TMI Blog2024 (5) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... mendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as royalty , the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG [ 2008 (11) TMI 74 - BOMBAY HIGH COURT] it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as royalty despite the retrospective amendments to the Act. The right to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the context of nonexclusive EULAs, not being so. At this juncture, we have examined the written submission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user right only. The buyer has no right to re-sale the product and it still remained a copyrighted article which the buyer cannot alter modified, reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and in law in dismissing the entire appeal of the Appellant without adjudicating on the following grounds: a) The Ld. AO has grossly erred both on facts and in law in levying interest under section 234B of the Income-tax Act, 1961. b) The Ld. AO has grossly erred both on facts and in law in levying the interest under section 234D of the Income-tax Act, 1961. 6. Without prejudice to ground 5 above, the Ld. CIT (A) has failed to appreciate that the Appellant was not liable to pay advance tax under section 208 and section 209(1)(d) of the Act since tax was deductible under section 195 of the Act on the payments made to the Appellant and hence, no interest under Section 234B was leviable. 7. Without prejudice to ground 5 above, the Ld. CIT (A) has failed to appreciate that no refund was granted to the Appellant for subject assessment year and hence, no interest under Section 234D was leviable. 2. The Ld. Counsel for the assessee, at the outset, submits that on identical facts the Tribunal decided the issue of whether the amounts received by the assessee for supply of software and maintenance falls under Royalty u/s 9(1)(vi) of the Act read with Article 13 of DTAA between India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, the transaction qualifies as sale of copyrighted article and not grants of any copyright right . Accordingly, same is classifiable as Business Profits and since the Appellant does not have Permanent Establishment (PE) in India, such business profits are not taxable in India. In light of these facts, income from licensing of software has not been offered to tax in the return of income for subject year. 5. However, the Assessing Officer following the findings rendered in the assessment order for the AY 2003-04 held that the amounts received by the assessee during this AY i.e. 2005-06 on account of licensing of software and rendering of maintenance services are taxable under the provisions of Section 9(1)(vi) of the Act as well as under Article 13 of the Tax Treaty between India and UK observing as under: - 3. During A.Y. 2003-04, relevant to F.Y. 2002-03, the assessee had licensed the software and provided the maintenance services to the same customers, from which payments are received during the year. The payments received are on account of the agreements, which were also applicable to A.Y. 2003-04. My predecessor has passed a detailed order u/s 143(3) of the Act on 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and rendering of services, the facts and circumstances of the case remains the same and the arguments of the assessee are also same, therefore, for the detailed reasons discussed in the order for A.Y. 2003-04, it is held that the amounts received by the assessee during this year on account of licensing of software and rendering of maintenance services are taxable under the provisions of Section 9(1 )(vi) of the Act as well as under Article 13 of the tax treaty between India and UK. 6. The Ld.CIT(A) relying on the order of his predecessor passed for the AY 2003-04 upheld the action of the Assessing Officer for the assessment year under consideration. 7. We observe that for the AY 2003-04 the Tribunal in ITA No.264/Del/2008 dated 01.08.2022 allowed the appeal of the assessee observing as under: - 2. Following grounds have been raised by the assessee: 1. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and taxing revenue earned by the appellant from supply of software as royalty under 9(1)(vi) of the Income- tax Act, 1961. 2. The learned Commissioner of Income Tax (Appeals) has grossl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse the software product to the sub-licensee is given with further restrictions on the extent and manner of the use of software. The sub-license in such a case is also the ultimate user of the software. The sublicensee is identified in the license agreement between the Appellant and its customers and the customers cannot sublicense such software product to any other sub-licensee. 7. License agreements with Bharti that provide the license to the Appellant s customers to use the software product in its own business without any further sub-licensing rights to any third party. The customers in such a case are the ultimate user of the software. 8. The Assessing Officer held that the payments amounting to Rs. 365,090,258/- received by the assessee for supply of software is taxable as royalty on account of being a payment for grant of a copyright as well as payment received for allowing the use of the process inherent in the software. 9. Aggrieved by the Assessment Order, the assessee has filed an appeal before the ld. CIT(A). The ld. CIT(A) upheld the order of the learned AO and observed as under: (a) Payment under software license agreement represents consideration for transfer of all o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 422), it was argued that there is a distinction between the acquisition of a copyright right and a copyrighted article and the assessee supplies the software, 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. 12. On the other hand, the ld. DR strongly relying on the order of the ld. CIT(A) and argued that the provisions of the agreement, sub-license, methodology of copying reproduction, use, access and the basis of payment, control safeguards reveal that the amounts needs to be taxed as royalty . It was argued that the software is commercially exploitable and can be used an accessed by agents as well as contactors. Hence, the reliance placed by the ld. AR on the decision of the Infrasoft cannot be applied to the facts of the instant case. The ld. DR has also argued that since the payments for the software depends upon the number of subscribers and variable, it should be rightly taxed as royalty payments . The ld. DR vehemently argued that owing to the nature and customization, the software dealt by the assessee cannot be said to be a shrink-wrapped software. For the sake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Licensee 1 2 1 2 1 2 Sub -Licensee 1 5 1 5 1 5 (It must be remembered there is no cap on the number of sublicensees. Hence, indirectly, there is no cap on total number of copies tool) Cl-6. c of Maintenance Services Attachment- Customer/Sub-license will maintain software and database backups external to the hardware processors. (p. 321, PB-II, 2004- OS) F. Use, Access, Confidentiality Restrictions Public Performance Cl-2 of General Terms- Customer agrees not to make available or disclose to anyone else except to customer s i. Employees ii. Agents iii. Contractors and iv. Sub-licensees G. Basis of Payment, Controls Safeguards i. Cl-4 Payment of License Fee on the basis of Licensed Capacity of Number of Subscribers . In case of increase in subscriber base, Licensee has to purchase Additional License Capacity . (p. 303, PB-II, 2004-05) ii. Cl-3. a TTL will provide CSG, written information of each licensed product sublicensed with the site location and 'number of subscribers' and shall on an annual basis audit and provide to CSG the updated number of subscribers per instance.(p.302, PB-II, 2004- 05) iii. Cl-14 Customer shall keep and maintain complete records of customer's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. 03. 2021. 3. In this regard, it is to submit that to constitute an outright sale of any product, the rights of ownership and usage should be completely transferred to the buyer/purchaser. However on perusal of the limited license contracts executed by the CSG with MIL and EIL, it is found that, there was no t a sale of computer products by CSG, rather limited license to use CSG products were provided. (ii) Further, the language of the terms of agreement of the contract is unambiguously clear as it mentions the term license and not sale. (iii) Also, a dedicated Staff team comprising Software Developer, software tester, Program Manager etc. were also provided by CSG in India for further customization/upgradation of the software according to the need of the customer. (iv) Further, the assessee has not produced any evidence like copy of invoices/ bills etc for the software to prove that the said transaction constituted a sale. (v) Additionally, there is also a clause to delete and destroy the software program copy after expiry/termination of the contract. So if once sale is executed by the assessee, how it can continue to have the right to delete/ amend the software? The assessee sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the category of customized software and not shrink wrap. c) When a business has specific software needs that off-the-shelf software can't address, it commissions developers to create custom applications. It is a solution that can handle one s business s unique requirements. Customized software resources are costly and require substantial in-house tech input and support. Further an article on the difference between the two software is reproduced below: Custom software vs. off-the-shelf software Packaged software applications are available for nearly every computing, business, productivity and communications task imaginable. These packages generally offer the following features. Ease of use : Off-the-shelf applications serve large audiences with fundamentally similar needs. For example, Microsoft Word is an enormously popular word processing application with features, functionality and customization options that organizations of all sizes and scopes can use. Easy access for purchasing or down loading: Off-the-shelf software can be prepackaged and purchased in a store, but it s often downloadable from manufacturers websites or available as a cloud subscription. Wide availabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires significant financial resources. The commissioning business must cover all costs associated with the development process. Some custom solutions can reach five figures or more.(emphasis supplied) (source- https://www.businessnewsdaily.com/5175-customsoftware-development. html) 7. The various clauses of the contracts which establish unambiguously that the software is a customized software. Some of them are reproduced below: (i) At point 4 of Page no. 19 of paper book-1 states clearly that CSG UK rendered professional services/training to its customers in India during the subject year and the professional services rendered by CSG UK entails analysis, configuration, customization, integration, implementation and deployment of billing solutions of CSG UK. (ii) The Billing and customer care software used is a specialized one having usage to manage and automate the billing process specific to the telecom industry. It can clearly be not applied to any other industry or organization. (iii) At work order 001 (Exihibit B) [Page No 65 of Paper Book 1] provisions for staffs with the skills of software testing, software development etc are mentioned. It states as under: CSG will staff t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lained with examples in para 44(i) to 44(iv) of the said judgment. None of these four models allow sub-licensing of software. An analysis on these models and the category of cases covered in the decision is further given in paras 45 to 47 of the Hon ble Apex court s decision. The findings of the Hon ble Supreme Court in paras 168 to 169 are with respect to the categories of cases mentioned above. (i) The assessee has not specified clearly as to under which category out of the four categories cited in the Hon ble SC order its case is covered. Ld. AR during the course of hearing however stated that the in which the case of the assessee may fall would possibly be Category two, which wherein is sue related to software sale by Non-resident Software manufacturer to Indian Distributer/End user is dealt with. In the last hearing before Hon ble Authority, the Ld AR was trying to establish Ericson Motorola [Limited licensor of CSG] as an Indian Distributors and trying to cover the matter with the case of Engineering Analysis. (ii) The same may not be accepted due to following reasons: - That the Para 01 of the software license contracts between CSG and Ericson dated 25. 03. 2002 read as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on these facts it has been held in para 47 as under: 47. In all these cases, the licence that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a licence which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. Thus SC has held that if the license transfers an interest in all or any of the rights contained in section 14(b) read with section 14(a), of the Copyright Act, it would amount to use of right in copyright and hence royalty. 11. In this regard, your kind attention is also drawn to the para 5 of assessment order of AY 2003-04 at page No. 5-6, wherein the case of CSG was cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. Perused the material on record. 15. The issue of royalty or not on software has been examined by the Hon ble High Court in case of Nokia Networks OY. Where in it was held that supply of software is not royalty despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as royalty , the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG (310 ITR 320) (Bombay), it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as royalty despite the retrospective amendments to the Act. 16. The Hon ble Apex Court dealt with four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, in as much as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the a foresaid book and then sell cop ..... X X X X Extracts X X X X X X X X Extracts X X X X
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