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TMI Blog2019 (5) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. That on the facts and in the circumstances of the case the A.O. erred in taxing revenue earned by company, being a non-resident, from sale of software to Indian customers as 'royalty' and the learned DRP grossly erred in confirming the action of the A.O. 3. That on the facts and in the circumstances of the case the A.O. and the ld. DRP failed to appreciate that sale of software is not 'royalty' within the provisions contained in Article 12 of the India-Ireland DTAA. 4. That on the facts and in the circumstances of the case both the A.O. and the Learned DRP had failed to appreciate the difference between 'copy righted article' and 'copyright right' while holding the software income to be in the nature of Royalty. 5. That the assessee craves leave to add, to amend, modify, rescind, supplement or alter any of the grounds stated hereinabove, either before or at the time of hearing of this appeal. 3. However, in this appeal the assessee has raised a multiple grounds of appeal, but at the time of hearing, the Solitary grievance of the Assessee has been confined to the issue whether the consideration received by a non-resident entity for the licensing of copyrighted article/so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "purchase" herein in connection with those items will be understood as a reference to the licensing to those items. With the exception of lest scripts and related documentation (collectively "TestScripts"), all software is licensed pursuant to the applicable end user license agreement (each a "EULA "). For Test Scripts and for all Professional services deliverables that do not constitute Software, Ixia hereby grants to Buyer a limited, non-exclusive, nontransferable, perpetual, worldwide license to copy and use such items only for Buyer's internal business purposes. As between Ixio and Buyer, Ixia is and shall remain the exclusive owner of all intellectual property rights in or related to any of the Products. " The buyer's right to use the software is absolute and is perpetual i.e. forever. The buyer thus becomes the owner of that copy of the software with limitations like the buyer cannot resale the software. The buyer can customise the software to suit it needs but cannot modify the software the software are generally encrypted, only exe files are sold, source code remains with the seller. Hence it is not possible for the buyer to modify or make any change in the softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean 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 film or films or tapes 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, other than an aircraft, or for information concerning industrial, commercial or scientific experience". Based on a reading of Article 12 of the India-Ireland DTAA, in the given case of the company, the consideration received for sale of software would only be classified as "royalty" if the company has allowed the use or right use the 'copyright' in the software supplied to the Indian customers. In the backdrop of the above discussion, the company would like to submit that in view of the definition provided in the Article-12 of India-Ireland DTAA for 'royalty', which means consideration for use orrightto use any copyright.There is a distinction between 'copyrighted article' and 'copyright right'. The term 'copyright' as has been used in the DTAA has not been s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghted material and does not give rise to any royalty income."Similarly, in another judgment pronounced in the case of DIT Vs. Ericsson A.B. 343 ITR 470, wherein the issue was relating to taxability of payments received against supply of GSM mobile telephone system, which consisted of both hardware and software, the Hon'ble Delhi High Court held that there was no wayin which an independent use of software could have been made. The High Court observed that the embedded software merely facilitated the functioning of the equipment and the GSM supply contract could not be bifurcated into hardware and software. The High Court then went on to record the principle towards taxability of payments made against supply of software and concluded that there is a difference between copyrighted article and copyright right. In the facts of the case it was decided that the payment was for mere usage of copyrighted software and therefore such payments were not covered under the definition of royalty provided under DTAA in the India-Sweden treaty as it only includes consideration for copyright and not for copyrighted article. For this, the ld Counsel relied on the following judgments: (i). ADIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and 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 fees for technical services. 3. (a) 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 film or films or tapes 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, other than an aircraft, or for information concerning industrial, commercial or scientific experience; (b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes 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, other than an aircraft, or for information concerning industrial, commercial or scientific experience. It is abundantly clear and we also note that from a consideration of the various decisions of the Supreme Court and the High Courts and the Circular No. 333, dated 2-4-1982, it would be clear that where the provisions of the DTAA are more beneficial than provisions of the Act, the provisions of the DTAA would prevail. We note that in the assessee`s case under consideration, the buyers of the software are not allowed to sell/distribute the copies of the software to the third parties. What the buyers get, is merely a right to use the software (which is a copyrighted article) and not the copyright in that software. Therefore, the sale of software is not 'Royalty'. Moreover, any incidental copy made while using the software for its proper use does not amount to acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hesaid judgment of Hon`ble Delhi High Court in the case of Infrasoft (supra), under consideration is not operational and effective. Unless and until the judgment of Hon`ble Delhi High Court is reversed by Hon`ble Supreme court, the same has to be given due effect. Judicial discipline demands that once an order has been passed in the assessee's own case, lower authorities are duty bound to act in accordance with the same. Therefore, we are of the view the ld DRP erred in not following the judgment of the Hon`ble Delhi High Court in the case of Infrasoft (supra). 10. We note that the assessee, a non-resident company, has earned revenue from supply of software to its Indian customers. As per the terms of the contract, the assessee provided a licensed software to its customers ( vide point 2 at Page nos. 17 of the paper book). Further, it may be noted that the software supplied were exclusively for the internal use of the customers [vide para 1 at Page Nos. 36 of the paper book). We note that the Ld. AO has merely reproduced the Assessee's submissions and the relevant provisions i.e., Section 9(1 )(vi) of the Income Tax Act, 1961 and has not examined the definition of 'royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. A combined reading of clause-3 and clause-8 of the Agreement dated 15.12.2008 between the appellant and NPL, clearly shows that the Appellant had only a right to use the computer software and did not have right to use copyright in the computer software. In other words none of the rights as is envisaged under Sec.14(a) or (b) of the Copyright Act, 1957 was conveyed by the agreement dated 15.12.2008. Therefore the payment in question made by the Assessee to NPL cannot be regarded as "Royalty". As we have already observed the Act does not specifically include "computer software" in the term "literary work" and under such circumstances, if we apply the provisions of Act to define the scope of "Literary Work", then perhaps the "computer software" will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the "computer software" will have to be included in the term "literary work" but to constitute "royalty" under the DTAA, the consideration should have been paid for the use of or the right to use the copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompetent to effect amendments to international instruments. As held by the Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373, these treaties are creations of a different process subject to negotiations by sovereign nations. Therefore insertion of Explanation 4 in the definition of "Royalty" in Sec. 9(1)(vi) of the Act by the Finance Act, 2012, w.e.f. 1-6- 1976, has no effect whatsoever and the issue has to be decided in the light of the definition of "Royalty" as contained in the DTAA read with the relevant provisions of the Copyright Act, 1957. 23. The learned counsel for the Assessee also addressed arguments to the effect that the right to use the software in the present case is akin to sale of copyrighted article rather than sale of copyright. Reference was made to the decision of the Hon'ble Delhi High Court in the case of DIT v. Ericsson A.B. [2012] 343 ITR 470/204 Taxman 192/[2011]16 taxmann.com 371, wherein it was held that the license granted to the licensee permitting him to download the computer programme and storing it in computer for its own use is only incidental to the facility extended to the licensee to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of a permanent establishment. 24. We are of the view that the view expressed by the Hon'ble Delhi High Court in the case of Ericsson AB (supra), which is favourable to the Assessee, should be followed and therefore we hold that the consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a permanent establishment. 25. The learned DR submitted that the Appellant, whose obligation is to deduct tax at source u/s.195 of the Act, cannot place reliance on the DTAA as NPL could do in defence of non taxability in India of income deemed to accrue and arise in India and in this regard relied on the decision of the decision rendered by the ITAT Bangalore Bench in the case of Vodafone South (supra). We have perused the said decision and we find that the observations of the Tribunal were made in the context of dispute raised by the revenue that the payee was not tax resident of a country, the benefits of DTAA between India and the said country were sought to be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes 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, other than an aircraft, or for information concerning industrial, commercial or scientific experience. We note that terms of the definition of 'royalty' provided in Article 12, ordinarily the receipt for sale of software shall be treated as 'royalty' only if it is for the use of a 'copyright'. Given the meaning of the term 'copyright' as has been discussed above in the Copyright Act, 1957, we note that the revenue accruing from supply of software in India is not chargeable to tax in India based on reading of the Article 12(3) of the India-Ireland DTAA. The amount received by the assessee towards sale of software is on account of sale of 'copyrighted article' and not on transfer of any 'copyright right'. The right to use any copyright in the software was never transferred by the company i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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