9911796707
TMI Blog2022 (4) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8,74,84,583 towards software maintenance fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.3 : On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to ax the receipt of Rs. 1,27,56,877 towards consulting service fees as Fees for Technical Services within the meaning of Article 12(5)(a) India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.4: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld.AO to tax the receipt of Rs. 1,48,45,943 towards training fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.5: On the fade and circumstances of the case, and in law, the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinue to vest with the TIBCO Group. - The customer is granted a limited, non-transferable, non-exclusive license to use the number of units set forth in the order form solely for customer"s internal business use. - The customer cannot make any modifications or enhancements to the software, create any derivative works of software or merge or separate any component. All rights with respect to this remain with TIBCO BV. - The customer cannot reverse compile, dissemble or otherwise reverse engineer the software. If the customer requires modification to the software to make it further useful to him, the same would have to be made by TIBCO BV. 1.1 The Company has been asked to show cause why the receipts on account of software license fees amounting to INR 94,538,285 (as referred in Sr.No.1 of the above table) should not be taxed in India as "Royalty" as per the provisions the Act and Article 12 of the India- Netherlands tax treaty." 6. In response to the show cause notice the assessee Company filed its detailed replies, but the Assessing Officer was of the opinion that consideration received towards use of software license fees is taxable as Royalty u/s 9(1)(vi) of the Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the direction of DRP as Rs. 9,45,38,285/- as Royalty income and software maintenance fees Rs. 8,74,84,583/-, consulting Service fees Rs. 1,27,56,877/-, Training fees Rs. 1,48,45,943/-, other service fees Rs. 1,72,800/- as "fees of Technical Services". Being aggrieved, the appellant is in appeal before us in the present appeal. 9. It is submitted before us that the ground of appeal No. 1 challenging the action of lower authorities in bringing to tax the software licence fees at Rs. 9,45,38,285/- as Royalty within the meaning of article 12 of the India and Netherland DTAA. It is submitted before us that in the immediate preceding assessment year 2013-14 the co-ordinate Bench of this Tribunal had decided this issue in favour of the appellant and finally submitted that the reasoning of the lower authorities in treating the software licence fee as royalty was not approved by the Hon'ble Supreme Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). 10. The ld. CIT learned Departmental Representative for the Revenue placing reliance on the order of the lower authorities justified the action of bringing to tax the software licence fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression "copyright" has to be understood only as is stated in section 14 of the Copyright Act and not otherwise. 107. Thirdly, when it comes to computer programmes, the High Court in Synopsis International Old Ltd. (supra) was wholly incorrect in stating that the storage of a computer programme per se would constitute infringement of copyright. This, again, would directly be contrary to the terms of section 52(1)(aa) of the Copyright Act. 108. Fourthly, the High Court is not correct in referring to section 9(1)(vi) of the Income-tax Act after considering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income And Capital Gains,40 ["IndiaIreland DTAA"]. Article 12 of the aforesaid treaty defining "royalties" would alone be relevant to determine taxability under the DTAA, as it is more beneficial to the assessee as compared to section 9(1)(vi) of the Income-tax Act, as construed by the High Court. Here again, section 90(2) of the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be noted:- "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to establish that there is transfer of all or any rights (including the granting of any license) in respect of copyright of a literary, artistic or scientific work. Section 2(o) of the Copyright Act 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. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under section 14 of the Copyright Act, 1957 stood vested in this 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". Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no. 1 & 2 in favour of the assessee and against the Revenue."(page 281) The High Court then followed its own judgment in Ericsson A.B. (supra), deciding the case in favour of the assessee. 112. In DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88/[2014] 220 Taxman 273 (Delhi) ["Infrasoft"],43 a Division Bench of the High Court of Delhi, by an exhaustive analysis of the provisions contained the India USA DTAA, the Income-tax Act and the Copyright Act, dealt with a situation in which the assessee who was primarily into the business of developing and manufacturing civil engineering software, licensed the said software to persons engaged in civil engineering work in India. The High Court referred to a decision of the Special Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the Assessee. 157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title "License", says that JTM is granted a non-exclusive 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. 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. 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." (pages 365-366) 114. Referring to the High Court's earlier judgments in Ericsson A.B. (supra) and Nokia Networks OY (supra) and the determinations of the AAR in Dassault Systems K.K. (supra) and Geoquest Systems B.V. (supra), the High Court concluded: "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 consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto." (pages 385-386) 115. The High Court of Delhi also expressed its disagreement with the impugned judgment of the High Court of Karnataka dated 15-10-2011, in Samsung Electronics Co. Ltd. (supra) as follows: "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 transferred is neither the copyright in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of copyright in respect of computer programmes is spelt out in section 14 (b). A joint reading of the controlling provisions of the earlier part of section 14 with clause (b) implies that in the case of computer programs, copyright would mean the doing or authorizing the doing-in respect of work (i.e. the programme) or any substantial part thereof - (b) In the case of a computer programme,- (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. The reference to clause (a) and (b) means that all the rights which are in literary works i.e."(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 already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a reading of the aforesaid judgments are as follows: (i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. (ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. (iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty under the provisions of Income Tax Act, 1961, the question of considering under the provisions as per DTAA between India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed. 13. Grounds No. 2, 3, 4 and 5 challenge the direction of the DRP directing the A.O to bring to tax software maintenances Rs. 8,74,84,583/- consulting service fees Rs. 1,27,56,877/-., Training fees Rs. 1,48,45,943/-, other services Rs. 1,72,800/- within the meaning of Article 12(5)(a) of the India and Netherland Treaty. The D.R.P held that the receipts of the assessee from software maintenance fees, consulting services, training fees and other services are chargeable to tax as fee for Technical Services as per Article 12(5)(a) of India and Netherland treaty. 14. On the other hand, the ld. A.R submits that the consideration received towards software maintenance fees, consulting services fees, training fees and other services cannot be considered as "fees for technical services" under Article 12(5) of the Treaty. He also submitted that the question of treating the above consideration as fees for technical services does not arise as the consideration received towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Article 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. 6. Notwithstanding paragraph 5, "fees for technical services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals, making the payment; or e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (Independent Personal Services) of this Convention.] 7. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of one of the States, carries on business in the other State, in which the royalties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot under challenge before us. Therefore, the software maintenance fees, consulting charges and training fees which are incidental to software license fee, assumes same character as that of software license fee. In relation to ground of appeal No.1 in the preceding paragraphs, we have held that the consideration received towards software license fee cannot be termed as "Royalty". Hence, what follows from this is that even the software maintenance, consulting charges and training fees which are incidental to software maintenance fee cannot come within the purview of FTS within clause 5 of Article 12 of the treaty. Our view is fortified by the judgment of Hon'ble Delhi High Court in the case of Datamine International Ltd. Vs. ADIT (2016) 68 taxmann.com 97. We, therefore, we hold that software maintenance fees, consultancy services fees and training services fees cannot be held to be "Fees for Technical services". Thus, grounds of appeal no. 2 to 4 stands allowed." 16. In the absence of any distinguishing facts and respectfully following the precedent, we hold that software maintenance fees, consulting service fees, and other services cannot be held to be "Fees for technical services" ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
