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TMI Blog2014 (9) TMI 889X X X X Extracts X X X X X X X X Extracts X X X X ..... - The assessee was given the right to use the said facility for its purposes on payment of cost stipulated - the terminology of the said agreement would not conclusively decide the nature of transaction between the parties. Canadian Company under the agreement has permitted or allowed the assessee to use the facilities which they have developed at considerable cost to be paid - Merely because the agreement provides that the term 'Cost' does not include any mark-up and is limited to the actual cost, it makes no difference in the eye of law - But one thing that clearly emerges from the said agreement is that in developing the facility or tool, it is the Canadian Company which has invested the entire money - Prior to the development of the facility, there was no agreement between the Canadian Company and the assessee for sharing the cost of development of the said tool - even after payment of cost, the product used would absolutely vests with the Canadian Company - The assessee under no circumstances, would get any title to any extent in the facility developed by the Canadian Company and the right conferred is only for its user - it is nothing but a license though it is styled as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring costs by which the Canada Company would procure licenses from Microsoft and also the communication tool developed by CGI Group Inc., and the costs relating to that would be subsequently invoiced on the assessee. Accordingly, invoice was raised on the assessee by the Canada Company. While making the remittance, the assessee deducted TDS at 20% under Section 195(1) of the Act and also paid the same to Government account. However, according to the assessee, since it is a cost sharing agreement and payments were made by the assesee for reimbursement of cost/expenses, no income is embedded therein. Therefore, the assessee is not liable to deduct tax under Section 195(1) of the Act. The appeals were filed by the assessee before the CIT(A) under Section 248 of the Act. The Appellate Authority sought for a remand report from the Assessing Officer. The claim of the assessee was that the payment was in the nature of reimbursement of expenses. Hence, it was not liable to deduct tax under Section 195(1) of the Act. Further, the payments are not in the nature of royalty. The Appellate Authority held that the payment made by the assessee to the Canada Company cannot be considered as royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that, no right in the intellectual property is transferred under the agreement nor any licence is granted under the agreement. As is clear from the agreement, the Canadian Company developed a tool providing Eportal-intranet facility. It was available only to the members of the Group. The other members of the Group agreed to share the cost of the said tool. Therefore, the assessee agreed to share the cost of the tool. No profit is embedded in the said payment as is clear from the clauses in the agreement. Clause 4.4. provides that the term 'cost' incurred does not include any mark up and is limited to the actual cost. Therefore, the Tribunal was justified in holding that it is neither a payment towards royalty nor payment towards technical services. 7. In the light of what is stated above and the rival contentions, it is necessary for us to look in to the terms of the agreement entered into between the parties, understand the intention of the parties and then find out the nature of transaction. Based on that factual finding, we have to decide whether it falls within the definition of royalty as provided under Section 9(1)(vi) or technical services as provided unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost. 4.5 CGI-India shall not have any right to the Intellectual Property rights (IPR) nor have any right to sell or license or lease or in any manner transfer the right assigned therein to other parties. 5. Any right in respect of CGI information Technology Infrastructure, or whatsoever in respect of any invention, improvements and other intellectual property rights in respect of CGI Information Technology Infrastructure or products shall vest with CGI Group Inc. 6. Disclosure of information. 6.1 CGI-India agrees to hold all such information in confidence to CGI Group Inc. and not to disclose such information to any other person or organization without the prior written consent of CGI Group Inc. 6.2 All materials received from CGI Group Inc. under this Agreement shall be and remain the property of CGI Group Inc. and shall be returned to CGI Group Inc. upon termination of this agreement. 7. This Agreement is effective 1st October 2001 and shall remain in effect unless terminated by either party as otherwise provided in this Agreement. Termination of this Agreement shall not relieve either party to any obligations, which may have accrued prior to such ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to use the tool which they have developed. The said tool is required by the assessee as an operational guidance for its day-today business. For using the said facilities, the assessee has allocated the cost in respect of the facilities on an agreed basis as mentioned in clause 4.3. It is made clear the term 'cost' incurred under clause 4.3 does not include any mark up and is limited to the actual cost. In other words, no profit or income is embedded in this cost. 10. Clause 4.5 is of utmost importance. It declares the assessee shall not have any right to the Intellectual Property rights. In other words, though the assessee pays the cost stipulated in the agreement for using the facility it does not confer any right in the intellectual property rights. In other words though the agreement is styled as 'cost sharing agreement', and the cost is paid, the assessee would not get any right in the said tool to any extent whatsoever. Further, the said clause makes it clear the assessee will not have any right to sell or license or lease the facility which is made available by the Canadian Company to the assessee. That clause does not stop there. It furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do the thing actually licensed to be done. It transfers an interest to a limited extent, whereby the licensee acquires an equitable right only in the copyrighted article. It was further held as under: 43. A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use confidential information, and in virtually in all cases it will be a permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software licence will be akin to a licence of confidential information or know-how. The owner or licensor of a copy right, has a right to grant permission to use the software or a computer programme, in respect of which they have a copy right, without transferring the right in copy right. It is one of the rights of a copy right owner or licensor. Without such right being transferred, the end user has no right to use the software or computer programme. If he uses it, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses to the CGI- India i.e. the assessee. Therefore, even after payment of cost, the said product used would absolutely vests with the Canadian Company. If really, the agreement was to share the cost of developing the facility, the assessee also would become a co- owner. That is not the intention between the parties. The assessee under no circumstances, would get any title to any extent in the facility developed by the Canadian Company and the right conferred is only for its user. Therefore, it is nothing but a license though it is styled as the Cost Share Agreement. 14. Section 9 provides for the income deemed to accrue or arise in India. It reads as under: 9(1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India. (vi) income by way of royalty payable by- (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh which such right is transferred. Explanation 5 - For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) the possession or control of such right, property or information is with the prayer; (b) such right, property or information is used directly by the payer; (c) the location of such right property or information is in India. Explanation 6. - For the removal of doubts, it is hereby clarified that the expression process includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for downlinking of nay signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;] 15. Explanations 4, 5 and 6 were inserted by the Finance Act, 2012, which came into retrospective effect from 1-6-1976. 16. The facility which is provided by the Canadian Company used by the assessee is the intranet facility. Therefore, it is necessary for us to understand what Intranet facility means. An intranet is a computer network that uses Internet Protoco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said CGI Information Technology Infrastructure facility. It has allowed the assessee to use the said facility subject to the terms and conditions stipulated in the said agreement. Clauses 4.2 and 4.3 deal with the payment of cost to be paid for using the said facility. Clause 4.4 declares that the cost does not include any mark up and is limited to the actual cost. Further, Clause 4.5 declares the permission granted to the assessee to use the facility on payment of cost does not extend to confer on the assessee any right to sell or licence or lease or in any manner transfer the right assigned therein to other parties . Therefore, it is clear that some right is assigned to the assessee under the agreement on payment of cost. That right is a right to use the facility notwithstanding the fact that the cost is paid. Clause 5 declares the rights of such facility vest with the Canadian Company only. Therefore, it is clear that the cost is paid for using the computer software. When the assessee is allowed to use the said facility, it is nothing but a license to use the said facility. If really the cost paid represents the assessee's share of cost for developing the internal tele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o contended that this Court has already held in the case of CIT v. Ranka And Ranka 352 ITR 0121 that Instruction No.3/2011 dated 9-2-2011 is retrospective in operation and equally applied to the proceedings pending even prior to 9-2-2011 notwithstanding the fact that Circular expressly states that it is only prospective and therefore, on that basis, relief has to be granted in the case where tax liability is less than ₹ 10.00 lakhs. We do not find any substance in the said contention. The question of extending the benefit of Instruction No.3 would arise only in cases where the tax liability is admitted and the tax payable is less than ₹ 10.00 lakhs. It has no application to the case, where the very liability is disputed. Therefore, in this case, we have held that the assessee is liable to pay tax. In fact, the assessee had paid the tax and therefore, in the facts and circumstances, we are satisfied that the said judgment has no application to the facts of the cases where the tax liability is less than ₹ 10.00 lakhs. It is placed on record that the assessee had no doubt paid the tax, after, deducting the tax at source as contemplated under Section 195(1) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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