TMI Blog2020 (7) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of Royalty under DTAA, where the term Royalty originally defined has not been amended. As per definition of Royalty under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of Royalty . We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of Royalty having not undergone any amendment in Tax Treaty, the assessee was not liable to be taxed on aforesaid receipts of Licensing software and also on sale of Hardware. - Decided in favour of assessee. - ITA No.9130/Del/2019 - - - Dated:- 6-7-2020 - Ms. Sushma Chowla, VP And Shri Prashant Maharishi, AM For the Appellant : Sh. Deepak Chopra, Adv. For the Respondent : Sh. Satpal Gulati, CIT DR ORDER PER SUSHMA CHOWLA,VP The present appeal filed by assessee is against order of ACIT, Circle Int. Tax.-2(2)(2), New Delhi dated 23.10.2019 relating to assessment year 2016-17 against the order passed under section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (in short the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leware products represents business income, which is not taxable in India in the absence of any PE of the Appellant in India, in accordance with the provisions of the Act as well as Article 5 read with Article 7 of the India-Swiss tax treaty. Addition to income on account of alleged differences between data as per Form 15CA filings and revenue as per Form 26AS 7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making an addition (amounting to INR 10,61,66,731) to the Appellant's taxable income on account of alleged mismatch/ difference in the amount of remittances (to the Appellant) reflected in the Form ISCAs filed by three (3) Indian resident customers (as per data available and sourced by the Ld. AO) vis-a-vis revenues reported in Form 26AS of the Appellant. 8. Without prejudice, on the facts and circumstances of the case and in law, the Ld. AO has erred in making addition to income amounting to INR 2,81,29,442 which represents income that has been doubly taxed in the hands of the Appellant as per the impugned assessment order for the subject AY. 9. Without prejudice, on the facts and circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the India-Swiss Tax Treaty. 5. Briefly in the facts of the case the assessee company is a foreign company and heaquartered in Cheseauxsur-Lausanne, Switzerland. It operates as a wholly owned subsidiary of Kudelski SA-a Swiss entity. It supplies conditional Access System (in short CAS ) products, Middleware Products, digital rights management, and integrated on-demand solutions for content providers and digital television (TV) operators over broadcast, broadband, and mobile platforms. The company offers satellite, terrestrial, cable, and IPTV solutions including content security solutions to manage and enhance pay-TV over broadcast and broadband networks; middleware and applications; consumer conditional access modules; and PCTV adapter solutions. It also offers mobile TV solutions, including mobile TV Micro-SD card and OMA BCAST smartcards. In addition, the company offers maintenance and support service, including hotline, support line, software updates, hardware repairs, remote diagnosis, onsite intervention, and health check services; and professional services, including technical training, system audit, operational mentoring, migration and deployment, system integration, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. The taxability of the CAS and middleware software has been dealt in detailing preceding paragraphs and which is covered in both the provisions of the Income Tax Act as well as treaty. In view of the above, it is categorically held that the consideration for CAS and middleware products supplied by the assessee is in the nature of royalty income taxable in India. The said observation were made by the Assessing Officer. The DRP has dismissed the objections filed by the assessee on the ground that SLP was pending against the decision of Hon ble Delhi High Court in the case of Infrasoft Ltd. in ITA No.1034/2009. 7. The Ld.AR for the assessee referred to the terms of License Agreement placed at pages 40 onwards of the Paperbook. Special reference was made to clause 8, 8.1 to 8.7 of the Agreement. The Ld.AR for the assessee pointed out that the issue stands squarely covered by the decision of Hon ble Delhi High Court in DIT vs Infrasoft Ltd. 264 CTR 329 (Del.) and DIT Ors. Vs New Skies Satellite BV Ors. [2016] 382 ITR 0114 (Del.). He also pointed out that reliance placed upon by the authorities below on the decision of Hon ble Karnataka High Court in DIT vs Samsung Electronics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able any process to the customers, who in turn use the process while carrying out their business. Further, no exclusive right in the software are transferred to the customers; it is only a copyrighted Article which is being licensed, and no right to use copyright subsisting in such software is transferred. Therefore, the same does not fall within the definition of Royalty as per amended provisions of section 9(1)(vi) of the Act. The assessee also claimed that the consideration receipt cannot be for use of process, since there was no control of the customer over the software system and all rights therein are retained with the assessee. Further, the transaction merely involves supply of the products on a license basis and not the grant of rights (including any rights towards the copyright) in the software/computer programme embedded with the product. 14. The alternate plea raised by the assessee is that without prejudice and in addition to above, the payments for supply of CAS and Middleware products do not fall within the definition of Royalty as per Article 12(3) of the India-Swiss Tax Treaty, where such definition is narrower in ambit as compared to the Act. 15. On the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations (explanation 2 in particular) The assesse has challenged this contention by referring to the definition of Royalty in the relevant DTAA. The assesse has also submitted the judgment by Hon ble Delhi High Court in Director of Income Tax vs. Infrasoft Limited (264 CTR 329) on similar issues where relief has been granted to the assesse basis the definition of Royalty in the DTAA. It has been reported that the department is in appeal before Hon ble Supreme Court (CC No 19034/2014) against the above referred judgment of Hon ble Delhi High Court. It has to be borne in mind that the panel is an extension of the assessment process and the AO is now bound by the directions of DRP. Accordingly, the matter needs to be kept alive in view of its pendency before the Apex Court. 18. The Assessing Officer held the aforesaid consideration received by the assessee on sale of software and hardware as taxable in the hands of the assessee. 19. The question which arises is whether such license of software by the assessee is covered under the term Royalty as provided in section 9(1)(vi) of the Act and/or Article 12 of the DTAA. Article 12 of the DTAA between India and Sweden stipulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. The Hon ble High Court in DIT Vs. Infrasoft Ltd. (supra) vide its decision dated 22.11.2013 was of the view that where the assessee was governed by Indo-US DTAA, the income of assessee would be chargeable to tax in terms of provisions of Indo-US DTAA and if the same was more advantageous or beneficial, then definition of the word Royalty as defined in Explanation 2 to section 9(1)(vi) of the Act could not be applied. The Hon ble High Court vide paras 64 and 65 held as under:- 64. To be taxable as royalty income covered by Article 12 of the DTAA the income of the Assessee should have been generated by the use of or the right to use of any copyright. 65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of MOTOROLA INC VS DEPUTY CIT (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under: 155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation. 158. Secondly, under the definition of copyright in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the Assessee is expressly stated in Clause 20.1 as a non exclusive restricted license . This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns that the cellular operator cannot make copies of the software for commercial purposes. This condition is plainly contrary to Section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. We may also notice Section 52(1)(aa) of the Copyright Act which lists out certain acts which cannot be considered as infringement of copyright. The particular clause permits the making of copies or adaptation of a computer programme by the lawful possessor of the copy and the computer programme in order to utilize the public programme for the purpose for which it was supplied or to make backup copies purely as a temporary protection against loss, destruction or damage. Therefore, merely because the cellular operator has been permitted to take copies just for backup purposes, it cannot be said that it has acquired a copyright in the software. 160. Clause 20.4(c) makes it mandatory for the cellular operator, while making copies of the software for backup purposes, to also mark the copied software with copyright or other marking to show that the rights of the Assessee are reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar's Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point: (h) Copyright is distinct from the material object, copyrighted: It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public (underline is ours). The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objection cannot be accepted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7. 166. We may also usefully refer to the proposed amendments to the regulations of the Internal Revenue Service (IRS) in the USA. Again these regulations may not be binding on us but they have a persuasive value and throw light on the question before us, namely the difference between a copyright right an d a copyrighted article. These regulations have been placed at pages 136 to 157 of Paper book No. II. The actual regulations as well as the explanatory Note explaining the object and the purpose of the proposed regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 148 of the paper book) that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred. Several examples have been given below these regulations to find out whether a particular transfer is a transfer of a copyright right or a transfer of a copyrighted article. 171. The Commentary of Charl P. du TOIT on this question has been placed at pages 202 to 204 of Paper book No. II. The Commentary is titled Beneficial ownership of royalties in Bilateral Tax Treaties. He has opined that articles such as Books and Records are copyrighted articles and if they are sold, the user does not obtain the right to use any significant rights in the underlying copyright itself, which is what should determine the characterization of the revenue as sale proceeds rather than royalties. He has further opined that consideration relating to sale of software can amount to royalty only in limited circumstances. 172. For the above reasons, we are of the view that the payment by the cellular operator is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Infrasoft s written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 23. The Hon ble High Court concluded by holding 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 beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration paid for purchase of goods cannot be considered as royalty . Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. 26. The Hon ble High Court has thus, made distinction between the cases where consideration is paid to acquire right to use, patent or copyright and cases where payment is made to acquire patented or copyrighted products / material and has held that where the payment is made to acquire products which are patented or copyrighted, consideration paid would have to be treated as payment for purchase of product rather than consideration for use of patent or copyright. In para 13, the Hon ble High Court in Pr.CIT Vs. M.Tech India (P) Ltd. (supra) refers to earlier decision of Coordinate Bench of the Hon ble High Court of Delhi in DIT Vs. Infrasoft Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. 28. The Hon ble High Court of Delhi in DIT Vs. Infrasoft Ltd. (supra) has taken note of the said decision of DIT Vs. Ericsson A.B. (supra) in para 71 and in para 72 held as under:- 72. The Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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