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TMI Blog2022 (5) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... P erred in directing the Ld. AO to tax receipt of INR 26,02,184 towards software license fees as 'Royalty' as per the provisions of the Income Tax Act, 1961 read with the provisions of the India-Netherlands Double Taxation Avoidance Agreement. It is thus prayed that the addition proposed by the Ld. AO and confirmed by the Hon'ble DRP be deleted. Ground No.2: 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 INR 29,05,513 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 thus prayed that the addition proposed by the Ld. AO and confirmed by the 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 tax the receipt of INR 3,78,346 towards consulting service fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is thus prayed that the addition proposed by the Ld. AO and confirmed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned. The above grounds are without prejudice to each other." 5. Briefly, the facts of the case are as under : The appellant TIBCO Software B.V. is a non-resident company incorporated in Netherlands. The company is engaged in sale of Software licences and provision of Software maintenance, Consulting and Training services in India. The return of income for the assessment year 2011-12 was not filed by assessee-company. Thereafter, on receipt of information that the appellant had received income of Rs.33,96,623/- on which TDS had been deducted, the Assessing Officer formed an opinion that income had escaped assessment to tax, then issued notice u/s 148 on 29.03.2018 after recording reasons u/s 147. In response to notice u/s 148, the appellant had filed return of income on 26.04.2018. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax (International Taxation), Circle-2, Pune ('the Assessing Officer'). During the previous year relevant to the assessment year under consideration, it is stated that the appellant company had received a sum of Rs.98,72,321/- towards Software licenses, Software maintenance and Customer support, Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l g) Mac Corporation (ITA No.1331 to 1336/2008) (A.Y. 1999- 2000 to 2004-05)-Delhi Tribunal. Rejecting the contentions of the appellant that such payment cannot be characterized as Royalty as the payment is made for purchase of standard software, not for use of 'copyright itself'. The appellant placed reliance on the OECD commentary as well as the decisions of Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. (2013) 39 taxmann.com 88 (Del), the decision of Pune Tribunal in the case of Allianz SE Vs. ADIT (TS-204-ITAT-2012 (Pun) and the decision of Mumbai Tribunal in the case of DDIT Vs. Solid Works Corporation (ITA No.3219/Mum/2010. 8. On receipt of above draft assessment order, the appellant filed objections before the DRP. The DRP considering the decisions relied upon by the appellant held that the consideration received towards software license fee is taxable as Royalty in India placing reliance on the judgment of Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd.16 taxmann.com 141 (Kar.) Further, DRP also treated the software maintenance fees, consulting service fee and training fees as ancillary and subsidiary to the enjoyment of right in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd.345 ITR 494 and CIT Vs. Synopsis International Old Ltd. 212 taxmann 454 held to the contrary. The reasoning given by the Hon'ble Karnataka High Court has been disapproved by the Hon'ble Supreme Court in the case of Engineering Analysis Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). The operative paras of the judgment are reproduced below : "105. The reasoning of the High Court of Karnataka in Synopsis International Old Ltd. (supra) does not commend itself to us. First and foremost, as held in Swastik Tobacco Factory (supra), the expression "in respect of", when used in a taxation statute, is only synonymous with the words "on" or "attributable to". Such meaning accords with the meaning to be given to the expression "in respect of" contained in Explanation 2(v) to section 9(1)(vi) of the Income-tax Act, and would not in any manner make the expression otiose, as has wrongly been held by the High Court of Karnataka. 106. Secondly, section 16 of the Copyright Act, which states that "no person shall be entitled to copyright...otherwise than under and in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in this case, found: "Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good", but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. (pages 499-500) "Be that as it may, in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 259 (Delhi) ["Nokia Networks OY"],41 with the High Court of Delhi, adverting, this time, to the further expanded definition of "royalty" that is contained in the retrospective amendment that inserted Explanation 4 to section 9(1)(vi) of the Income-tax Act. In this case, the High Court was concerned with the Agreement between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,42 ["India-Finland DTAA"]. After setting out the rationale for the clarificatory amendment made vide the Finance Act 2012, the High Court held : "He, thus submitted that the question of "copyrighted article" or actual copyright does not arise in the context of software both in the DTAA and in the Income-tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. v. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire controversy and we may now proceed to address this issue. 156. We must look into the meaning of the word "copyright" as given in the Copyright Act, 1957. Section 14 of this Act defines "Copyright" as "the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof [ ... ] It is clear from the above definition that a computer programme mentioned in clause (b) of the section has all the rights mentioned in clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15-1-2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in Sub-clause (ii) of clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in Clauses (a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) of Section 14 or the additional right mentioned in Sub-clause (ii) of clause (b) of the section which relates to a computer programme and, therefore, what JTM or any other cellular operator has acquired under the agreement is not a copyright but is only a copyrighted article."" (pages 362-364) 113. Further, the Court noted that the same argument that found favour with the AAR in Citrix Systems Asia Pacifice Pty. Ltd. (supra) was pressed into service by the learned senior counsel who appeared for the Revenue in the case of Motorola Inc. (supra), and this was correctly turned down as follows: "163. We may now briefly deal with the objections of Mr. G.C. Sharma, the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. 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 priv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pying 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 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 non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ighted 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. Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software." (page 388) 116. Likewise, in CIT v. ZTE Corporation [2017] 77 taxmann.com 304/245 Taxman 252/392 ITR 80 (Delhi) ["ZTE"], a Division Bench of the High Court of Delhi dealt with the India-China DTAA and after referring to its earlier judgments, held as follows: "The misconception that the revenue harbors stems from its flawed appreciation of a copyright license. True, "copyright" is not defined; yet what works are capable of copyright protection is spelt out in the Copyright Act. Sections 13 and 14 of the Copyright Act flesh out the essential ingredients that make copyright a property right." (page 93) "Thus, Section 14 categorically provides that copyright "means t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e title implying that it has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as "copyright". In the present case, the facts are closely similar to Ericsson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separate invoicing was done for purchase and other transactions did not imply that it was royalty payment. In such cases, the nomenclature (of license or some other fee) is indeterminate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee's customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities; moreover, eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. (vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in State Bank of India (supra) (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. 118. Consequently, the view contained in the determinations of the AAR in Dassault Systems K.K. (supra) and Geoquest Systems B.V. (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft Ltd. (supra), ZTE Corporation (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India's DTAAs are based." 13. In the light of the judgment of Hon'ble Supreme Court, we hold that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.] 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 1 4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.] 5. For purposes of this Article, "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision 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 4 of 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 technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, having regard to the royalties fees for technical services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable, according to the laws of each State, due regard being had to the other provisions of this Convention.]" 17. Clause 5 of Article 12 defines "fees for technical services" to mean the payment of any kind to any person in consideration of rendering any technical or consultancy services that are ancillary and subsidiary to application of enjoyment of the right, any copyright information described in clause 4 which deals with the payment made towards Royalties. The DRP gave a finding that the software maintenance, consultation charges and training fees are in connection with the receipt of consultation towards software license fee. This finding of the DRP is not under challenge before us. Therefore, the software maintenance fees, consulting charges and training fees which are incidental to software license fee, assumes same c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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