TMI Blog2018 (5) TMI 1861X X X X Extracts X X X X X X X X Extracts X X X X ..... or was the same referred to during hearing. In fact, no specific arguments were advanced by the parties in relation thereto. We are therefore unable to issue any definite findings with regard to the license fee from TCSL. The matter therefore shall accordingly have to travel back to the file of the AO for a decision on merits consistent and in accordance with the findings/observations made herein, of-course after allowing the assessee a reasonable opportunity to state its case in the matter. We may though clarify that if the development agreement on record is also applicable to TCSL our findings would be equally applicable to the license fee from TCSL as well. AO shall proceed accordingly. We decide accordingly. Applicability of Education cess on DTAA rate - charged Education cess over and above the tax rate stipulated in the Indo-German DTAA, on the royalty income - HELD THAT:- ‘Education cess’ is only a ‘surcharge’ is clarified by the relevant Finance Act itself. Further, that surcharge is only a tax, stands clarified by the Apex Court in CIT v. K. Srinivasan [1971 (11) TMI 2 - SUPREME COURT]. We, accordingly, have no hesitation in, accepting the assessee’s plea, directing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India:- (vi) 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 utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income form any source outside ; or (c) a person who is a non-resident, where the . 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 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 mark or similar property ; (iii) the use of any pate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services. 3. The term royalties as used in this Article 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 or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of the term royalty , which cannot be taken into account as the narrower definition of royalty, i.e., as per DTAA, shall prevail. Specifically in relation to the license agreement with Robert Bosch India (RBI), the development license granted is a non-exclusive, non-transferable fees based license to use the software EB Guide Studio for developing and configuring its own software interface products/licensed products. The grant of development license is thus a mere limited right to use the said software in business process. The same is not for commercial exploitation. There is no reverse engineering or modification right, nor the right to make copies/derivatives of the products. The source code is not shared, and what is transferred is the object code. Surely, there is no right to sell the same or make the copies thereof for licensing/sub-licensing. Similarly, the sale of EB Auto Care with EB Tresos Suite to TCSL, again, only entitles the licencee non-exclusive user rights in the said software products, i.e., for its internal business purposes, with no right to commercially exploit the same. The ld. counsel for the assessee, Sh. Sparsh Bhargava, Advocate, was during he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and royalty on the basis of the invoice raised by the assessee. 3.4 We may now advert to the decision by the Hon'ble jurisdictional High Court in the case of DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88 (Delhi), the relevant part of which, also read out during hearing, is as under: 87. In order to qualify as royalty payment, it is necessary to establish that there 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 in it. It does not amount to transfer of all or any right including lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only 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. 91. 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 Incometax Act or under the DTAA. 92. The licensees are not allowed to exploit the computer software commercially, they hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. 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. [emphasis, by italics, ours] 3.5 The question therefore that arises for being determined is the true nature of what stands acquired through the development license, in the context of the computer software, by the assessee s customer, RBI. That is, is it a right in a copyright, a copyright right, as the Hon'ble Court puts in, including the right to use the same, or a copyrighted article. The tests laid down for the purpose in several jurisdictions; co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd, the example of which the assessee cites. Preparing a word document using the same does not in any manner gives the user any right in the software, being a clear case of its user as a tool, for the user s internal purposes. Copying the same, where so, would be an infringement of the copyright. Continuing further, in a particular case, a software may enable creating or modifying another software/computer program. Enabling the writing of another programme would qualify the program being used for writing it as a tool. It could, in that case, be written using any other software. Further, the same does not necessarily provide the environment and, in any case, does not form the basis, the foundation, on which the software being created is built/rests, forming its edifice as it were, which is so in the present case. Further, beginning with its design, followed by testing, simulation, prototyping and, finally, deployment (onto target devices), a HMI model/system requires, and cannot be created without using, the EB Guide Studio, which thus is its base program, beyond being only a tool. The programming logic and its attributes, and thereby the intelligence embedded therein, clearly fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal terms of which were gone through and read in detail by both the sides during hearing, so as to avoid burdening this order further and, further, principally for the reason that we observe no dispute on the primary/principal facts of the case. In fact, the manner of working / using the EB Guide Studio, on which in fact both sides before us rely on, stands provided by the assessee itself. 3.7 The assessee argument of the computer software being not a copyright is negated by its own case of EB Guide Studio being an off-the-self software, and its supply being one of a copyrighted article. The several decisions relied upon by either side, i.e., for and against the license fee being, in the facts of a case, royalty (or not), are again largely qua computer software. Further, all the authorities, as the decisions by the Hon'ble High Courts; the OECD commentaries referred to therein, or by the tribunal, regard computer software as a copyright of literary/scientific work. We do not wish to enter into the controversy as to whether the same could be regarded as a literary work, as stated in some decisions (including Infrasoft Ltd. (supra)), or as scientific work. Again, in-as-much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded in the software inasmuch as it gets transmitted/embodied in the licensed products, with the user (RBI) being invoiced on the basis of the licensed products supplied. The decision in Infrasoft Ltd. (supra), rather, on facts, supports the case of the Revenue. Conclusion 4. The license fee from RBI in respect of software EB Guide Studio earned by the assessee, in our view, in view of the fore-going, qualifies to be royalty. Further, we may clarify that we have as yet considered only the said license fee there-from, from RBI. As regards the software licensed to TCSL, we do not find any specific agreement on record, nor was the same referred to during hearing. In fact, no specific arguments were advanced by the parties in relation thereto. We are therefore unable to issue any definite findings with regard to the license fee from TCSL. The matter therefore shall accordingly have to travel back to the file of the Assessing Officer (AO) for a decision on merits consistent and in accordance with the findings/observations made herein, of-course after allowing the assessee a reasonable opportunity to state its case in the matter. We may though clarify that if the development agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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