TMI Blog2018 (4) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,3444 (Mum.) of 2008 & Others - - - Dated:- 2-2-2018 - Sh. Rajendra, Accountant Member Ravish Sood, Judicial Member Revenue by : S/Shri Parag Vyas- DR Assessee by: S/Shri J. D. Mistry/Deepak Jain ORDER PER RAJENDRA, AM Challenging the orders of the CIT(A)-XXXI, Mumbai, of various dates, the Assessing Officers (AO. s)have filed above mentioned appeals. Issue involved in all the appeals is identical-relief granted by the First Appellate Authority(FAA)to the assessees for the alleged violation of the provisions of section 40(a)(i)of the Act. The AO. s were of the opinion that there was failure on part of the assessees of not deducting tax at source for the payments made by them to the non-resident-entities. Considering the commonness of the issue, we are adjudicating these appeals together. Assessee-company are part of Reliance(ADAG) Group. The group consists many an entities, including Reliance Communication Ltd. (RCL), Reliance Telecom Ltd. , Reliance BPO Ltd. and Reliance Communication Infrastructure Ltd. RCL. is engaged in business of telecommunication. Other three entities were also connected with wireless telecommunication netwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition of the term Invention given under the Oxford Dictionary and Black Laws Dictionary to hold that Software is an invention. Reffering to the term 'Equipment' from Wikipedia website and relying on the decision of the Poompuhar Shipping Corporation Ltd. (360 ITR 257), he submitted that payment made by the assessee for purchase of software fell under the head equipment-royalty . He also relied on the definition of the royalty as per DTAA and stated that definition of the royalty was same in all DTAA. s, that some of the DTAA. s did not include equipment-royalty under the definition of royalty, that after amendment in the Act, the definition of royalty had become very vast and the same was also applicable to the tax treaties. He further relied on section 14 of the ICA and submitted that to reproduce the work in any material form including the storing of it in any medium by electronic means covered under the definition of computer programme, that the assessee had stored or reproduced the software in equipment and therefore payment made by it for purchase of software fall under the definition of royalty, that as per section 30 of the ICA the assessee had receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that payment made by the assessee for purchase of software was covered by the definition of royalty, that it was liable to deduct TDS on the said payments. 3. 1. The(AR)referred to four contracts entered in to on dated 31/07/ 2002, with Lucent Technologies, Hindustan Private Limited (LTHPL), namely, Wireless Equipment Contract(Pg. 1-55, Vol. 44);Wireless Software Contract(Pg. 56-73, Vol. 44);Wireless Service Contract(Pg. 74-101, Vol. 44);Wireless Network General Terms and Conditions ('GTC Contract'-Pg. 102-289, Vol. 44). He also referred to Wireless Software Assignment and Assumption Agreement, dated 5/08/2002 entered in to with Lucent Technology GRL LLC(Lucent)wherein LTHPL assigned the Software Contract to Lucent (Pg. 290-294, Vol. 44). He contended that payment made to Lucent/other vendors for the purchase of software in pursuance of the aforementioned Contracts did not constitute royalty, as per the definition given under the Act and the DTAA. s. 3. 2. He referred to the definition of 'royalty' given under the India-USA DTAA and argued that as per the definition, the term royalties included any payment towards the use or right to use any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary on Article 12 and stated that the facts of the assessees cases were similar to that of Ericsson s case, that the payment made by the assessees to Lucent and other vendors for supply of software was not royalty within the meaning of the Act or the DTAA, that Ericsson A. B. was also one of the vendors/deductees to whom the assessees had made payments for purchase of software, that treating the payment of software to Ericsson A. B. as royalty in the hands of the assessees/deductors was not correct, that payments made to other suppliers was not royalty as the Hon'ble Delhi High Court had-based on similar agreement-held that the said payment was not royalty, that payment made for purchase of software was for the use of copyrighted article which was distinct from the copyright, that the same did not constitute royalty under the provisions of the Act as well as DTAA. 3. 4. Regarding software being a process /an Invention/an Equipment, he submitted that after the order of the Solid Works(supra)the Tribunals and/or High Courts had considered the arguments advanced by the DR, that they had deliberated upon the arguments of Software being a Process/an Invention, an Equipment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the decision of Karnataka High Court in the case of Synopsis(supra)in the cases of Alcatel Lucent USA Inc. (ITA/1131, 7299 7300/Mum/ 2010) Reliance Industries Ltd. (supra)and National Stock Exchange of India Ltd. (supra), it was held by the Tribunal that payment made for use of software did not constitute royalty. Referrring to the case of Samsung, he stated that it was considered in many a matters by the Tribunal. He also stated that the facts of the case of Synopsis(supra)were totally different from the facts of the present case. Referring to the case of Citrix Systems Asia Pacific Ptv Ltd. (supra). the AR stated that the Hon'ble Delhi High Court in the case of M Tech India (P. ) Ltd. (381 ITR 31) had considered the decision of the AAR in Citrix Systems Asia and had held that payment made for purchase of software as a product would be treated as a payment for purchase of software rather than payment for use or right to use software. About Millenium IT Software (338 ITR 391)and IMT Labs (India) (P. ) Ltd. the AR submitted that both the AARs were considered in Citrix Systems (supra) which in turn had been considered by the Delhi Tribunal as well as the Delhi High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generating revenue or other such desirable activities. In most cases, royalty is designed to compensate the Owner for the asset's use and they are legally binding. The terms under which royalties are based on is called a license agreement. The license agreement defines the limits and restrictions of the royalties, such as its limitations pertaining to geographic territory, how long the agreement will last or the type of products with particular royalty cuts. License agreements are regulated specially if the resource Owner is the government or if the license agreement is a private contract. We would like to refer to the case of Ahmedabad Manufacturing and Calico Printing Mills (139 ITR 806), wherein the word royalty has been defined as follows: In the case of secret processes, patents, special inventions, when right of exploitation is given by the Owner of the inventions, patents, etc. , to a third party instead of outright sale, then for the right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be correlated to the extent of the exploitation. It is in this sense that licence agreements for the exploitation of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iterary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset. In the case of royalty, the Ownership on the property or right remains with the Owner and the transferee is permitted to use the right in respect of such property. According to sub-clause (iii) of the Explanation, even consideration paid for use of intellectual property would qualify as royalty . Clause (vi) makes payments made for services rendered in connection with activities referred to in sub-clauses (i) to (iv), (iva) and (v) royalty for the purpose of section 9 . Explanation 2 has to be read as part and parcel of section 9(1)(vi) of the Act. 4. 1. For taxation purposes the term royalty has to be understood in the manner it has been defined by the Act/tax treaties. Section 9(1)of the Act reads as under: The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement 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- 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 mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret-formula or process or trade m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the tax treaties, entered in to with above mentioned five countries, the term royalty has been also been dealt with. We are reproducing the relevant portion of the DTAA. s. Article 12 of Australia India DTAA contains following provisions about Royalty: (3) The term royalties in this article means payments or credits, whether periodical or not, and, however described or computed, to the extent to which they are made as consideration for : (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right ; (b) the use of, or the right to use, any industrial, commercial or scientific equipment ; (c) the supply of scientific, technical, industrial or commercial knowledge or information ; (d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), any such equipment as is mentioned in sub-paragraph(b) or any such knowledge or information as is mentioned in subparagraph( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction 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 right or property which were contingent on the productivity, use of disposition thereof; A comparison of the provisions of DTAA. s and the section 9 of the Act clearly reveal that term royalty does not connote the same meaning even if both are casually glanced at. In the DTAA. s royalty 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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. But, the Act has expanded the meaning of Royalty by adding explanations to the section. The canvass of term royalty is broader in the Act, as compared to the above referred tax treaties. While making amendments to the Act, the Parliament has not amended the DTAA. s with the above mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4907 Israel Verint Systems Ltd. 18. 4261 Israel Verint Systems Ltd. . . 19. 4875 Singapore 3 Com Asia Pacific Rim Pte Ld 20. 4674 Singapore 3 Com Asia Pacific Rim Pte. Ltd. 21. 4922 Singapore Actix Pte . Ltd. 22. 4903 Singapore Agilent technologies Singapore (Sales) Pte. Ltd. 23. 4923 Singapore Hewlett Packard Singapore Pte (Sales) Ltd 24. 4287 Singapore Hewlett Packard Singapore Pte (Sales) Ltd. 25. 5085 Singapore Infovista (Asia Pacific) Pte. Ltd. Singapore. 26. 5373 Singapore Nortel Network Singapore Pte. Ltd 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies GRL LLC 49. 3442 USA Lucent Technologies GRL LLC 50. 3443 USA Lucent Technologies GRL LLC 51. 3444 USA Lucent Technologies GRL LLC 52. 4921 USA Techtronix Inc. 53. 4252 USA Tekelec Inc. 54. 4917 USA Tekelec Inc. 55. 4247 USA Ulticom Inc 56. 4306 USA Ulticom Inc. 57. 5075 USA Venturi Wireless Inc. USA 58. 5082 USA Venturi Wireless Inc. USA 5. 1. In the case of Tata Consultancy Service(271 ITR 401), the Hon ble Apex Court has dealt with the issue of sale of software. That matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes. The theory of copyrighted article and copyright itself , as propounded by the Hon ble Apex Court, has worked as a lighthouse for tax litigation related to copyright issues. Following the above judgment, Hon ble High Courts of Delhi and Madras have held that the provisions of section 9(1)(vi) of the Act, cannot be applied to a situation of outright purchase and sale of a product. In the case of Vinzas Solutions India Pvt. Ltd. (392ITR155), the Hon ble Madras High Court has dealt the issue. Facts of the matter were that the assessee was a dealer in computer software purchased from various companies. The AO disallowed the deduction u/s. 40(a)(ia) of the Act on the ground that the consideration for the purchase by the assessee was in the nature of royalty and tax ought to have been deducted at source in accordance with the provisions of section 194J. The FAA confirmed the order of the AO and held that the consideration paid by the assessee fell within the ambit of the definition of royalty under Explanations 4 and 5 of section 9(1)(vi). The Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Initial Wireless Reliance Network cind the Wireless Reliance Network as specified in the relevant Document. The Vendor represents, warrants and covenants that the Equipment shall he fully compatible with and fully supports the Objectives, as shall be demonstrated to Reliance, in part, in the Acceptance Tests. 3. 1. 1 The Vendor shall provide to Reliance the Equipment set forth in the Specifications as amended from time to time. Vendor's obligations hereunder shall include, but not be limited to the obligations to manufacture, supply (including inspection and expediting) and deliver the Equipment on FCA basis (read with Documents), to agreed international airport in the country- of the export to be put on ship/airport in accordance with the Documents. . , . . . . . . . . . . . The Software Contract (Pg. Nos. 56-73 of the PB, Vol. 44): 1. 1 Background Reliance desires too btain certain Software to support the Wireless Reliance Network. The Vendor shall perform all specific Vendor responsibilities set forth in this Wireless Software Contract, including applicable Purchase Orders and the Specifications. Notwithstanding the foregoing se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hereby grants to Reliance or its Affiliates (and to third parties whom Reliance or its Affiliates had contracted to operate the Wireless Reliance Network on their behalf (and to the extent of the same) upon payment (of, or agreement to pay, the relevant license fees by Reliance and/or its Affiliates, ajjerpetual, irrevocable, non-exclusive, unrestricted (within the Wireless Reliance Network), unlimited (where specifically so identified in the relevant Documents), royalty-free license, to use such Software for the benefit of Reliance in connection with the Ownership operation and maintenance of the Wireless Reliance Network in the Territory and the provision of relevant services in the Temton' to Reliance's customers. The Software shall be used in accordance with the appellant Documents 15. 1. 4 Except as otherwise expressly set forth in the Documents, Reliance shall use such Software only for the operation of the Wireless Reliance Network, in the case where the Software is purchased by or on behalf of Reliance Affiliates, for the operations of such Reliance Affiliates in the Wireless Reliance Network. The Software Licenses grant Reliance or Reliance Aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Reliance and the Vendor shall agree in writing with respect to exploitation rights. 15. 2. 2 All intellectual property rights with respect to the Software (other than the Intellectual Property Rights) were and shall remain the sole and exclusive property of Vendor or its suppliers, including without limitation, all copyrights, trademarks, patents, trade secrets, any other proprietary rights inherent therein and appurtenant thereto. All intellectual property rights with respect to the Reliance Software were and shall remain the sole and exclusive property of Reliance, including, without limitation, all copyrights, trademarks, patents, trade secrets and any other proprietary rights inherent therein and appurtenant thereto. In the appeals before us, in more than one cases the assessee had made payments to Lucent only. In all those appeals the terms and conditions are similar. The agreements of other 7 suppliers also are on the similar lines. 6. 1. Now, we would like to refer to the terms and conditions of the agreement entered in to with one of the companies of Israel, namely, Com verse Ltd. GTC entered into between the assessee and the supplier of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software shall not be construed as modification of the Software 42. 7 Owner shall not use the Software for (i) commercial time-sharing with non-affiliate third parties (ii) rental, lease, and sub-licensing to non-affiliate third parties; and (iii) service-bureau purposes. Clause 43. 0 of GTC deals with Intellectual Property/Warranties and it reads as under: Licensor represents, warrants and covenants that: (i)Licensor is the Owner, valid licensee or authorized user of the SOFTWARE, Documentation and the Licensor's internal use tools: (ii) the SOFTAWRE and Owner'S proposed use thereof does not and shall not infringe the patent, copyright, trade secret or other intellectual property right of any third party: (iii) the SOFTWARE complies with Applicable Law: (iv) Licensor has and shall have full and sufficient right to license the Intellectual Property Rights (as defined below), including without limitation to sublicense the SOFTWARE and any intellectual property related thereto, hereunder to Owner for the purposes contemplated by this Agreement: (v) the Intellectual Property Rights are, or prior to Acceptance of any SOFTWARE wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or maintenance functions related to the Owner'S data centre; or (iv) the transfer, assignment or sublicense by Owner Affiliate (or vice versa) or between Owner Affiliates, in conjunction with a transfer of a portion of the Owner'S network, provided that in each such case, such transferee, assignee or sublicense agrees in writing to abide by all the terms and conditions set forth in the Software Licenses and the SELLER is informed of the same in writing by Owner and provided further that the rights transferred, assigned sublicensed or granted to outsources, as the case may be, shall be only those reasonably to fulfill. 42. 3. The rights and obligations of Owner under the Software Licenses shall survive the termination of all or any portion of the Purchase Order. In the event that Owner fails to pay applicable and undisputed charges for the Software, seller may terminate Owner'S right to use the Software to which such charges apply: provided that SELLER has given written notice and details of such breach to Owner and has advised Owner of its intention to terminate and Owner has failed to make such payment within (30) days from Sellers notice thereof. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbrance, charge, lien or security interest. Further, in the event of such encumbrance, charge or lien the SELLER shall (i) notify the party in whose favour such encumbrance, charge or lien is created, of Owner'S rights under this Agreement; and (ii) obtain such party's consent (and intimate such consent to Owner within seven (7) days of obtaining thereof) and in no case later than 30 days from the date its supplying such Software to Owner. Further, seller shall not, at anytime, undertake any act or omission that shall limit, regress or abrogate either the licenses granted to Owner and Affiliates hereby or any rights accruing to Owner and Affiliates hereunder. 6. 3. Agreement with, Clarity International, a supplier of software from Australia, contains following main clauses: 2. 1 Grant of License in consideration of the License Fee, Vendor hereby grants unto Reliance and its Affiliates' nonexclusive irrevocable, worldwide, and unlimited, royalty free and perpetual license for Use of the Software and all Upgrades and the Documentation. Reliance shall be entitled to Use the Software, Documentation, and all related documentation, in the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hance, upgrade, customize, or assign or in any other confer any rights or interest in Catalyst to any third party in the territory of India. A detailed description of Catalyst is attached to this Agreement under Annex C. 6. 4. Erricsson AB Sweden, a Swedish company had also entered in to agreements with the assessee group companies for supplying software for installing wireless network. Clause 20 of the Supply Contract provides for the Software Licenses and it stipulates transfer of a nonexclusive, non-transferrable, irrevocable restricted License to use the Software for Buyer s own operation and maintenance of the system and its extensions. Sub-clause 2 and 4 state as under: Notwithstanding anything in this Contract to the contrary it is understood that Buyer receives no title or Ownership software or Document such right shall remain with Supplier or its suppliers. However, buyer receives the right to use software and the documentation as provided in this Article 20. 4. In pursuance of the foregoing Buyer Shall: a) not provide or make the Software or Documentation or any portions or aspects thereof available to any person except to its employees an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessees to the suppliers of software for the wireless network can be considered royalty. In other words, rights of the Owner of the IPR. s on one hand and the rights and duties of purchasers/users on the other hand are the decisive factors. If the Owner retains absolute rights of the IPR. s with itself then the payments made by the user will not be royalty. But, if the Owner transfers the rights of the property against periodical or onetime payment to the user it will be a case of payment of royalty. Thus, it is the degree of transfer of the rights of IPR. s that is very crucial. 7. 1. We do not have even slightest doubt in our mind that the answers to questions number four and five, at paragraph 7, are plain and simple NO, if the agreements entered in to by the assessee with the non-resident suppliers of softwares are analysed. Similarly, remaining question will have positive answers. In the earlier paragraphs, we have summarised the main characteristics of the agreements. All the agreements stipulate that the assessee would be using the software for operation of its wireless network only . Thus, it is clear that it was prevented from utilising the software for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngapore (Sales) Pte. Ltd. , Nortel Network Singapore Pte. Ltd. , Sun Microsystem Pte. Ltd. , Envilogg AB, Techtronix Inc. , Tekelec Inc. , Ulticom Inc. and Venturi Wireless Inc. USA. From the perusal of the agreements one thing is clear that there was no transfer of copyright of the software in any manner. As mentioned earlier, a copyright is different from the work in respect of which copyright subsists. The assessee had only got a copy of software without any part of the copyright of the software. All the arguments advanced by the DR about ICA, including the section 30, in our opinion are of no help. At the cost of repletion , we are holding that in the cases under consideration payments made by the assessee was for copyrighted articles. So, we are of the opinion that payments made by it to various suppliers of six countries did not amount to royalty within the definition of Article 12/13(3) of the DTAA. s and it was not obliged to deduct tax at source. 8. 1. Submissions of the DR in respect of software being Process/, Invention/Equipment were considered in the matter of ZTE Corporation(supra). The Tribunal, in the case of Baan Global BY(71 taxmann. com 213), hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Customs [2006] 7 SCC 714, of this court wherein, inter alia, it was observed as under : While dealing with a taxing provision, the principle of ' strict inter pretation' should be applied. The court shall not interpret the statutory provision in such a manner which would create an additional fiscal burden on a person. It would never be done by invoking the provisions of another Act, which are not attracted. It is also trite that while two interpretations are possible, the court ordinarily would interpret the provisions in favour of a taxpayer and against the Revenue. Considering the above, we would like to follow the judgments of Hon ble Madras and Delhi High Courts rather than judgment of Hon ble Karnataka High Court. 10. We would also like to deal with other arguments advanced by the DR and the cases relied upon by him. In the case of M/s. PSI Data System Ltd. , we find that the Hon ble Supreme High Court has held as under: We make it clear at the outset that when we shall speak of software, we shall be referring to the tangible software of the nature of discs, floppies and CD rom and not to the intellectual property, also called so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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