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TMI Blog2013 (8) TMI 952X X X X Extracts X X X X X X X X Extracts X X X X ..... ia) Ltd. (in short 'CDSS') which was claimed to have been received for information technology support but the A.O as well as the DRP have treated the said income as a royalty u/s 9(1)(iv) of the Act as well as within the meaning of Article 12 of the Double Taxation Avoidance Agreement (in short 'DTAA') between India and United States of America (in short 'USA'). We first dispose off the ground taken by the assessee challenging re-assessment proceedings more particularly in A.Y. 2004-05. 3. Briefly stated the facts are as under. The assessee is a foreign company incorporated in USA and is also a tax resident of USA. It is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. The assessee has a subsidiary in India called as Cummins India Ltd. (CIL) which was incorporated in 1962 as a JV with Cummins Engine company, US to manufacture internal combustion diesel engines. CIL manufactures diesel engines in the 200-2000 hp range and fiteration equipments. The assessee has also set up a wholly owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by observing that no reasoned order was passed by the A.O while making regular assessment. The A.O also observed that the A.O has not expressed his opinion on the assessee's claim of exemption in respect of licence fee received from "CIL" and "CDSS" for information technology support. The assessee carried the issue before the "DRP" but without success. The assessee is in appeal before us. 5. The main thrust of the argument of the learned counsel is that the assessment proceedings initiated by the A.O u/s 147 is merely on the change of opinion . He submits that at the time of original assessment proceedings, the returned of income was having a note which has been considered by the A.O. The learned counsel also referred to the observations of the A.O in the original assessment order passed u/s 143(3) of the Act that the case was discussed and notes to the return of income and various submissions have been considered. The main reliance in the argument of the learned counsel was on the notes in the return of income and has argued that everything was placed before the A.O. and hence it cannot be said that there was failure on the part of the assessee to disclose any material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-05 declaring total income of Rs. 11,32,94,584/- on 29-10-2004. The assessee's case was selected for scrutiny and assessment was completed u/s 143(3) of the Act on 20-10-2006. Let us deal with the argument of the learned counsel that the re-assessment proceeding is based on mere change of opinion. We have examined and perused the original assessment order. We find force in the argument of the learned CIT (DR) that the assessment order is only of one page and cryptic which reads as under: "Return of income was filed on 30/10/2004 disclosing the total income at Rs. 113,294,580/-, The return was accompanied with the Audit Report in prescribed from 3CEB u/s 92E relating to International transactions. The case was selected for scrutiny and accordingly notice u/s 143(2) was issued to the assessee on 22.09,2005 and served on 01-10-2005. 2. Assessee company is incorporated in USA. It. is engaged in the business of Manufacturing of heavy-duty and mid range engines for tracks & buses & marine lodging, agriculture and rail applications. In response to notice u/s 142(1) Shri Ameya Kunte, CA attended, on behalf of .assesses. Case was discussed and notes to the return of income and various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2004-05 and Rs. 62,769,649 in A.Y. 2006-07, respectively, are taxable as royalty u/s 9(1)(vi) of the Act as well as under Article 12 of DTAA between India and USA. The assessee had entered into an agreement with CIL and CDSS for grant of user rights in certain software. The software provided are third party software which has been procured by the assessee-company from "Oracle". It was claimed by the assessee that what is transferred under the agreements is the user right in the copyrighted software and not the 'use of copyright'. In the case of the assessee, the fees have been paid by CIL and CDSS to acquire the right to internally use and operate the software program. The assessee took a stand that the payments have been made for use of the right to use of or the right to use a copyrighted software. The assessee also contended that fees received by CIL and "CDSS" cannot be treated as royalty, nor it can be treated as fees for technical service. The A.O called for the agreements between the assessee and CIL/CDSS. The A.O has noted that on perusal of those agreements it was found that the assessee was paid Licence fees by those two subsidiaries for professional use of certain s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections of the assessee, a copy of purchase order No. 749180 dated 16-12-1987 was filed with the letter stating that same is a copy of Software License and Service contract between Oracle and the assessee which is also placed on record. The learned counsel submits that the assessee had received different amounts from CIL and CDSS but limited controversy is in respect taxability of fees for grant of user right and related support service received from CIL and CDSS i.e. Rs. 77,538,913/- in A.Y. 2004-05 and Rs. 62,769,649/- in A.Y. 2006-07. He submits that in order to ensure and achieve the greater degree of operating efficiency in its business operations including management reporting vis-à-vis its subsidiaries, the assessee company decided to uniformly use the software across the world in Cummins Group entities and joint ventures including CIL and CDSS. He submits that from the said object, the assessee-company acquired various types of off-the-shelf software and granted user rights in the same to its subsidiaries/joint venture entities worldwide for their internal use. The assessee entered into separate agreements dated 7-6-2004 with CIL and CDSS for grant of user rights i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act which defines "computer program". He submits that in the present case, the CIL and CDSS used the software only for the internal use and have not been given right to perform or communicate to the public. Moreover, the Indian Affiliates do not have right to translate the software. He submits that there is difference between copy right and copyrighted article. He further submits that the definition of royalty has to be given a contextual meaning. The right to use in Article 12(3) of the Treaty refers to right to use the right in the copyright and not the Copyrighted article. He submits that as per the provisions of Copyright law, the copyright clearly vests in a person who has an exclusive right to do all or any of the acts mentioned therein to the exclusion of others. He also referred to 'Right to use" mentioned under the DTAA refers to the right to use of the copyright and not the copyrighted article. In support of this contention, he placed reliance on the following judicial decisions: a) DIT Vs. Ericsson Radio systems AB and Metapath Software International Ltd. 246 CTR 422 (Del); (b) Motorola Inc Vs. DCIT (2005) 95 ITD 269 (Del) (SB) (c) Allianz SF Vs. ADIT-ITA No. 156 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by no stretch of imagination it can be interpreted that the assessee has no absolute right to use the software or to allow the use of the software to its affiliate or group company. The learned CIT (DR) placed his heavy reliance on the decision of the Hon'ble Karnataka High Court in the case of M/s Samsung Electronics Co. Ltd. (India Software Operations) and others 345 ITR 494 (Kar. H.C.). The learned CIT (DR) also placed his reliance on the following judicial decisions: (a) CIT Vs. M/s. Synopsis International Old Ltd.(2010-III-36-HC-KAR-INTL, judgment dt. 3-8-2010; (b) Millennium IT Software Ltd (2011-TII-25-ARA-INTL), judgment dt. 28-9-2011; (c) Acclerys K.K. AAR No. 989 of 2010, decision dt. 27-2-2012; (d) M/s. Ing Vyasya Bank Ltd (2011-TII-136-ITAT-BANG-INTL), decision dt. 5-8-2011. 13. We have heard the rival submissions of the parties and carefully examined the material on record. The assessee is a copy incorporated in USA. The assessee company procured software from Oracle Inc. The assessee is disputing the taxability of the payment made by CIL & CDSS to the assessee which are affiliates Indian companies. So far as the taxability of the payment received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of payment received by the assessee from two affiliate companies. We first examine the terms of agreement between Oracle and the assessee company. As per the terms mentioned in the software licence and service agreement (hereinafter referred to as "the Agreement), as per the definition of the programme means the computer software owned and designated by the Oracle. The assessee is given nomenclature as a "Client" and the assessee is granted licence for using Software. It is asserted in the terms and conditions that the assessee is granted non-exclusive licence to use the programme solely for the assessee's internal data processing operations on the specific CPU designated in the relevant order form or on back-up CPU is inoperative if the designated CPU is inoperative. As per the terms, the assessee cannot use the programme for commercial time sharing, rental or service bureau use. The assessee acquired only the right to use the programs and did not acquire any rights of ownership and such rights would, at all the times remained the property of Oracle. The assessee cannot modify the programme or combine the said program with other software products. It is specifically provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and sub-license rights thereof; NOW THEREFORE, in consideration of the mutual promises of each party to the other herein, it is hereby mutually agreed as follows: 1. Scope of Work CIL hereby engages Cummins to license and sub-license certain software rights as described in the Scope of Work attached as Exhibit 'A' (collectively referred to as the "Licences".) CIL will be provided either continuously or as needed during the Term of this Agreement. The parties will make certain adjustments, deletions and adjustments to the license provided by mutual written agreement. No changes to the license may be made without prior agreement in writing. 2. Compensation In consideration of Cummins granting a sub-license for CIL to use the licenses, CIL shall pay Cummins according to the fees provided in Schedule 'B'. The rates specified under Exhibit 'B' are categorized into one time fee under Group 1 and the payment per annum based on actual number of units on which these licenses will be used. The Units which are in operation since April 1, 2003 are indicated in Annexure 'B'. 3. Payment Cummins will be required to submit monthly invoices to CIL at the address set forth for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that violate the foregoing warranty. Cummins hereby assigns, and represents that it has the authority to assign / sub-licence, to CIL any and all manufacturer's and supplier's warranties, express or implied, representations, service agreements, patents and other indemnities, if any, with respect to products sold to CIL and upon written request from CIL, Cummins will take all reasonable action to enforce any such warranty, express or implied representation, service agreement, licence agreement/s or indemnity issued on or applicable to the products and materials which are enforceable by Cummins in its own name. 7. Ownership of Intellectual Property; Reports All reports and other work performed for or delivered to CIL under this Agreement shall be construed as works-for-hire, and shall become the sole and exclusive property of CIL without restriction as to use. However, it is expressly agreed that Licences shall not be owned by CIL. 8. Confidential Information Cummins agrees to keep and preserve in strict confidence all technical, manufacturing, marketing, sales, financial or other confidential and proprietary information and know how (collectively referred to herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions of any such engagement relationship do not apply to and are excluded from this Agreement. 10. Notices Except as otherwise provided in this Agreement, all notices hereunder shall be given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, to the parties at their respective addresses set forth below, or to such other address as either party shall have furnished in writing to the other; If to CIL: Cummins India Ltd., * Kothrud, Pune 411 038 * India * ATTN: ___________ * If to Cummins: Cummins Inc. * * . 500 Jackson Street, * * . Columbus, IN 47202-3005 12. Force Majeure Neither party shall incur liability to the other for delay in performance or for failure to perform under this Agreement if due to causes beyond its control, including, but not limited to, acts of God, acts of war, fire, riot, strike or other labor trouble, or intervention by any governmental authority, and each party shall take steps to minimize any such delay. 13. Non-Waiver T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra), the Hon'ble Karnataka High Court has examined the identical issue under provisions of sec. 9(1)(vi) of the Act as well as Article 12(3) of DTAA between Indo-USA. As per the terms of the agreement between the assessee and the Oracle what is transferred to the assessee is licence to use the software and copy right continued with the Oracle i.e. software company. It is pertinent to note here that as per the terms of agreement between the assessee company and Oracle, the assessee has entered into agreement with its affiliate or group companies including two companies in India. In the case of Samsung Electronics Co. Ltd (supra) the Hon'ble Karnataka High Court observed that copy right is a negative right which is an umbrella of many rights and licence is granted to use of copy right in respect of particular software/off the shelf software in the respective agreement which authorizes the user i.e. customer, to make use of copy right software contained in the said software which is purchased and the same would amount to transfer of part of the copy rights for use in internal business as per the terms of the agreement. In our opinion, the decision of the Hon'ble Karnataka High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the meaning of Income Tax Act and DTTA. In the said TCS's case, it has been held that copyright in computer program may remain with the originator of the program, but the moment copies are made and marketed, it becomes goods, which are susceptible to tax. The contention of the assessee that the consideration received by the non-resident supplier towards the software products would amount to 'royalty' within the meaning of DTAAA with respective country was not at all considered in the said case. Therefore, the said decision in TCS's case is not helpful to the respondents in the present cases. It is well settled that the intent of the legislature in imposing. Sales Tax and Income Tax are entirely different as Income Tax is a direct tax and Sales Tax is an indirect tax and wherefore, mere finding that the computer software would be included within the term 'Sales Tax' would not preclude this Court from holding that the said payments made by the respondents to the non-resident Company in the present cases would amount to 'royalty' unless the respondents are able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial object of the rental. (c) in the case of an artistic work:- (i) to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph firm; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) in the case of a cinematograph film:- (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) in the case of a sound recording:- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording, regardless of whether such copy has been sold or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the same and to store it in the hard disk of the designated computer and to take back up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright i.e. the respondent supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. The decision of the Delhi High Court in COMMISSIONER OF INCOME TAX DELHI - V M/s DYNAMIC VERTICAL SOFTWARE INDIA PVT. LTD in ITA No.1692/2010 DATED 22.02.2011 = (2011-TII-08-HC-DEL-INTL) relied upon by Sri Aravind Dattar, learned senior counsel appearing for the respondents in some of the cases in support of his contention that by no stretch of imagination., payment made by the respondents to the non-resident suppliers can be treated as 'royalty' is not helpful to the respondents in the present cases as in the said case, Delhi High Court was considering the provisions of Sections 40(a)(i) of the Act and the order of the High Court reads as follows:- "What is found, as a matter of fact, is that the assesses has been, purchasing the software from Microsoft and sold it furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any right upon the end user and the purpose of the CD is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music C.D. or the CD containing software and in view of the same, the Legislature in its wisdom, has treated the literary work like books and other articles separately from computer software within the meaning of the "Copyright" as referred to above under Section 14 of the Copyright Act. 25. It is also clear from the above said analysis of the DTAA Income Tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of the Act as the definition of 'royalty' under clause 9(1)(vi) of the Act is "broader than the definition of "royalty" under the DTAA as the right that is transferred in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem of which software was an inseparable parts, incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. We fail to understand how the principles laid down by the Hon'ble Delhi High Court in the said case are applicable to the facts of the present case where the matter rests with independent software having independent identity In the case of Ericsson A.B (supra) the said company was a Sweden company. When the decision of the Hon'ble High Court of Karnataka is available then it is not necessary for the Tribunal to show more wisdom unless some contrary decision on the issue of another High Court or the Supreme Court has been brought to our notice. In our opinion, all the decisions relied upon by the assessee are not helpful to decide the nature of payment received by the assessee in present case which is described as licence fee but in fact it is the royalty only. We therefore, respectfully following the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics co. Ltd. (supra) hold that the payment received by the assessee from its two affiliate CIL an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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