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TMI Blog2021 (7) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... end users/ customers in India as per the distribution / license agreement. As per the said agreement QlikTech India Private Ltd., will promote and resell assessee's products to the end users within the prescribed territory in accordance with the terms and conditions set forth in the agreement. A copy of the distributor agreement dated 16.11.2011 and End users Licence Agreement (EULA) which forms Appendix 1 to the Distribution Agreement are at pages 106 to 112 of the assessee's paper book. The following features in the said agreement are material for a decision in deciding the 1st issue in this appeal and the same are that (i) the distributor gets only a non-exclusive and non-transferable license to resell computer software. (ii) No copyright in the computer program is transferred to either the distributor or to the ultimate end-user. (iii) The end-user can use the computer program itself, but there is no further right to sub-license or transfer or reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user; (iv) The distributor pays the computer program's price as goods, in a medium that either stores the software or embeds it in the ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or earning any income from any source in India : ........ 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 patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble Taxation Avoidance Agreement ("DTAA" or "Tax Treaty"). 2.2. The learned CIT(A) has erred in law in not following the decision of the Hon'ble Delhi Income-tax Appellate Tribunal ("ITAT") in the Appellant's own case for the past years (AY 2012-13, AY 2013-14 and AY 2014-15), wherein the ITAT has decided the issue in favour of the Appellant and held that receipts from sale of software products are not liable to tax as 'royalty' in India. 2.3. The learned CIT(A) erred in not appreciating the fact that sale of software by the Appellant under the buy-sell model are in the nature of sale of "copyrighted article" and not in nature of transfer of "copyright" and further failed to appreciate that fact that a mere transfer of a copyrighted article, without transferring the right in the copyright, shall not be held as payment towards "royalty" and consequently, cannot be taxed in the hands of the Appellant. 2.4. The learned CIT(A) has erred in law and on facts in failing to appreciate that the rights described in section 14(b) of the Indian Copyright Act, 1957 in the case of "computer programme", are the rights vested only in the author of the "computer programme" (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in a copyright. It has held that the right that is being 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. He submitted that the QlikTech Software product in question in the current year and also in the preceding assessment year is the same, He further submitted that the sale of software in the instant case cannot be held to be "use of process" or "information concerning Industrial, commercial or scientific experience" because the end users do not have any access to the source code and what is available merely for their use is software product as such and not the process embedded in it and all intellectual property rights and other rights relating to the QlikTech products at all times is the exclusive property of the assessee. He submitted that assessee in the instant case has merely transferred the right to use the copyrighted article. He submitted that AO and the Ld. CIT(A) relying on the decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 and CIT vs Lucent Technologies vide ITA No. 168/2004 and that those de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of transfer of all or any rights for use or right to use a computer software irrespective of the medium through which such right is taxable as royalty. We find the Tribunal after considering various decisions including the decision of Hon'ble Delhi High Court in the case of DCIT Vs Infrasoft Ltd. 264 CTR 329 and in the case of DIT Vs M/s Nokia Networks (358 ITR 259) has decided the issue as under :- "6. In this background the points to be adjudicated would be a) Whether the receipts from sale of software be treated as royalty or not. b) Whether the effect of amendment in Section 9(1)(vi) brought about by the Finance Act, 2012 can be read into the treaty or not. 7. We have heard the arguments of both the parties and perused the material on record. 8. We find from the judgment of the Jurisdictional High Court, in the case of DCIT Vs Infrasoft Ltd. 264 CTR 329 has elaborately explained as to what constitutes licensing agreement, its exclusivity, non-transferability, as to what constitutes a copyright and how the amounts paid for transfer of copyright and amounts paid for royalty defer in connection with the Article 7 and Article 12 of the DTAA. The judgments also deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse- engineer the Software without 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. 87. In order to qualify as royalty payment, it is necessary to establish that there is tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to enjoy any or all of the enumerated 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 to 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 coextensive 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal right to the software i.e. copyright remains with the owner and the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither the copyright in the software ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT 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. 10. Regarding the applicability of amendment in Section 9(1)(vi) brought out by Finance Act, 2012, we find that this issue of applicability has been examined in the case of DIT Vs New Skies Satellite BV by the Hon'ble Delhi High Court in ITA 473/2012. The Hon'ble Court observed that the only manner in which change in position of the provisions of the treaty can be relevant only if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs." 11. From the above judgment, it can be concluded that the amendment in the DTAA unilaterally cannot be enforced, hence, the provisions of Section 9(1)(vi) are not applicable to the instant case. The contention of the Assessing Officer cannot be upheld. 12. In the result, both the appeals of the revenue are dismissed." 9. Since the facts of the instant assessment year are identical to the facts of the two preceding assessment years decided by the Tribunal in assessee's own case, therefore, respectfully following the decision of the coordinate bench of the Tribunal we set aside the order of the Ld. CIT(A) and hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any medium electronically; 2. To issue copies of the work to the public, provided they are not copies already in circulation; 3. To perform the work in public, or communicate it to the public; 4. To make any cinematographic film or sound recording in respect of the work; 5. To make any translation of the work; 6. To make any adaptation of the work; and 7. To do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (1) to (6). The court held that a licence from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a licence issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is 'licensed' by the foreign, non-resident supplier to the distributor and resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. 11. In the light of the aforesaid discussion, the grounds raised by the assessee with regard to taxing receipts on sale of off-the-shelf software are allowed. 12. Ground Nos.3 to 3.8 raised by the assessee reads as follows: 3. Grounds in relation to treatment of receipts from shared services in India to be in the nature of 'fess for technical services' and therefore liable to tax in India 3.1. The learned CIT(A) has erred in law and on facts in holding that the sum of Rs. 98,93,448 received by the Appellant from QlikTech India on account of shared service centre cost recharge, to be in the nature of Fees for Technical Services ("FTS") and therefore taxable in hands of the Appellant both under the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o fees for technical services under the provisions of the Income Tax Act as well as the DTAA. 3.7. Without prejudice to any other grounds taken herein, the learned CIT(A) has erred in law and on facts by not following the principle laid out by various judicial precedents relied upon by the Appellant, including the decision of the Jurisdictional Karnataka High Court. 3.8. Without prejudice to the above grounds, the CIT(A) has erred in law and on facts in not adjudicating the alternate argument that, by virtue of the MFN clause as contained in the Protocol to the India Sweden DTAA, the Appellant can claim the benefit of the India Finland DTAA which provides that only such services would be chargeable to tax in India, which are rendered in India. Therefore, given that in the current case of the Appellant, the services are rendered entirely from Sweden, the same would not be liable to tax in India. 13. The assessee entered into an agreement with Qlik India Ltd., whereby it agreed to provide assistance to Qlik India in respect of certain back office support operations, through it's shared services center. Copy of the said agreement is at pages 113-119112 of the assessee's Paper Boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or other personnel. The definition under the Act and DTAA is therefore one and the same as far as FTS is concerned. In terms of Article 12(2) of the DTAA, it is taxable in the State in which it arises, i.e., India. The assessee submitted that under article 12 of the India-Sweden DTAA, FTS cannot be brought to tax in India because under the protocol to the India-Sweden DTAA if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on, inter alia, fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in the India-Sweden DTAA, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under the India-Sweden DTAA. Such terms contained in a DTAA are referred to as the Most Favoured Nation ("MFN") clause. The assessee therefore submitted that on the basis of the MFN clause as contained in the Protocol to the India-Sweden DTAA, the assessee referred to the India- Portugese DTAA and the India-USA DTAA, which imposes more restrictions for taxation of FTS by source state by adding a cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore restricted scope compared to the provisions of the Act since, as per the India-Portuguese DTAA, the services shall be considered as fees for included/technical services only when there is transfer of technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. which enables the person acquiring the services to apply the technology contained therein. Similarly, the India-USA DTAA also has a more restricted scope compared to the provisions of the Act since, as per the India-USA DTAA, the services shall be considered as fees for included/technical services only when there is transfer of technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 16. The assessee submitted that it was a tax resident of Sweden and therefore it was entitled to avail the benefit of the MFN clause as contained in the Protocol to the India-Sweden DTAA by virtue of which, it can claim the benefit of the "make available" condition imposed for bringing to tax the fees for technical services in the India-Portuguese / India-USA DTAA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al and consultancy services are considered included services only to the extent they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The assessee pointed out that by providing the back office services referred in the earlier paragraph, nothing is made available to the recipient of services from the assessee. 19. The AO, however, did not agree with the submissions made by the assessee and he held that services were in the nature of consultancy and services were regarded as FTS. With regard to the argument on Article 12 of the India-Sweden Tax Treaty, reliance was placed by the assessee on NSN. The AO held that the services rendered by the assessee was made available to the Indian company to the benefits of such services. The AO did not specifically discuss about the NSN clause. 20. On appeal by the assessee, the CIT(A) concurred with the view of the AO and placed reliance on the decision of the Authority for Advanced Ruling (AAR) in the case of Areva T & D India Ltd., (2012) 18 taxmann.com 171 (AAR - New Delhi). In the decision relied upon by the CIT(A), it was held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portugal. The Tribunal noted that India entered into DTAA with the Sweden which was notified vide notification no. GR 705/E dated 17.12.1997. Article 12 of the India-Sweden DTAA provides the mode of taxation of the royalties and fees for technical services whether the same are to be taxed in the source country or in the residence country. The definition of the fees for technical services (FTS) is given in Article 12(3)(b) of the Act. It is true that it is a very conservative definition and there is no condition that the technical services should be made available. The India also entered into the treaty with Portuguese republic which was notified vide notification no. GR F42/E dated 16th June, 2000. The Tribunal accepted the argument that considering the principle of most favoured nation (MFN) clause in treaty between India and Portuguese unless a condition of make available the technical knowledge or skill or services is fulfilled then said payment cannot be taxed in source country i.e. India. 23. We are of the view that the assessee is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices enumerated in the present case, we are of the view that the services were purely in the nature of back office services and nothing can be regarded as having been made available to the recipient of services. As per the terms of the Service Agreement, it is clear that the assessee only provides corporate back office services to QlikTech India and such services are not consultancy services and the same do not involve transfer of any technical knowledge or skill or experience to the recipient. The CIT(A) has erred in law and on facts in stating that, since the business model and the accounting and financial policies of the business remains the same, the consultancy services could be utilised by the Indian entity in its business year after year, thereby satisfying the 'make available' condition. On the contrary, the CIT(A) has failed to appreciate that the year on year rendition of services by the assessee to the Indian entity proves that technical knowledge is not transferred or made available to the Indian entity for independently function without the aid of the assessee. We therefore agree with the plea of the assessee and hold that the sum received towards shares ser ..... 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