TMI Blog2019 (12) TMI 1029X X X X Extracts X X X X X X X X Extracts X X X X ..... was not taxable In India. Tribunal in the case of Black Duck Software Inc Vs. DCIT [ 2017 (7) TMI 1269 - ITAT DELHI] has held that where assessee, a US based company, granted a non-exclusive, non-transferable software license to Indian customer for a specific time period, since copyright in said software programme was retained by assessee, payment received by it was not liable to tax in India as royalty. In the case of Aspect Software Inc Vs. ADIT [ 2015 (5) TMI 726 - ITAT DELHI] held that consideration received by assessee for supply of 'contact solutions' used for better management, customer interaction, comprising of sale of hardware alongwith license of embedded software to end user is not royalty under article 12 of DTAA between India and USA. Provision of implementation and maintenance services are inextricably and essentially linked to supply of software; where supply of software is itself not taxable as 'royalty', these services are also not royalty. Respectfully following all we hold that the payment received by the assessee from its customers from sale of software products/ licenses is not in the nature of the royalty u/s. 9(1)(vi) of the IT Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the Grounds of Objection. ITA No. 2415/Del/2013 ( A. Y. 2009-10) 1. The learned Asstt. Director of Income-tax, Circle 1(1), International Taxation, New Delhi (AO) erred in law and on facts in holding that the amount of ₹ 3,48,69,783/- received by the assessee company from its customers is in the nature of ROYALTY u/ s 9(1 )(vi) of the ITA, 1961 and Fees for Technical Services as per Article 13(4)(a) of the Indo-USA DTAA. The AO ought to have appreciated that the said amount is normal Business Income of the appellant arising on account of sale of copyrighted products (licenses) and not taxable in India in the absence of Permanent Establishment (PE) in India. 2. The Honorable DRP has erred in law and on facts in rejecting the objections of the appellant to the additions proposed by the learned AO in treating the amount of ₹ 3,48,69,783 /- received by the assessee company as ROYALTY u/s 9(l)(vi) of the ITA, 1961 and Fees for Technical Services as per Article 13(4)(a) of the Indo-USA DTAA; instead of treating the same as consideration for sale of software licenses. 3. The assessee company craves leave to add / modify / delete / amend all / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,87,522) which was deducted by the various Indian customers of the assessee by taking extreme conservative position of the law. 4. Alternatively and without prejudice to the ground no 1 to 3 above, learned Assessing officer has erred in law and on facts in applying taxation rate of 15% as per DTAA between India and USA instead of 10% rate given under section 115A of Income Tax Act 1961. 5. The assessee company craves leave to add / modi fy / delete / amend all / any of the Grounds of Objection. ITA No.382/ Del /2016 (A.Y.2012-13) 1. The Hon ble DRP-IV Delhi has erred in law and on facts, in upholding learned AO s order treating the amount of ₹ 2,65,00,760/- being received by the assessee company for sales of licenses as a taxable ROYALTY u/s 9(l)(vi) of the IT A, 1961 and as per Article 12 the India - USA DTAA; instead of treating the same as consideration for sale of copyrighted software licenses. 2. The DRP / AO ought to have appreciated that the said amount, received from assessee s Indian customers, is normal Business Income of the appellant arising on account of sale of copyrighted licensed software products and not taxable in India in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The DRP vide order dated 23.12.2011 passed the order dismissing the objections of the assessee company and consequently the final order was passed by the AO on 27.12.2011 which was received by the US company on 27.01.2012 for A.Y.2007-08. Similarly, the order for A.Y.2009-10 passed by the AO on 26.10.2012 was received by the US office on 04.12.2012. He submitted that in view of the passing of the Finance Bill 2012 which was declared on 28.02.2012 many retrospective amendments to sections relating to Royalty were proposed. The said amendments were subject matter of multiple and conflicting views in many professional circles and there was total confusion at assessee s end regarding impact of the said amendment. On further consultation the assessee was advised by certain senior counsels that there is a merit in filing of the appeal despite the retrospective amendments for which the company filed the appeal. But in the meantime since the papers were required to be sent to USA for signature etc there was some delay in filing of the appeal for A. Y. 2007-08. 5. So far as A. Y. 2009-10 is concerned it has been stated that the main finance person Mr. Jyotiwardhan Patil of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the former case, the consideration of prejudice to the other party will be a relevant factor so the case calls for more cautious approach but in the later case no such consideration may arise and such a case deserves a liberal approach, no hard and fast rule can be laid down in this regard. The court has to exercise the discretion of the facts of each case keeping in mind that in construing the expression 'sufficient cause', the principle of advancing substantial justice is of prime importance. 9. The Hon'ble Supreme Court in B. Madhuri Goud v. B. Damodar Reddy (2012) 12 SCC 693, by referring to various earlier decisions held that the following principles must be kept in mind while considering the application for condonation of delay; (i) There should be a liberal, pragmatic, justice oriented, non-pedantic approach while dealing with an application for condonation of delay, for the courts are not supposed to legalise injustice but are obliged to remove injustice. (ii) The terms sufficient cause should be understood in their proper spirit, philosophy and purpose regard being had to the fact that these terms are basically elastic and are to be applied in prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009-10 and these appeals are admitted for adjudication. 11. Now, we take up the ITA No. 4918/Del/2010 for A.Y. 2007- 08 as the lead case. 11.1 Facts of the case, in brief, are that the assessee filed its return of income on 01.04.2008 declaring total income Nil . Regarding background and business of the assessee company, the assessee had submitted the following :- The company is engaged into development and sales of Project Management Software Licenses to various customers all over the world. The company has developed the various versions of its PMS system and is providing licensed copyright products on a sale basis. All the necessary and essential programs are own creations of the company. The company provides and sells large quantities of the licensed softwares through internet by providing KEY or passwords, etc. The softwares are downloaded from the net and protected through the licenses extended with the same. As the sales of copyrighted softwares is carried out through the internet protocol and our company does not have any PE in India, the company s income embedded in the sales to Indian companies, does not accrue in India. Kindly appreciate Article- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he software is delivered at the site of the end customer. There is a specific roll out plan and installation and implementation programme. During the same the employees of the customer are given training on how to use the same. The services including updates, maintenance, support etc. are part parcel of the contract. The same is also verifiable from the nature of receipts of the assessee: Infosys HCL TOTAL (USD) License $200,000.00 $ 200,000.00 Professional Services $208,436.61 $1,4,249.47 222,686.08 TOTAL (USD) $434,334.61 $29,788.47 464,123.08 Once the license is granted the assessee is responsible to maintain it as it is their proprietary product. After the grant of license the assessee keeps on billing the customers. There are number of software and solutions on the website of the assessee. Then in each product / solution number of modules are integrated. The assessee has filed only one cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a normal computer / system. The software are feature rich and are capable of carrying out various activities-. These can carry out the activities which many person together will not be able to do. Moreover the speed of carrying out the processes is real time i.e. the process is carried out as and when the activity happens. k) The customer gives its own IP Products to the assessee so that the software developed by the assessee is compliant to them. That is why there is a clause of Infosys IP. I) The assessee is required to protect those IP. A long list containing those IP of Infosys are provided in the agreement itself. The list runs into number of pages and is highly technical. The assessee has to make sure that the software developed talks to those modules of future user in a seamless manner and the assessee has to integrate its own software into the already running system of the client. m) The software developed for one client can not be licensed to any other client because the IP internal system infrastructure is unique to every organization and also the IP of the clients are to be protected. n)The software, for which license has been granted, equip t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tronics Company Limited and the decision of AAR in the case of Millennium IT Software Limited. 18. The AO thereafter passed the order u/s. 143 (3)/ 144 C on 27.12.2011 treating the software consideration of ₹ 2,01,51,292/-as royalty which is taxable at the rate of 15%. He further held that the services in connection are taxable as FTS as per Article 13 (4) (a) of the Indo US DTAA. 19. Aggrieved with such order of the DRP/ AO the assessee is in appeal before the Tribunal. 20. The Ld. Counsel for the assessee while strongly challenging the order of the AO/ DRP filed the following written synopsis :- Part-Si- Regarding merits of the appeals 2.1 - Key issue involved In all the four (4) appeals, the key issue involved is, characterisation of payments made to the appellant by its customers for sale of software products / licenses, whether ROYALTY as per ITA, 1961 read with DTAA between USA and India; or not. Learned AO has treated the payments as ROYALTY and taxed the same at applicable rate of tax. Appellant has prepared a chart of summarised Grounds of Appeal involved in all the above appeals. The same is given at page no. 452. 2.2 -Product sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Literary, dramatic or musical work Computer programme Artistic work Cinematograph film Sound recording To reproduce y y y X X To issue copies y y y y X To perform work in public/ To communicate to public y y y y y To make film y y y X X To translate y y X X X To make adaption y y y X X To sell or commercially rent X y X y y To sound record X X X ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmary of the rights granted and restrictions imposed in the Agreement involved in the said Infrasoft (supra) decision and compared the same with Appellants agreement. The said comparison is as under :- Reasons of DRP-I Explanation Page-6 (Para-2) That the right to use the software licence falls within ambit of section 9(l)(vi) Key proposition is, DTAA does not cover the right to use software in the meaning of Royalty Page-6 (Para-2) That the nature of rights is far from shrink-wrapped ...... since the supplier (^required to update fix the bugs, etc. Totally irrelevant contention since, issue involved is, what is the fate of a copyrighted product (i.e. a licence having restrictions of copying / duplicating, etc.) Issue of update / fixing bugs, etc. are typical warranties which come with every product. Moreover, the same is besides the present issue. Page-6 (Para-3) Concept of copyrighted product does not find mention in the ITA / DTAA / Copyright Act Copyrighted article is the result of the Copyright Act itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soft, etc. Appellant is enclosing herewith list of various cases where, ratio of Infrasoft has been followed. The same is given at page no. 535. Recent jurisprudence tilts clearly in favour of the Appellant. 2.8 - Various other reasons of learned AO While framing the draft order dated 31st December 2009, the learned AO has taken various alternate positions. Learned AO states that, the PMS software is not only a copyright, but also a patent / process / equipment, etc. As such, provisions of section 9(l)(vi) apply to the facts in either one of the situation. Appellant has been submitting that, the software license is not a patented technology. There is no any grave and material process involved in the same. In fact, the PMS software's of the Appellant are simply, Business Intelligent tools or MIS data tools for increasing efficiency. Further, these software licences are certainly not any equipment. The DRP-I has also focused on the issue of copyright V. copyrighted article and left the other analogies of the learned AO at that. Appellant submits, at the same time, the PMS software license cannot be a copyright + patent + process + equipment. Analogy of the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tl Tax.) 93 taxmann.com 80 (Delhi ITAT) 21. Ciena India P. Ltd. Vs. ITO (Intl Tax.) 96 taxmann.com 17 (Delhi ITAT) 22. Engineering Analysis Centre of Excellence P. Ltd. Civil Appeal No.8733-8734/2018 (SC). 23. DIT Vs. Infrasolt Ltd. (220 Taxman 273) 24. Halliburton Export Inc. Vs. ADIT (2014) 43 taxmann.com 223 Delhi ITAT 22. The Ld. DR on the other hand relied on the order of the AO / DRP and filed the following written synopsis :- D. Taxation of Software Royalty - The assessee claims the nature of its transactions with Infosys and other clients as one of sale simplicitor involving the sale/transfer of a copyrighted material/product rather than a transfer of copyright. Heavy reliance has been placed by the assessee on the decision of Hon ble Delhi High Court in the case of Infrasoft Ltd. [2013-TII-50-HC-DEL-INTL], However, nowhere it has been established that the facts of the case of the assessee are identical to that of Infrasoft. Moreover, the Hon ble Delhi High Court in the case of Infrasoft had also observed - 69. The Tribunal has held and rightly so that the question whether there was a transfer of a copyright right or only of a copyri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t one of developing, customizing integrating the software of the assessee with that of the client for the ultimate use by the end-users. This is one of the most significant differences between the facts in the case of Infrasoft that of the assessee. ii . Significance of Source Object Code creation of Derivative works - Another important point of departure from the facts in the case of Infrasoft is the provision of Source Code Object Code of the supplied software to the client. After becoming a party to the Agreement on Trade-Related Aspects of IP Rights (TRIPs), India has significantly amended its IP laws to comply with various requirements set out in TRIPs. Article 27(1) of TRIPs states that patent protection for new, inventive and industrially applicable inventions must be available without discrimination based on the technical field of an invention. In respect of software, Article 10(1) of TRIPs mandates the protection of computer programs, whether in source code or object code, as literary works under the Berne Convention, to which India has also acceded. It is in this context that the importance of the provisions of the agreement making available the sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein. Similarly, cl.11.3 [p.282] provides that in the event of termination of the agreement, Infosys shall be entitled to retain and withhold and use without any restrictions the software, software core derivatives and software derivatives. Moreover, the agreement provides that the assessee shall refrain from providing such software and software core derivatives to any third party and in the event of any breach to this, the assessee is liable to pay liquidated damages to Infosys. iv. Commercial Exploitation - It has already been discussed earlier that the agreement permits and the access to the source code allows Infosys to embed and incorporate whole or part of the software into Infosy s own products and developing new products based on the software, [cl.2.1 (ii), p.271] It has also been highlighted that the assessee will receive a Bonus on the basis of End User satisfaction of the products where the software has been incorporated. It was also highlighted that Infosys will own all worldwide right, title and interest in and to all such integration code and the assessee will assign to Infosys all of its right, title and interest in and to all such integration code, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than it. [para-88] , - Purpose Test - Whether the purpose of the license or the transaction is only to restrict use of the copyrighted product for internal business purpose [para-89] or the licensee was permitted to use and exploit the same commercially i.e. loan/rent/sale/sub-license or transfer the copy of software to any third party without the consent of the licensor, [para- 92] The case of the assessee when examined from the above perspective clearly establishes that the transfer is that of a copyright and not a copyrighted material. The following facts are the clear indicators of this conclusion - ■ Nature of transaction - It has already been discussed earlier that the agreement between the assessee and Infosys other customers is more in the nature of a Software Development agreement than in the nature of sale simplicitor and the as contention of the assessee that the product transferred is in the nature of goods is not tenable. As has been observed by the Hon ble Special Bench of this Tribunal in the case of Motorola Inc. [2005-TII-10-ITAT-DEL-SB-INTL1, the appellant has transferred something more than merely a copyrighted article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or rent the software to the third parties, in reality, the provisions of MLA itself permit the licensee to allow third party user of the software either independently or through embedded form along with the licensee s products. The licensee, thus, can allow any number of users to use the product either (i) by engaging/getting involved such user in the business of the licensee i.e. subsidiaries, employees and contractors and (ii) by any other person by supplying/using licensee s own products embedded with the software. In fact, integration of the software supplied by the assessee with Infosy s own software and embedding of the assessee s software in the products of Infosys and other customers for the third party users/customers clearly establish the commercial use and exploitation of the software by the licensee. In fact, the agreement explicitly provides for and encourages such joint commercial exploitation of the software. Such commercial use of the software, and for that matter, the purpose of the license, in no stretch of imagination, can be viewed or treated as a restricted use of the product for internal business purpose of the licensee. Thus, application of various test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution number of modules are integrated. The assessee has filed only one contract during the proceedings. This contract is with Infosys and is in relation to the Project Management Software that is why only the details of Project Management Software have been described above. 24. He submitted that it is not a sale simplicator. In addition to copy right services, service has been provided. Whether the services are to be taxed as business receipts or royalty has been discussed by the AO thoroughly and he held that the consideration received by the assessee falls in the category of royalty both under the Act as per section 9(1) (vi) Clause (i), (iii), (iva) and (v) of explanation 2 and Article 12 (3) (a) and 12 (3) (b) of Indo US DTAA. He submitted that the agreement in the instant case provides for auditing and documentation. Had it been a sale simplicitor no question of auditing arises. He submitted that the supply of the software in the instant case gives full freedom to customers to commercially exploit the same. Further payment of bonus is not possible in case of a simple sale. Relying on the following decisions, he submitted that the order of DRP/ AO be upheld. 1. Elektr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the software licenses for their business need. The assessee restricts its customers from duplicating/ adopting etc of the software products. It is the submission of the Ld. Counsel for the assessee that the moment restrictions are put regarding copying/duplicating/reproducing etc a copy right gets converted into a copy righted product. However, in the instant case, the assessee does not part with any copy right to the customers but merely extends a copy righted product to the customers. It is also his submission that unless and until a right protected under the copy right Act is not extended / shared with a party, and unless consideration is received for such a right, there is no case of any royalty for IT purpose. According to the Ld. AR the limb for sale / commercially rent as so made applicable for software, infact, ascribes copyright protection even in making of such use purpose copies. According to him the enhanced kitty of copyright protections for software, elevates the software family and makes the same highly protected from infringements. It is also his submission that the assessee has not transferred any rights for copying the softwares for commercial exploitation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... numerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right t r use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should 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 incident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase 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 to be considered as a royalty. The relevant observation of the Hon ble High Court from para 10 onwards reads as under :- 10. The Assessee had entered into a VAR Agreement with THPL. Paragraph 1.1 of the said agreement expressly indicates that THPL had appointed the Assessee (described as VAR) to market and sell the products in the Territory. Article 2 of the said Agreement provides for VAR s Obligations . Clause (a) of paragraph 2.1 of Article 2 expressly provides that the Assessee Shall promote, market and sell the Products in accordance with a business plan which shall be submitted to Trak within three (3) months of the effective date of the Agreement . Paragraph 4.2 entitles the Assessee to, inter alia, use the software and source codes for a limited purposes to sell and promote the software for use by third parties; demonstrate the software to third parties; and to customise the software for the purposes of End Users. The said agreement further contains a number of covenants to ensure that the Intellectual Property Rights in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the software and it was a case of mere transfer of copyrighted article. This Court concurred with the Tribunal and held that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income. 14. Insofar as the reliance placed by the Revenue on the decision of the Karnataka High Court in Samsung Electronics Co. Ltd. {supra) is concerned, a Coordinate Bench of this Court in lnfrasoft Ltd. {surpa) has unequivocally expressed its view that it was not in agreement with that decision. Thus, the said decision is of no assistance to the Revenue in this case. 15. In another case, Dynamic Vertical Software India (P.) Ltd. {supra), this Court had reiterated the view that payment made by a reseller for the purchase of software for sale in the Indian market could by no stretch be considered as royalty. 16. In the aforesaid view, the question framed must be answered in the affirmative, that is, in favour of the Assessee and against the Revenue. 17. The Appeal is accordingly dismissed. In the circumstances the parties are left to bear their own costs. 29. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or use of software owned by US company, when assessee would use software only for internal business operations and would not sub-license or modify same, could not be considered as royalty within meaning of article 12(4) of DTAA. 31. We find the Coordinate Bench of the Tribunal in the case of ACIT Vs. Landmarks Graphics Corporation reported in 87 taxman.com 311 has held that where assessee, a US based company, did not have PE in India and its activities were not covered by deeming fiction of article 5(2) of India - USA DTAA, income earned by it from sale of software to Indian companies which was 'off the shelf software, was not taxable In India. 32. We find the coordinate Bench of the Tribunal in the case of Black Duck Software Inc Vs. DCIT reported in 86 taxman.com 62 has held that where assessee, a US based company, granted a non-exclusive, non-transferable software license to Indian customer for a specific time period, since copyright in said software programme was retained by assessee, payment received by it was not liable to tax in India as royalty. 33. We find the Delhi Bench of the Tribunal in the case of Aspect Software Inc Vs. ADIT reported in 61 taxmann.com 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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