TMI Blog2021 (7) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court, now stand overruled by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd [ 2021 (3) TMI 138 - SUPREME COURT] as held that copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. Hon ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary work includes a computer program or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t - IT(IT)A No. 173/Bang/2021 - - - Dated:- 6-7-2021 - Shri N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Assessee : Shri. Sharath Rao, CA For the Revenue : Shri. Pradeep Kumar, CIT(DR), ITAT, Bangalore ORDER PER N.V. VASUDEVAN, VICE PRESIDENT This is an appeal by the assessee is directed against the order dated 25.2.2021of CIT(A)-12, Bangalore, relating to assessment year 2017-18. 2. The assessee is a company incorporated in Sweden and is engaged in the business of sale of software products and rendering information technology services. The business of the assesseee includes software materialization, marketing and support of the software material Qlikview for which it enjoys all intellectual property rights such as patent, trademark and copy rights. The assessee has entered into an agreement with its subsidiary QlikTech India Private Ltd. for onward sale of shrink wrapped software to the 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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tancy services including the provisions of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. The provisions of Sec.9(1)(vi) (b) read with Expln.-2 of the Act reads thus: Income 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 utilised 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 from any source outside India ; or ( c ) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : .. Explanation 2. -For the purposes of this clause, royalty means consideration ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of payment for use of copyright in a process and transfer of information of commercial or industrial nature. In coming to the aforesaid conclusion, the CIT(A) relied on the decision of the jurisdictional Karnataka High Court in the case of IBM India Limited (ITA No. 540/08) dated 21 October 2011 and Samsung Electronics (345 ITR 494). 4. Aggrieved by the order of the CIT(A) the assessee is in appeal before the Tribunal raising the following grounds :- 2. Grounds in relation to treatment of receipts from sale of offthe- shelf software in India to be in the nature of 'royalty' and therefore liable to tax in India 2.1. On the facts and in the circumstances of the case, the learned AO and the learned CIT(A) have erred in law and on facts in holding that the sum of ₹ 24,45,50,141 received by Appellant from its subsidiary company, QlikTech India Private Limited ( QlikTech India ), against the sale of off-the-shelf software are in the nature of transfer of copyright and therefore taxable as royalty both under the provisions of section 9(1)(vi) of the Act and under the India-Sweden Double Taxation Avoidance Agreement ( DTAA or Tax Treaty ). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the decision of the jurisdictional Karnataka High Court in the case of IBM India Limited (ITA No. 540/08) dated 21 October 2011 and Samsung Electronics (345 ITR 494) as the same have been reversed by the Honourable Supreme Court in a recent decision in the case of Engineering Analysis Centre of Excellence [2021] 125 taxmann.com 42 (SC). 5. The Ld. Counsel for the assessee submitted that assessee is a tax resident of Sweden, therefore, in view of Section 90(2) of the Act or the DTAA whichever is more beneficial to the assessee shall apply. He submitted that since the definition of royalty provided under Article 12 of the India-Sweden DTAA is more beneficial as compared to the provisions of Section 9(1)(vi) of the Act, therefore, the provisions of DTAA shall apply. He submitted that the Tribunal in assessee's own case for the immediately preceding Assessment Year i.e., Assessment Year 2012-13 and 2013-14 had held that what is being provided by Qlik India to end users is neither the copyright in the software nor the use of the copyright in the software but right to use the copyrighted material or article which is clearly distinct from the rights in a copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e implementation of a process and also transfer of information of commercial or industrial nature and the consideration received is precisely for this purpose. According to him the definition of Royalty within the DTAA with Sweden and also in Section 9 of the Income Tax Act clearly provide the consideration for use of process or consideration for Industrial or commercial knowledge. 8. We find an identical issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment years 2013-14 and 2012-13 in ITA No.391/Del/2017 and ITA No.6668/Del/2016 and the Delhi Bench of the Tribunal in its common order dated 17.10.2018 decided the issue. We find in those two years the revenue had come up before the Tribunal challenging the order of the Ld. CIT(A) wherein he had held that receipts of the assessee from sale of software are not taxable as royalty although by selling software assessee has transferred the rights to use to software. Ld. CIT(A) in those two years have held that receipts of the assessee from sale of software are not taxable as royalty even when explanation 4 to section 9(1)(vi) of the Act clearly states that consideration in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent 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. 86. The Licensing Agreement shows that the license is nonexclusive, non-transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT software and associated support information and that also for backup purposes. It is also stipulated that the copy so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to operate the program. The rights transferred are specific to the nature of computer programs. 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 business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a nonexclusive and non-transferable licence enabling the use of a copyrighted product cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub- licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de- assembling, or reverse engineering the software without the written consent of Infrasoft.The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software. 99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. 9. Since, the matter stands settled by the order of the Hon'ble High Court, we hereby uphold the ld. CIT (A) observation that the right to use granted through licensing of a software does riot fall within the meaning of Royalty as provided for in the domestic law or the DTAA. Any consideration for the same is not taxable as Royally under section 9(1)(vi) or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. This fact is also not in dispute. ........... 77. The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the DTAA are the same which appear in Section 9(1)(vi), for better understanding all these very terms, OECD commentary can always be relied upon. The Apex Court has emphasized so in number of judgments clearly holding that the well-settled internationally accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Income Tax Act............... 59. On a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rruled by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC). The Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts: 1. The seven ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the transfer of all or any rights in respect of any right, property, or information included and had always included the transfer of all or any right for use or right to use a computer software . The court ruled that Explanation 4 to section 9(1)(vi) expanded the scope of royalty under Explanation 2 to section 9(1)(vi). Prior to the aforesaid amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or other similar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of royalties will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term copyright has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary work includes a computer program or software. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has erred in holding that the services rendered are in the nature of 'consultancy services' which make available technical knowledge, experience and skill to the Indian entity without appreciating the fact that as per the Service Agreement, it is clear that the Appellant 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. 3.5. The learned 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 learned CIT(A) has failed to appreciate that the year on year rendition of services by the Appellant 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 Appellant. 3.6. On facts and circumstances of the case, the learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. The plea of the assessee that the said receipt is not chargeable to tax in India was that the services were rendered outside India and payments were received outside India by the person to whom services were provided. It was the plea of the assessee that it being a non-resident, in terms of section 5(2)(b) (c) of the Act, it is only income that is chargeable to tax in India that which accrue or arise in India or is deemed to accrue or arise in India. Since the services in question was rendered outside India, payment cannot be regarded as income that accrues or arises in India. Assessee also pointed out that payment in question cannot be regarded as Fees for Technical Services (FTS). The assessee brought to the attention of the AO the provisions of section 9(1)(vii) which defines the terms of FTS to mean any consideration for rendering any managerial, technical or consultancy services. The plea of the assessee was that back office services rendered by the assessee were neither managerial, technical or consultancy services. The assessee, therefore, submitted that the receipt in question cannot be brought to tax as FTS. 15. Without prejudice to the above submission, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . Fees for Included Services ( FIS ) means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available 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 Fees for technical services means payments of any kind to any person in consideration for the rendering of any technical or consulting services (including through the provision of services of technical or other personnel) if such services: (a) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which are managerial in nature. It was submitted by the assessee that the services provided by the assessee, even if considered to be managerial in nature, the same would not fall in the nature of technical or consultancy services and accordingly, would not fall within the definition of FIS/ FTS as contained in the India- Portuguese / India-USA DTAA. Therefore, the same would not be liable to tax in India under Article 12 of DTAA. 18. Without prejudice to the above, it was submitted that if the services provided by the assessee are considered to be technical or consultancy services, even otherwise, the payments in respect of the same would be considered as FIS/ FTS only if - They are ancillary and subsidiary to the application or enjoyment of a right, property or information for which are royalty payment is made; or - 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 submitted that as per the memorandum to India-USA DTAA services will be regarded as made available only when: Technology will be considered 'made availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Sweden had received 'Management Service Fee' from Indian AEs for direction or guidance relating to business strategy and its group policies. The Assessing Officer taxed the consideration received for services rendered by it as fees for technical services under article 12 on the ground that article 12 included managerial, technical or consultancy services. The assessee stated that the above payment was not taxable in view of the protocol to DTAA between India and Sweden on article 12 and that the services provided by the assessee-company were managerial in nature and, hence, were non-technical. The DRP did not accept the contention of the assessee that the services rendered were in nature of marketing, manufacturing and human resources and information technology functions and in view of lack of clarity on part of the assessee to establish that the services rendered by it were eligible for the beneficiary clause under India-Portugal treaty, the DRP declined to interfere with the order passed by the Assessing Officer. On further appeal, the Pune ITAT, held that as per the protocol, on the principle of the most favoured nation (MFN) clauses received by the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available in Article 13.4 refers to the stage subsequent to the making use of stage. The qualifying words is which the use of this relative pronoun as a conjunction is to denote some additional function the rendering the services must fulfil. And that is that it should also make available technical knowledge, experience, skill etc. The word which occurring in the article after the word services and before the words make available not only described or defines more clearly the antecedent noun (services ) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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