TMI Blog2023 (10) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... n it comes to the definition of the term Royalty and accordingly the service fees received by the assessee is taxable in India as Royalty. HELD THAT:- Assessee retains exclusive ownership of all right, title, and interest of all intellectual property and all other legal rights in the software and that nothing in EULA constitutes a sale or other transfer or conveyance of any right, title, or interest in the software. Therefore we see merit in the contention that except the right to use the Software embedded on the hardware, there is no other rights being transferred to the SSS. Whether the payment for troubleshooting software would be royalty ? - As to be taxable as royalty income covered by article 12 of the DTAA the income of the assessee should have been generated by the use of or the right to use of any copyright . 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. In assessee's case from the perusal of the terms of EULA, it is clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable SSS to independently apply any knowledge without assessee's support or resolve or diagnose the issues / errors / bugs / problems on their own in future. The SSS engineers continue to approach JTAC in case of critical / priority / time sensitive issues which are eventually resolved by Juniper engineers on the phone or through release of software updates. From these facts it is clear that the Juniper Services provided by the assessee does not result in any enduring benefit to the SSS as the SSSA between the SSS and the assessee is renewed upon the expiry of its tenure similar to any maintenance contract. In view of this discussion in our considered view the services rendered by the assessee to SSS does not make available any technical knowledge that would enable to SSS to resolve the technical issues independently in future and therefore does not fall within the definition to FTS under the India Netherlands DTAA. Accordingly the payment received by the assessee towards rendering Juniper Services is not taxable in India. This appeal of the revenue is dismissed. - Shri Vikas Awasthy(Judicial Member) And Ms. Padmavathy S. (Accountant Member For the Assessee : Shri J.D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The assessee, for the assessment year 2015-16 filed the return of income on 30/11/2015 declaring a total income of Rs. 6,59,00,040/-. Further, the assessee revised its return on 14/07/2016 declaring total income at Rs. 1,21,77,09,650/- for the reason that due to clerical error, the income received from support services specialists was not entered in the return of income. The return was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. The Assessing Officer, during the course of assessment called on the assessee to furnish the details pertaining to the support services income received by the assessee. The assessee filed a detailed note with respect to the business activities. The assessee also furnished a copy of SSSA that the assessee entered into with SSS. The Assessing Officer, after analyzing the various clauses of the said agreement held that the income received by the assessee is in the nature of fees for technical services . The assessee submitted before the Assessing Officer that the income received is exempt under clause 12 of the DTAA entered into between India and Netherlands, since the assessee, while rendering the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in to allowing commercial exploitation of the copy of the software application program - Alternatively, it is observed by the AO that software/ software application is a property similar to', 'patent', 'invention', design', 'process', 'trademark', 'secret formula'. 6. The CIT(A) held that the payments received by the assessee would fall within the definition of FTS and Royalty under the Act. However the CTI(A) held that the payment received are not within the purview of India-Netherlands DTAA definition of FTS and Royalty. The final findings of the Ld.CIT(A) allowing the appeal in favour of the assessee are extracted below:- 5. Final Findings: Ground No. 1: It can be summarized that the assessee basically sells Juniper Networks equipments and also provides services to the users of these equipments. The services to end user is provided through SSS. For each user, separate AMC is signed. The working of assessee can be compared with the sale of computer where software are uploaded on the computer. For any problem in the computer, the seller enters into an agreement with the buyer through AMC. Whenever the buye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght have been escalated by SSS to the assessee and SSS use the updated knowledge bank for resolving similar problems going forward. Therefore, the Ld.DR submitted that the knowledge is periodically made available to SSS and, therefore, the income received by the assessee is in the nature of FTS. With regard to the income being taxable for the reason that it is in the nature of royalty, the Ld.DR submitted that the CIT(A) has given a finding that the income received is in the nature of royalty under the provisions of section 9(1)(vii) of the Act but has given relief stating that the receipt does not fall within the definition of Royalty under DTAA. However, the Assessing Officer has analysed the clauses of DTAA and has given a categorical finding that there is no material difference between the provisions of the Act and the DTAA and, therefore, the income is taxable in India as the same is in the nature of royalty. Thus, the Ld.DR relied on the order of the Assessing Officer. 8. The Ld.AR, on the other hand, submitted that the assessee while supplying the networking equipments also provides only maintenance contracts which is part and parcel of the hardware supplied. The Ld.AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t make available any technical services and thus, the services are not taxable under Article 12 of India Netherlands DTAA. The facts being identical for the year under consideration, the Ld.AR submitted that the ratio laid down by the co-ordinate bench in assessee s own case are clearly applicable to the year under consideration and on that ground also, the income is not taxable in India. The Ld.AR further relied on the decision of the co-ordinate bench in the case of M/s. Murex Southeast Asia Pvt. Ltd.vs DCIT ITA No.2338/Mum/2022 dated 08/05/2023 and also the decision of the Delhi Bench of the Tribunal in the case of Amazon Web Services Inc. vs ACIT in ITA Nos 522 523/Del/2023 dated 01/08/2023. The Ld.AR submitted that with regard to the contention of the Assessing Officer that the income received is in the nature of royalty, the CIT(A) has analysed the definition of royalty as per the clauses of DTAA and has given a clear finding that the income received does not fall within the definition. 10. The Ld.DR, to counter the above argument, submitted that the assessee does not enter into service directly to the end-users, but only through SSS. The Ld.DR further argued that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. In other words, 'Royalty as per India-Netherlands DTAA means payments for the use of, or right to use: any copyright of a literary, artistic., or scientific work; any patent, trade mark, design or model, plan, secret formula or process; or for information concerning industrial, commercial or scientific experience. 15. Though there is no dispute with regard to the finding of the CIT(A) that the service fees received falls within the meaning of Royalty under the Act with the retrospective amendment to section 9(1)(vi), whether the definition of Royalty under the Act can be read into DTAA needs to be examined. It is a settled position that the definition of 'Royalty' as stated under the Act and under the DTAA are not parimateria with each other. Therefore the definition of royalty under DTAA has to be given the meaning as contained in the Article itself and no other meaning should be looked upon. 16. In the light of the above legal positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or online. Once a service request has been opened, the SSS are kept updated on the progress status of the query via e-mail. The process to be followed by the JTAC engineer once a service request has been initiated with Juniper Networks equipment is as follows: Take ownership of the service request Begin troubleshooting, diagnostics, and problem replication as appropriate Provide the SSS with periodic updates on problem status and escalate the problem as required according to escalation management guidelines Where required, generate a product replacement request in case of defective product (a Return Materials Authorization ('RMA') is issued and the Juniper Network equipment is replaced) Close the service request once the problem has been resolved. Online support (through CSC) Where the queries are general/routine in nature and are not time sensitive, SSS are requested to go through the Online support (i.e. through the CSC). The Offerings on the CSC include, but not limited to, the following: Educational base: Provides information on the EULA, status of service requests raised through the JTAC, FAQs, etc Downloads: Contains tools ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch Juniper Platform. Transferred Juniper Platforms and subsequent sofhvare licensing are subject to the Service and Support Inspection and Reinstatement Policy that can be accessed at https://support. juniper. net/support/pdffguidelines/990222.pdf. .. g. You shall not, directly or indirectly, decompile, disassemble, reverse engineer, modify, unbundle, detach or separate any part of or embedded within, or create derivative works based on, the Software, except solely to the most minimal extent required to be permitted by applicable law, provided that any such limited legal exception, if any, shall not in any event be deemed to be construed to he any contractual waiver by Juniper. If the law requires Juniper to provide interface information to You to adapt the Software, Juniper, at its option, may either (1) provide the information to You subject to Your acceptance of non-disclosure or use limitation terms as Juniper may reasonably require, or (2) perform that adaptation itself at a reasonable charge for services. If multiple Software products are licensed together as a single license, such Software is licensed to be Used as a bundle and no component of the bundle, may be Used o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to commercially exploit the same. The contention of the Assessing Officer is that the 'software/ software application [i.e. troubleshooting application and license of software] are in the nature of 'Copyright of literary work' and thus the payment which is received as consideration for the use of or the right to use the same are taxable as Royalty' as per the India-Netherlands DTAA. It is therefore relevant to examine the term copy right as per section 14 of the Copyright Act which is extracted below 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 authorize 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 from including the storing of it in any medium by electronic means; (ii) to issue copies the work to the public not being copies already in circulation; (tii)to perform the work in public, or communicate it to the public; - (iv) to make any cinematog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition of a copyright right and a copyrighted article . Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright, Copyright or even right to use copyright is distinguishable from sale consideration paid for copyrighted article. This sale consideration is for purchase of goods and is not Royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee 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 utilising 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 transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition to do so. 91. There is no transfer of any right in respect of copyright by (he Assesses see and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as Royalty either under the Income-tax Act or under the DTAA. 21. From the above it is clear that to be taxable as royalty income covered by article 12 of the DTAA the income of the assessee should have been generated by the use of or the right to use of any copyright . 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. In assessee's case from the perusal of the terms of EULA, it is clear that SSS is given the mere access to use the troubleshooting / licensed software without the right to own or reproduce and the right to do so continued to be retained by the assessee. The grant of license to use the software cannot be construed as granting a right to utilize the copyright embe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; or 'information'. The 'literary work' has been covered within a separate limb of the section via-a-vis computer software. As laid down by the Hon'ble Tribunal under the Act, computer software is not a literary work and even if computer program is a literary work under the Copyright Act, the same cannot constitute a Royalty under the DTAA since the consideration should have been paid for the use of or the right to use the copyright in the 'literary work' and not the 'literary work' itself. 24. It is also pertinent note that India while entering into DTAA with certain countries such as Morocco, Kazakhstan etc. has specifically included for 'software/computer software program' to be classified as Royalty. Therefore there is force in the argument that, where the intention of both the States was to include payment for 'software/ computer software within the ambit of the definition of 'Royalty' under the DTAA the same would have been specifically negotiated between the parties and stated within the definition of 'Royalty' in the DTAA, as the same has not been specifically mentioned under the India-Netherlands DTAA, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to be taxed as FTS under the India-Netherlands tax treaty conditions mentioned therein need to be cumulatively satisfied. It is trite law that the make available clause only applies when the recipient of the technology has been made competent and authorised to use the technology independently without any dependence on the provider of the service. In other words, services would fall within the scope of FTS only if they make available technical knowledge, experience, skill, know-how, or processes and a technology is made available when there is a person is acquiring services. The Hon'ble Mumbai Bench of ITAT in the case of Raymond Ltd v DCIT (2003) 86 ITD 791, interpreted the expression 'make available to state that the services can be considered to be 'make available where the person utilizing the services is in a position to apply the technology for his own use in his business in future without recourse to the person rendering the services. The relevant extract of the ruling is reproduced below: 92, We hold that the word which occurring in the article after the word services and before the words make available not only describes or defines more clearly th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Example (4) given in the MoU also supports it. This is of a US company manufacturing wallboard for the assessee using assessee's raw material but using its own plant. No technical knowledge, experience, skills, plan or design is held to have been made available in such a case. However, in contrast, example (5) is of a US company rendering certain services in connection with modifying the software used by the Indian company to suit a particular purpose. A modified computer software programme, is supplied by the US company to the Indian company. It is therefore held that there is a transfer of a technical plan (i.e., computer software) which the US company has developed and made available to the Indian company. The fees are chargeable. These examples affirm the position by the assessee company before us as to the interpretation of the words make available , 30. The above principle was also relied upon by the Courts in the below judicial precedents CIT v De Beers India Minerals Private Limited [2012] 346 1TR 467 (Kamataka High Court DDIT v Preroy A.G [201 0] 39 SOT 187 (Mumbai ITAT). 31. From the perusal of SSSA we notice that the Juniper Services are ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iper Services is not taxable in India. This appeal of the revenue is dismissed. ITA.Nos.1592 /Mum/2021 - AY 2013-14 32. For the assessment year 2013-14, the assessee filed the return of income on 31.03.2015, declaring Nil income. The assessment was completed under section 143(3) accepting the income returned by the assessee. Subsequent to the scrutiny proceedings for AY 2015-16, where the payments received by the assessee from SSS for Juniper Services, were treated as taxable as Royalty/FTS, the Assessing Officer issued a notice of re-opening the assessment under section 148 for AY 2013-14. The Assessing Officer stated that the payments received by the assessee for AY 2013-14 were towards the same services under the same terms and conditions for AY 2015-16 and since the income has not been offered to tax the assessment was reopened. The Assessing Officer completed the assessment under section 143(3) r.w.s.144C r.w.s.147 assessing the income of the assessee at Rs. 20,87,95,209. On further appeal the CIT(A) deleted the addition and held the appeal in favour of the assessee. 33. The ld AR submitted that the assessing officer has reopened the assessment of 2013-14 for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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