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TMI Blog2018 (1) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... as erred in law and in facts by upholding the order of the learned AO by holding that the Appellant was under an obligation to deduct tax at source under Section 195 of the Act, on the payments made by the Appellant to Shell International Exploration and Production BV ("SIEP BV"), Shell International BV ("SIBV") and Shell Global Solutions International BV ("SCSI BV"), collectively known as Shell Overseas entities for acquiring access/user rights of software. 3. Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and in facts, by upholding the order of the learned AO, and hence, erred on the following counts: 3.1 Holding that that the grant of user rights amounts to transfer of right in respect of a copyright. 3.2 Not appreciating the distinction between a transaction involving the 'transfer of copyrighted article' and 'transfer of rights in a copyright'. 3.3 Holding that when a person has the exclusive right to do or authorise the doing of the acts specified in the section 14 of the Copyright Act, 1957 in the case of a literary work in which copyright subsists, such right is considered as copyright, irrespective of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se payments which in his opinion were royalty payments. In response, the assessee submitted as under: 1. That it has been granted only right to access a particular software application and has not obtained any right to commercially exploit the software and make multiple copies of the same. According to the assessee for the purpose of categorizing income from a transaction as amounting to royalty what is to be seen is whether the transferee has the right of commercial exploitation of the intellectual property contained therein. In the instant cases, as it is not permitted to exploit the copyright commercially, the assessee does not have this rights associated with a copyright in terms of Sec. 14 of the Copyright Act. Therefore in such case, what it acquired cannot be considered as a copyright right; 2. That it has obtained only a user right in the copyrighted article in the form of software applications and not the right of use of copyright. Whereas use of copyright encompasses exploitation of the rights embedded in a copyright, a mere user right is a limited right and consideration paid for such user right cannot be regarded as consideration for use of or right to use a copyrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted by the assessee thereon either at the time of crediting or subsequently. As the assessee has failed to discharge its obligation to deduct tax at source as stipulated u/s. 195 of the Income Tax Act, 1961, as per the provisions of sec. 201(1) of the Income Tax Act, 1961, for the asst. years 2009-10 and 2010-11. I am holding the assessee as assessee in default in respect of tax not deducted at source in respect of royalty payable to the Suppliers listed above. 6. Against the above order, the assessee appealed before the ld. Commissioner of Income Tax (Appeals). 7. The ld. Commissioner of Income Tax (Appeals) agreed with the finding of the Assessing Officer. He noted the submission of the assessee and reliance by the assessee upon the Hon'ble Delhi High Court decision in the case of DCIT vs. Ericsson A.B., New Delhi (in ITA 504/2007 and others vide order dated 23.12.2011). However, he proceeded to place reliance upon the decision of Hon'ble Karnataka High Court in the case of CIT vs Samsung Electronics Co. Ltd. & others (in ITA No. 2808 of 2006 and others). Making quotations from the aforesaid order, the ld. Commissioner of Income Tax (Appeals) concluded as under: In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra, the ld. Departmental Representative submitted that the ld. Commissioner of Income Tax (Appeals) in this case has followed the Hon'ble Karnataka High Court decision which was the jurisdictional High Court for the ld. Commissioner of Income Tax (Appeals). Hence, the ld. Departmental Representative submitted that no-fault can be found in the order of the ld. Commissioner of Income Tax (Appeals) who has followed his jurisdictional High Court decision as per the mandate of law. 11. In rejoinder, the learned counsel of the assessee submitted that the taxpayer entity in this case has got merged with the concern whose jurisdiction lies with assessing officer and the ITAT at Mumbai. Hence, he pleaded that the jurisdictional High Court in this present appeal before the ITAT is not Hon'ble Karnataka High Court. The ld. Counsel of the assessee has made the following submissions: Shell Technology India Private Limited ("STIPL"), a company having its registered office in Bangalore merged with Shell India Markets Private Limited ('the Appellant'). The appointed date of merger as per the amalgamation scheme (enclosed as Annexure 1) was 1 April 2008. The amalgamation scheme was appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the jurisdiction of the Appellant was at Mumbai. We also wish to bring to your Honors notice, Instruction No. 8/2011 dated 11 August 2011 (attached as Annexure 6) relating to Instructions on process of filing appeals to ITAT. Para 7 of the said Instruction specifies the procedure to be followed on the transfer of jurisdiction outside of CIT's charge during the pendency of appeal. It provides that in a case of transfer of jurisdiction over a case involving two different Benches of ITAT during the pendency of appeal, necessary steps shall betaken by the transferor CIT to request the ITAT Bench where the case impending to transfer the same to the Bench of ITAT having jurisdiction over the cases of transferee AO. 12. The ld. Counsel of the assessee submitted that jurisdiction of court is determined by situs of transferee assessing officer. For this proposition, he placed reliance upon following case laws: 1. CIT vs. AAR BEE Industries [2013] 36 taxmann.com 308 (Delhi) 2. CIT vs. Sahara India Financial Corpn. Ltd. [2007] 162 Taxman 357 (Delhi) 13. The ld. Counsel of the assessee submitted case laws for the proposition that decision of non jurisdictional High Court is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant cannot modify, translate, reverse engineer, decrypt, decompile, disassemble, create directive works based on, or otherwise attempt to discover the above mentioned software source code or underlying ideas or algorithms. There is no acquisition of copyright which remains the property with the supplier. Generally there are two types of softwares namely, "Unbranded software" which is specialised and exclusively custom made to cater to the needs of individual clients, and "Branded software" or "off-the-shelf software" which is standardised and marketed as such. When off-the-shelf software is sold there is no doubt that the essence of such transaction is an outright sale. The said software purchased by the appellant company is "off the shelf" software/Shrink wrapped Software. The appellant company is authorized to use only the software and cannot tamper/copy/sale the same to any other person. The said software is delivered electronically by downloads from the respective websites. Activation key/code is then e-mailed for initialization. Software is then installed by putting the activation key/code and prompt-based installation is done thereafter. Thus, the appellant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and Air Transport) from activities described in Para 2(c) or 3 article 8." This definition is much narrower and restricted than the definition of "Royalty" under the Income-tax Act. In the case of Samsung Electronic Co. Ltd. (supra) the Bench has considered this issue and had given a finding, that under the Indo-US DT AA, payment made for a copyrighted article is not "Royalty" and that only Article '7' is attracted. The OECD Commentary clarifies the distinction between the right to use copyright and transfer of a copyrighted article. According to OECD, only a transfer that enables a transferee to commercially exploit software copyright will give rise to royalty income. But where the transferee gets exclusive rights for use, though it is short of full ownership, it will nevertheless be a case of sale of software. In such cases, the transaction will be outside the tax net in India as the said transaction will give rise to business income and in the absence of Permanent Establishment (PE) in India of Minitab Inc. Of U.S.A, business income are not be chargeable to tax in India as per Article 7 of India -USA DT AA. There is no acquisition of the software rights in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the insertion of these Explanations has not altered the views of Hon'ble High Court of Karnataka and on the contrary the views of the Hon'ble High court have been reaffirmed. 10. Ld. DR further submitted that it's that explanation 4 inserted section 9(1)(vi), has to be given retrospective effect, in as much as it is clarificatory in nature. In this regard he submitted that whether amendment/explanations inserted in the Income Tax Act can be read into the DTAA or not has to be considered on the anvil of ambulatory approach to interpretation of treaty, as against static approach adopted by the Hon'ble Delhi High Court. He further submitted that Hon'ble Bombay High Court in the case of CIT vs. Siemens AG, 310 ITR 320 has approved the ambulatory approach. Ld. DR further submitted that eminent author Klaus vogel in his commentary has also supported ambulatory approach. According to this approach, law in force as per the domestic law would be law as it stands on the date of application of Treaty. As against this Static Approach considers that law in force as per the domestic law would be law as it stood on the date of entering into of Treaty. 11. Ld. DR further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret; 14. The term royalty has been defined in Article 12(3) of the INDO-USA DTAA as under:- "a) Payments of any kind received as consideration for the use of, or right to use, any copyright of a literary, artistic to use, any copyright of a literacy, artistic or scientific work, includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uscate any copyright notice or other proprietary rights notice placed in or on or displayed by the Software and the Documentation, whether in machine language or human readable form..." The Ld A.R submitted that the ownership, title and interest in the IPR of the software vested with the US company and the assessee has no right in respect of the same except the license to use the software as expressly granted under the agreement. The Ld A.R submitted that the assessee has obtained only copyrighted article from the US company and not the copyright in the software. Accordingly he submitted that the payment made by the assessee to a copyrighted article, which is akin to "off the shelf" software is not royalty. He submitted that the Hon'ble Delhi High Court, in the case of DIT Vs. Ifrasoft Ltd (264 CTR 329) has taken its view in favour of the assessee in this matter and hence the decision rendered by Hon'ble Karnataka High Court, which was relied upon by the Ld D.R, need not be followed. He submitted that the identical issues have been decided by the coordinate benches of tribunal in various cases in favour of the assessee by following the decisions rendered by Hon'ble Delhi High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute. The dispute is with regard to the payment of Rs. 3,75,25,291/received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold "off shelf" which is mainly used by the Indian customer in their business for financial accounting, inventory management, HR management etc. INFOR India carries out marketing and sale of the software in India and places order with the assessee. The software supplied is then distributed to the Indian customers through INFOR. The consideration charged by INFOR India is based on terms agreed between the assessee and INFOR India as per the 'distribution agreement'. Under the terms of the agreement, as noted by the CIT(A), there is no transfer of any copyright in the software product. The payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the various Courts have consistently opined that the definition of "copyright" as given in the 'Copyright Act, 1957' has to be taken into account for understanding the concept. Section 14 of the said Act defines the 'copyrights' to mean as under:- "14. Meaning of copyright -For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely:- (a) in the case of a literary, dramatic or musical work, not being a computer programme, - (i)to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii)to issue copies of the work to the public not being copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. As noted by the CIT(A), under the terms of the agreement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling the software. The agreement also provides that the end user shall use the software only for the operation and shall not sublicense or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT(A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of "shrink wrapped software" off the shelf and hence, cannot be considered as a "royalty" within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly clause (v) of Explanation 2 there to, 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. Section 2(0) of the Copyright Act, 1957, makes it clear that a computer programme is to be regarded as a literary work. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. This was not established. It was not even the case of the Revenue that any right contemplated' under section 14 of the 1957 Act stood vested in the cellular operator as a consequence of article 20 of the supply contract. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article." Even assuming that the payments made by the cellular operator were regarded as a payment by way of royalty as defined in Explanation 2 below section 9(1)(vi), nevertheless, it could never be regarded as royalty within the meaning of the term in article 13, paragraph (3) of the DT AA. This is so becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act & Article 12 of the DTAA, "payments of any kind in consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work" is deemed to be "royalty". Under the Copyright Act, 1957, a software programme constitutes a "copyright". A right to make a copy of the software and use it for internal business by making copy of the same and storing it on the hard disk amounts to a use of the copyright u/s 14 (1) of that Act because in the absence of such a licence, there would have been an infringement of the copyright. Accordingly, the argument that there is no transfer of any part of the copyright and the transaction involves only a sale of a copyrighted article is not acceptable. The amount paid to the supplier for supply of the "shrink-wrapped" software is not the price of the CD alone nor software alone nor the price of licence granted. It is a combination of all. In substance unless a licence was granted permitting the end user to copy and download the software, the CD would not be helpful to the end user; (ii) There is a difference between a purchase of a book or a music CD because while these can be used once they are purchased, software stor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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