TMI Blog2017 (11) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is purely a copyrighted software given for use of the customers without transferring any kind of right to use and with lot of restrictions as given in clause 2.4 of the agreement. We completely agree with the clarification and submission made by the Ld. Counsel that supplementary agreement does not enlarge the scope of the main license agreement but only envisages providing access to all the persons within the enterprise. Thus, in view of the discussion made above and respectfully following the judgment of Hon’ble Delhi High Court, in the cases of DIT vs. Nokia Networks (2012 (9) TMI 409 - DELHI HIGH COURT) DIT vs. Ericsson A.B. (2011 (12) TMI 91 - Delhi High Court); DIT vs. Infrasoft Ltd. (2013 (11) TMI 1382 - DELHI HIGH COURT ); and CIT vs. Alcatel Lucent Canada (2015 (5) TMI 431 - DELHI HIGH COURT) we hold that the payment received by the assessee does not fall within the ambit of ‘royalty’ under Article 12(3) of India USA DTAA and hence, the same cannot be taxed under the terms of India USA Treaty. If the receipts cannot be taxed under the treaty as royalty, then it cannot be taxed under the domestic law under section 9(1)(vi) Income Tax Act and the amended provision cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts as fee for technical services/fee for included services. 3. The brief facts qua the issue involved are that, the assessee-company is incorporated under the laws of State of Delaware, USA and is provider of products and services for automating the management, compliance and secure use of open source software in multi source development at enterprise scale. It provides its customers a non-exclusive; non-transferable license for the programs in which the company normally deals. The customers subscribe for these licenses for a specified period as per the agreement entered into with the assessee-company. 4. During the year under consideration, the assessee had sold software under a Master License and Subscription Agreement with two entities in India, namely, (a) Infosys Limited; and (b) Robert Bosch Engineering and Business Solutions Limited. The Assessing Officer in the impugned assessment order has reproduced the relevant clause of the Master License and Subscription Agreement , which is very crucial for the purpose of our adjudication, hence is reproduced hereunder:- 2.3 License: Subject to terms and conditions of this Agreement and the applicable Supplement, Black ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Explanation 4, 5 and 6 to section 9(1)(vi), the law as enumerated by the Hon ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh [2004] (271 ITR 401) still holds the field, wherein it has been held that the sale of computer software is good and such a sale cannot be treated as royalty. This judgment, has been upheld by the Hon ble jurisdictional Delhi High Court in the following cases: * DIT vs. InfraSoft Ltd, reported in [2014] (220 Taxman 273) * DIT vs. Nokia Networks OY, reported in [2013] 358 TR 259(Del) * DIT vs. Ericsson AB, reported in [2012] (343 ITR 470 )(Del) * The assessee also sought shelter of the India US tax treaty by referring to Article 12(3) of the said treaty and submitted that, what is sought to be taxed as Royalty under the treaty was a copyright of a literary work. A distinction was made between a copyright and copyrighted article and treaty, till date, recognizes the subtle distinction between copyright and copyrighted article . Although there has been an amendment to section 9(1)(vi) by the Finance Act, 2012 by insertion of Explanation 4 which enlarges the concept of Royalty, but no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough he acknowledged that these judgments were squarely in favour of the assessee, but he noted that Hon ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd. [2012] 345 ITR 494 was in favour of the Revenue which has to be followed. In his assessment order, he has tabulated to make a comparison of the decisions of various Courts on this issue, which is reproduced as under:- Taxability of Computer Software Particulars Karnatak a HC in Samsung /Delhi ITAT in Microsoft AAR in Millenniu m IT Software Delhi HC in Ericsson/I TAT (SB) in Motorola Mumbai ITAT in TII Team Telecom Delhi HC in Infrasoft Ltd. 1. Taxable as royalty under section 9(1)(vi)? Yes Yes Does not amount to royalty Not discussed Not discussed 2. Taxable as royalty under DTAA? Yes Yes Does not amount to royalty Does not amount to royalty Does not amount to royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panded retrospectively, cannot be imported into the treaty. In support, he strongly relied upon the judgment of Hon ble Delhi High Court in the case of DIT vs. Nokia Networks [2013] 358 ITR 259 (Del). He further submitted that so far as issue of permanent establishment in India is concerned, the Assessing Officer and the DRP have not mentioned anything despite assessee s categorical submission before both the authorities, this inter-alia, can be inferred that question of taxability under Article 7 does not arise at all, in case if it is to be held as business income. 9. Coming to the issue whether it is a royalty within the terms of Article 12(3), he submitted that recital of the agreement clearly shows that there is no infringement of copyright in any manner. Since the copyright has not been defined in the Income Tax Act, therefore, the meaning given in section 14 and 52 of the Copyright Act, 1957 has to be considered. He pointed out that as per the terms of agreement, the assessee only gives non-exclusive and non-transferable license to the customers for a specified period only. The customers have no right to use the software after the subscription period or can make copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of Hon ble Karanataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd.(supra) which has been strongly referred and relied upon by the revenue authorities. He further relied upon the decision of ITAT Mumbai Bench in the case of ADIT vs. Baan global, 29 ITR (Trib.) 73, wherein the Tribunal, after detailed discussion on various provisions of copyright and the judgments of various High Courts on similar set of facts and software license agreement, held that payment received for software license in such a situation cannot be taxed under royalty and there is a distinction between copyright and copyrighted article. Lastly, he referred and relied upon the decision of Hon ble Delhi High Court in the case of CIT vs. Alcatel Lucent Canada, 372 ITR 476, wherein again the Hon ble High Court held that sale of a software programme cannot be taxed as royalty. Again the Hon ble High Court has reiterated its earlier judgments. Thus, in wake of several Jurisdictional High Court judgment, the view taken by the department to tax the receipts as Royalty has to be rejected. 11. The ld. CIT (DR), Shri Anuj Arora, though fairly agreed that so far as Master License and Subscrip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. limitation in the size of the Managed Code base) as further described in the applicable supplement. 12. Then he pointed that Supplement Agreement indicates that there are unlimited number of users; unlimited size of managed code base; and terms of supplement agreement shall prevail in the event of any conflict between the terms of Supplement Agreement and Master License and Subscription Agreement. Lastly, from the sample copy of supplement agreement he pointed out that access is granted to all the companies within the Robert Bosch Group, held under the Robert Bosch GmbH holding in Stuttgart. Thus, he submitted that the agreements entered into by the assessee mainly supplement agreement clearly violates the principles laid down by the judgment of the Hon ble Delhi High Court in the case of DIT vs. Infrasoft Ltd (supra) and, therefore, the said judgment cannot be held to be applicable, especially if the supplement agreement is to be looked into. 13. We have heard the rival submissions, perused the relevant finding given in the impugned order of the DRP as well as the material referred to before us and the judgments relied upon. The sole issue involved in this appeal is, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... active back up, disaster recovery, failover or archival purposes. Customer has no right to rent, lease, assign, transfer, sub license, display or otherwise distribute or make the Program available to any third party. Unless otherwise expressly stated in this Agreement or the Applicable Supplement, the Program may not be used (a) in the performance of services for or on behalf of any third party or as a service bureau or (b) in connection with the analysis of any Code other than the Managed Code Base. Except to the extent Black Duck may, in certain jurisdictions be required by law to permit reverse engineering. Customer may not modify, disassemble, decompile or otherwise reverse engineer the Program nor permit any third party to do so. Black Duck reserves all rights not expressly granted to the Customer under this Agreement. The use of Black Duck s intellectual property beyond the scope of the license expressly granted is acknowledged and agreed to be outside the subject matter of this Agreement. 14. From a perusal of the aforesaid scope of license, it is quite apparent that the assessee provide to its customers a nonexclusive; non-transferable license within the applicable su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right to use any copyright in an article (which is in the nature of literary; artistic; or scientific work) has to be given. Since the copyright has not been defined or explained in the treaty, therefore, meaning assigned of the copyright under the domestic law, i.e. Copyright Act, 1957 can be referred for understanding the true purport and meaning of copyright. Section 14 of Copyright Act, 1957 defines the copyright in the following manner:- 4.Meaning of copyright:- (1) For the purposes of this Act, copyright means the exclusive right, by virtue of and subject to the provisions of, this Act, (a) in the case of a literary, dramatic or musical work, not being a computer programme, - (i) to reproduce the work in any material form including the storing of it in any medium 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rogramme for the purpose for which it was supplied; 17. The aforesaid section also makes it amply clear that private use including research or to utilize a computer programme for the purposes for which it was supplied or make back-up copies is purely for the temporary protection against loss; destruction or damage in order to utilize the computer programme for the purpose for which it was supplied. This doesn t enlarges the scope so as to reckon it as giving any copyright. Hence under the Copyright Act, no use or right to use of copyright has been given by the assessee to its customers in terms of its licensing agreement. 18. The issue whether consideration received for granting of license to use copyrighted software for licensee s own business and whether can it be brought to tax as royalty under Article 12(3) of India USA DTAA, is no longer res-intra at least in the jurisdiction of Hon ble Delhi High Court in the wake of catena of decisions, like DIT vs. Nokia Networks (supra); DIT vs. Ericsson A.B. (supra); DIT vs. Infrasoft Ltd. (supra); and CIT vs. Alcatel Lucent Canada (supra). 19. In the case of DIT vs. Infrasoft Ltd (supra), in fact the license agreement was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. * Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. * Just because one has the copyrighted article, it does not follow that one has also the copyright w it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for copyrighted article. This sale consideration is for purchase of goods and is not royalty. [Para 87] * The license granted by the assessee is limited to those necessary to enable the licensee to operate the program. The rights transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. [Para 90] * There is no transfer of any right in respect of copyright by the assessee and it is a case of mere 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 either under the Act or under the DTAA. [Para 91] * The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted software which by itself is an article and they have not acquired any copyright in the software. * In the case of the Assessee company, the licensee to whom the assessee company has sold/licensed the software were allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of the software is not royalty under the DTAA. [Para 96] * 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 the copyrighted material or article which is clearly distinct from the rights in a copyright. * The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. [Para 97] * In view of above, it is concluded that the Tribunal was right in holding that the consideration received by the assessee on grant of licenses for use of software is not royalty within the meaning of article 12(3) of the DTAA between India and USA [Para 100] 20. The aforesaid points as highlighted from the judgment of the Hon ble High Court clearly clinches the issue in favour of the assessee on the present facts. This ratio has been further reiterated in CIT vs. Alcatel Lucent Canada (supra), the relevant observation reads as under:- We have noticed, at the outset, that the ITAT had relied upon the ruling of this Court in DIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery wide and include all types of movable properties whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed. it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become goods . We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just (if the media which by itself has very little value. The software and the media cannot be split lip. What the buyer purchases and pays Jar is not the disc or the CD, As in the case of paintings or books or music or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of unlimited number of users and unlimited size of managed code base; and also access has been granted to all companies within Robert Bosch group. He has also referred to corresponding managed code base as given in point 1.5 of the Master License and Subscription Agreement. (as reproduced in the foregoing paragraphs) the managed code base has been defined in the agreement as code base owned or controlled by the customer, i.e., input into a program by customer and managed using that programme over the course of the applicable subscription period. Since the software is to be run at an enterprise level, managed code base size has to be kept unlimited but within the organization and is not meant to the outsiders. It has been clarified before us by the ld. Counsel for the assessee that software sold by the assessee is used as antivirus by the customers for entire organization and access to such software is IP based and is given to the server installed at the customer s place, so that it can be used by the customer and all its employees. It is not the case of the Revenue also that software is being commercially exploited by the customers albeit it has to be used only for private use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew to provide flexibility to customers, the clause subscription to overnight the Master Licensing agreement have been inserted. Thus, he submitted that the reference made by the ld. CIT D.R. to these clauses and also supplement will not change the basic fact that what has been sold by the assessee is purely a copyrighted software given for use of the customers without transferring any kind of right to use and with lot of restrictions as given in clause 2.4 of the agreement. We completely agree with the clarification and submission made by the Ld. Counsel that supplementary agreement does not enlarge the scope of the main license agreement but only envisages providing access to all the persons within the enterprise. 22. Thus, in view of the discussion made above and respectfully following the judgment of Hon ble Delhi High Court, in the cases of DIT vs. Nokia Networks (supra); DIT vs. Ericsson A.B. (supra); DIT vs. Infrasoft Ltd. (supra); and CIT vs. Alcatel Lucent Canada (supra)., we hold that the payment received by the assessee does not fall within the ambit of royalty under Article 12(3) of India USA DTAA and hence, the same cannot be taxed under the terms of India USA Tre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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