rigs. 30 2012 Inspection of generator. 31 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines. 32 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33 2008 Expert advice on the device to clean insides of a pipeline. 34 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations. 35 925 Engineering analysis of rig. 36 1519 Imparting training on cased hold production log evaluation and analysis. 37 1533 Training on well control. 38 1518 Training on implementation of six sigma concepts. 39 1516 Training on implementation of six sigma concepts. 40 6023 Training on drilling project management. 41 2796 Training in safety rating system and assistance in development and audit of safet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services has been rightly assessed under section 44BB of the Act. 24. The second part of the contention raised by the Revenue is that the income from royalty was taxable under section 44DA of the Act and, therefore, in such case provisions of section 44BB were not applicable in view of the proviso inserted below section 44DA of the Act. The relevant proviso below section 44DA reads as under : "Provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this section." 25. We find that said proviso has been inserted by the Finance Bill, 2010 with effect from April 1, 2011 only. Since, the assessment year in consideration before us is the assessment year 2009-10, the said proviso was not applicable over the facts of the instant case. The Revenue has contended before us that said amendment in the Act was only clarificatory in nature and thus its application has to be read into the main provisions with effect from the time the main provision came into effect in view of the decision of the hon'ble Supreme Court in the case of Sedco Forex International Drill Inc v. CIT [2005] 279 ITR 310 (SC). 26. In our opinion, the amendment bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal in CGG Veritas Services SA v. Additional DIT (International Taxation) reported in [2012] 50 SOT 335 . Thus, grounds Nos. 2 and 3 of the appeal of the Revenue are dismissed. 29. The next issue is in respect of the ground raised by the assessee in its appeal. In the ground, the assessee has challenged assessment of income from sale of software to the entities engaged in exploration of mineral oil as taxable under section 44BB of the Act. 30. Before us, the learned counsel submitted that the issue of taxability of receipts from sale of software has been tested on the touchstone of the treaty principle and, therefore, it was not permissible to go to the Act and tax the transaction. However, on a perusal of the order of the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals), we find that the issue of sale of software was examined by them only from the angle of the taxability under the Income-tax Act, 1961 and not from the perspective of relevant treaty. The learned counsel for the assessee has first time raised this issue before us. We have decided that sale of software is not amounted to "royalty" under the relevant treaty. As far as the receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t services as taxable under section 44BB of the Act. The hon'ble High Court of Uttarakhand in the case of CIT v. Halliburton Offshore Services Inc. reported in [2008] 300 ITR 265 (Uttarakhand) held that the amount paid or payable whether in India or outside India have to be included for the purpose of computing global receipts under section 44BB of the Act. The relevant finding of the hon'ble High Court as under (page 269) : "Thus, it is clear from the perusal of section 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the assessee at 10 per cent. Therefore, in our view, the Tribunal fell into error in not appreciating the difference between the amount and the income. Amount paid or received refers to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under section 2(24) of the Income-tax Act and section 5 and section 9 deal with the income and accrued income and deemed income. Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e favour of the assessee by the decision of the hon'ble Delhi High Court in the case of DIT v. Jacabs Civil Incorporated [2011] 330 ITR 578 (Delhi). 40. We have heard the rival submission and perused the relevant material on record. In the decision of the Jacabs Civil [2011] 330 ITR 578 (Delhi), the hon'ble High Court has held that if the assessee had no role in deducting or collecting the tax, the question of payment of interest would not arise, however, if there is a default in making advance tax, the assessee is liable to pay interest under section 234B of the Act. In view of the above decision of the hon'ble High Court, we restore the issue to the file of the Assessing Officer to decide the liability of interest under section 234B of the Act in accordance with law. It is needless to mention that the assessee shall be provided opportunity of hearing on the issue in dispute. 41. In the result, the appeal of the Revenue is allowed partly for statistical purposes. 42. To sum up, the Revenue's appeal having I. T. A. No. 1182/Delhi/2012 and the assessee's appeal having I. T. A. No. 1225/Delhi/2012 are dismissed and another appeal of the Revenue in I. T. A. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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