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2017 (4) TMI 763 - AT - Income TaxPayment received for network access and related services - payment for acquisition of copyrighted software OR copyright over such software - Royalty receipt - P.E. in India - business income taxed in India - DTAA - Held that - The definition of copyright in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. Here in this case, none of the conditions mentioned in section 14 of the Copyright Act is applicable as held by the learned CIT(A); and is also is evident from the terms of MSA, because no such rights has been given by the assessee to the IT Service providers. Further by making use or having access to the computer programs embedded in the software, it cannot be held that either WIPRO/IBM are using the process that has gone into the software or that they have acquired any rights in relation to the process as such. The software continues to be owned by the assessee and what WIPRO/IBM is getting mere access to the software. The source code embedded in the software has not been imparted to them. Hence, there is no use or right to use of any process as held by the learned AO. Hence, the finding of the learned CIT(A) that the payment in question cannot be reckoned as royalty is factually and legally correct and the same is upheld. Thus, we hold that for all the years the payments received by the assessee from WIPRO/IBM in pursuance to the MSA cannot be treated as royalty under Article 12(4) of the India-Netherland DTAA. Thus, the matter is decided in favour of the assessee and against the revenue
Issues Involved:
1. Whether the payments received by the assessee from IT service providers, like WIPRO & IBM, for providing network access to use copyrighted software, constitute "royalty" under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands. Detailed Analysis: Issue 1: Nature of Payments as "Royalty" Facts and Arguments by the Assessee: The assessee, a tax resident of the Netherlands, provides IT support services to Shell Group Companies and entered into a "Master Service Agreement" (MSA) with WIPRO & IBM. The services include IT support, network infrastructure services, and teleconferencing services. The payments received by the assessee are for providing network access and related services, not for the use of or right to use any copyright in the software. The assessee argued that these payments do not constitute "royalty" as per Article 12(4) of the DTAA between India and the Netherlands. Revenue's Argument: The Assessing Officer (AO) held that the payments received for access/use of software were in the nature of "royalty" under both the Income Tax Act and the DTAA. The AO argued that the software is an intangible property, and consideration for its use is "royalty". The AO also referred to Explanation 2 to section 9(1)(vi) of the Income Tax Act, which includes payments for the use of or right to use software as "royalty". CIT(A)'s Findings: The CIT(A) concluded that the payments received by the assessee were for the use of a copyrighted article, not for the use of copyright itself. The CIT(A) observed that WIPRO/IBM did not acquire any right to exploit the copyright in the software, and the payments could not be considered as "royalty" under Article 12(4) of the DTAA. Tribunal's Analysis: The Tribunal examined the MSA and noted that: 1. The right granted to WIPRO/IBM cannot be transferred to any other person. 2. The right to access/use the software is limited and subject to various conditions. 3. The payments are for the use of a copyrighted article, not for the use of copyright. The Tribunal referred to various judicial precedents, including the Delhi High Court's decision in DIT vs. Infrasoft Ltd., which distinguished between the acquisition of a "copyright right" and a "copyrighted article". The Tribunal concluded that the payments received by the assessee do not constitute "royalty" under Article 12(4) of the DTAA. Conclusion: The Tribunal upheld the CIT(A)'s decision, stating that the payments received by the assessee for sums amounting to ?3,75,25,291/- do not amount to "royalty" within the meaning of Article 12(4) of the Indo-Netherland DTAA and are not taxable in India. Since the assessee has no Permanent Establishment (PE) in India, the payments cannot be taxed as business income under Article 7. Separate Judgments: The Tribunal's decision applied to the assessment years 2006-07, 2007-08, and 2008-09. For the assessment years 2006-07 and 2007-08, the appeals by the Revenue were dismissed. For the assessment year 2008-09, the assessee's appeal was allowed. Final Order: The Tribunal dismissed the Revenue's appeals for the assessment years 2006-07 and 2007-08 and allowed the assessee's appeal for the assessment year 2008-09. The order was pronounced on 15th March 2017.
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