TMI Blog2022 (11) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany stated to be engaged in the business of development and sales of Project Management Software ( PMS ) Licenses to various customers all over the world. Assessee electronically filed its return of income for A.Y. 2014-15 on 22.09.2015 declaring total income at Rs. Nil. The case of the assessee was selected for scrutiny and accordingly notices u/s 143(2) 142(1) of the Act were issued and served upon the assessee. AO noticed that the perusal of AIR as per ITD system revealed that an amount of Rs.1,49,48,277/- was received by the assessee which the assessee had claimed to be non taxable. Assessee was asked to show-cause as to why the aforesaid receipts which was from license fees by granting provision of copyrighted software licenses be not taxed as Royalty under the provisions of Income Tax Act, 1961 and India USA Double Taxation Avoidance Agreement. AO also noted that in the past assessment years also the assessee had claimed similar receipts to be non taxable but the same was disallowed by AO. Assessee made detailed submissions inter alia contending that the amount received from various customers in India were not for any grant of copy right but was for merely using user l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product/license to be not in the nature of Royalty u/s 9(1)(vi) and as per Article 12(3) of Indo-US DTAA. He placed on record the aforesaid decision which is placed at page 56 to 87 of the paper book and from which he pointed to the relevant findings at page 74 onwards. He submitted that there are no change in the facts of the present case as compared to that of earlier years and therefore the issue be decided following the aforesaid decisions. 6. Learned DR on the other hand did not controvert the factual submissions made by Learned AR but however supported the order of lower authorities. 7. We have heard the rival submissions and perused the material available on record. The issue in the present grounds is with respect to taxability of the amounts received by the assessee on the sale of software licences. We find that identical issue arose in assessee s own case for A.Y. 2013-14 in ITA No.525/Del/2017 and the Co-ordinate Bench of Tribunal has decided the issue in favour of the assessee by observing as under: (a) After considering the relevant findings given in the impugned orders as well as the submissions made by the parties, we find that, it is an admitted fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee falls in the category of royalty both u/s. 9(1) (vi) of the IT Act, 1961 and article 12 (3) (a) and article 12 (3) (b) of Indo US DTAA. 25.1 It is the submission of the Ld. Counsel for the assessee that the assessee being a USA company enters into agreements with the customers for sale of licenses. As per various clauses in the agreement the assessee retains the ownership of intellectual property rights relating to the software licenses sold to customers. The assessee permits the customers to merely use the software licenses for their business need. The assessee restricts its customers from duplicating/ adopting etc of the software products. It is the submission of the Ld. Counsel for the assessee that the moment restrictions are put regarding copying/duplicating/ reproducing etc a copy right gets converted into a copy righted product. However, in the instant case, the assessee does not part with any copy right to the customers but merely extends a copy righted product to the customers. It is also his submission that unless and until a right protected under the copy right Act is not extended / shared with a party, and unless consideration is received for such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for V 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 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 t r 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyrighter mains 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the Revenue that the Incometax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America. 28. We find the Hon ble Delhi High Court in the case of PCIT vs. M. Tech India Private Limited reported in 381 ITR 31 has held that where payments are made for purchase of software as a product would be treated as a payment for purchase of software rather than payment for use or right to use software' to be considered as a royalty. The relevant observation of the Hon ble High Court from para 10 onwards reads as under :- 10. The Assessee had entered into a VAR Agreement with THPL. Paragraph 1.1 of the said agreement expressly indicates that THPL had appointed the Assessee (described as VAR) to market and sell the products in the Territory. Article 2 of the said Agreement provides for VAR s Obligations . Clause (a) of paragraph 2.1 of Article 2 expressly provides that the Assessee Shall promote, market and sell the Products in accordance with a busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. 13. A Coordinate Bench of this Court has also expressed a similar view in the case of Infrasoft Ltd. (surpa). In that case, the Revenue sought to tax the receipts on sale of licensing of certain software as royalty. The Tribunal held that there was no transfer of rights in respect of the copyright held by the Assessee in the software and it was a case of mere transfer of copyrighted article. This Court concurred with the Tribunal and held that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income. 14. Insofar as the reliance placed by the Revenue on the decision of the Karnataka High Court in Samsung Electronics Co. Ltd. (supra) is concerned, a Coordinate Bench of this Court in Infrasoft Ltd. (surpa) has unequivocally expressed its view that it was not in agreement with that decision. Thus, the said decision is of no assistance to the Revenue in this case. 15. In another case, Dynamic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he latter and not the former. Explanations 4 'and 7 relied by the authorities would thus, have to he redd and understood only in that context and cannot be expanded to bring within its fold transaction beyond the realm of the provision [Para 7] 30. We find the Mumbai Bench the Tribunal in the case of ADIT (IT) Mumbai Vs. First Advantage Private Limited reported in 77 taxman.com 195 has held that Payment made by assessee to US company for use of software owned by US company, when assessee would use software only for internal business operations and would not sublicense or modify same, could not be considered as royalty within meaning of article 12(4) of DTAA. 31. We find the Coordinate Bench of the Tribunal in the case of ACIT Vs. Landmarks Graphics Corporation reported in 87 taxman.com 311 has held that where assessee, a US based company, did not have PE in India and its activities were not covered by deeming fiction of article 5(2) of India - USA DTAA, income earned by it from sale of software to Indian companies which was 'off the shelf software, was not taxable In India. 32. We find the coordinate Bench of the Tribunal in the case of Black Duck Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation 4 to Section 9(1)(vi). It is not in dispute that the assessee is into the sale of project management software licenses to various customers and is providing copyright product on the sale basis. This software is downloaded from the internet and products with the licenses extended with the same and are basically in the nature of sale of Shrink wrapped software. No source code or any authority is extended to the customers for making any changes, duplication of the standard software products and it merely gives user license and no substantial right to reproduce or copyright software is given to the customers. Only restricted rights have been given to the customers. In any case, any retrospective amendment brought in the statute cannot be read into the articles of DTAA when no corresponding management in the bilateral treaty have been made. This precise issue stands covered by the decision of Hon ble Jurisdictional High Court in the case of Nokia Networks OY and DIT vs. Infra Software (supra). 9. Thus, there is no change in the facts and circumstances of the case and the issues involved as well as the findings given by the authorities below and therefore, the aforesaid deci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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