2015 (3) TMI 306 - AT - Income Tax

User rights of software OPUS - assessability of consideration received - whether royalty under Article 12 of the Tax Treaty and therefore liable to tax in India at 10%? - India-Germany DTAA - Held that - in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, aliistic or scientific work. Section 2 (0) 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 . The Assessing Officer has clearly stated that the copyright of software vests only with the CGI Group and therefore, even from that standpoint, there can be no divergence from the assessee s point that what has been transacted in the license agreement is only the grant of user right in the copyrighted software and not the use of copyright itself. Thus respectfully following the decision of the Coordinate Bench of the Tribunal in assessee s own case for assessment year 2005-06 2012 (5) TMI 179 - ITAT PUNE which is the basis for reopening the assessment for the impugned assessment year, we hold that the license charges earned by the assessee is not liable to be treated as Royalty. - Decided in favour of assessee

Issues Involved:
1. Assessability of consideration received for provision of user rights of software "OPUS" as royalty under Article 12 of the Tax Treaty.
2. Enhancement of income by treating the consideration as royalty under Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961.
3. Application of previous Tribunal decisions and pending appeals before the Hon'ble Bombay High Court.

Detailed Analysis:

Issue 1: Assessability of Consideration as Royalty under Article 12 of the Tax Treaty

The primary issue in both appeals was whether the consideration received for the provision of user rights of the software "OPUS" constituted royalty under Article 12 of the India-Germany Double Taxation Avoidance Agreement (DTAA) and was therefore liable to tax in India at 10%. The assessee contended that the payments received were for granting user rights in the copyrighted software, which does not equate to the use of the copyright itself. This distinction was crucial because payments for the use of copyrighted articles are treated as business profits under Article 7 of the DTAA and are not taxable in India if not attributable to a Permanent Establishment (PE) in India.

The Tribunal referred to its prior decisions in the assessee's own case for assessment years 2004-05, 2005-06, and 2007-08, where it was held that the license charges received for granting user rights in the software "OPUS" did not constitute royalty. The Tribunal's rationale was based on the distinction between payments for the use of a copyright (which would be royalty) and payments for the use of a copyrighted article (which would not be royalty). This distinction was supported by the Special Bench decision in Motorola Inc., which was affirmed by the Hon'ble Delhi High Court.

Issue 2: Enhancement of Income by Treating Consideration as Royalty under Explanation 2 to Section 9(1)(vi)

The authorities below had enhanced the assessee's income by treating the consideration received for the provision of user rights of software "OPUS" as royalty under Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. The Tribunal, however, found that the payments were received for the use of a copyrighted article and not for the use of copyright itself. It emphasized that the copyright of the software remained with the CGI Group, and the assessee had only granted user rights, which does not fall under the definition of royalty.

The Tribunal also considered the decisions of the Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd. and the Mumbai Bench of the Tribunal in M/s Solid Works Corporation, which supported the assessee's position. The Tribunal held that the license charges earned by the assessee were not liable to be treated as royalty and should be considered as business receipts.

Issue 3: Application of Previous Tribunal Decisions and Pending Appeals Before the Hon'ble Bombay High Court

The Tribunal noted that its previous decisions in the assessee's favor for assessment years 2004-05, 2005-06, and 2007-08 were pending before the Hon'ble Bombay High Court. The Tribunal acknowledged the applications made by the assessee under section 158A(1) of the Act, agreeing that the final decision on the question of law by the Hon'ble Bombay High Court should be applied to the current assessment years (2008-09 and 2009-10). The Tribunal directed the Assessing Officer to apply the decision of the Hon'ble Bombay High Court and/or the Hon'ble Supreme Court of India on the said issues once decided.

Conclusion:

The Tribunal allowed both appeals of the assessee, holding that the consideration received for the provision of user rights of software "OPUS" did not constitute royalty under Article 12 of the DTAA or Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. The Tribunal directed the Assessing Officer to apply the decision of the Hon'ble Bombay High Court and/or the Hon'ble Supreme Court of India on the said issues for the relevant assessment years. The appeals were disposed of with these observations.

Order Pronounced:

The order was pronounced on the 20th day of February, 2015.

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