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TMI Blog2016 (3) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Group, to mining industry in India. The assessee, inter alia, declared 'Software sales' of Rs. 1,04,18,783/- in its Profit & Loss Account as business receipts. During the course of assessment proceedings, the assessee was asked to submit various Agreements including the license agreement under which software were claimed to have been sold to end-users. After going through these Agreements, the AO rejected the assessee's claim of having sold copyrighted articles instead of copyright itself. In reaching this conclusion, he noticed that the software licensed for use by the assessee to the end-consumers were specialized software having special purpose usage in mining activity covering full scope of mining from the exploration, drill hole extending up to shipping. In addition, he also held that the software sold by the assessee were making available a 'process' to the customer who 'use' the process while carrying out their business. In the backdrop of this factual matrix, the AO held that the consideration for software license falls within the definition of `Royalty' under section 9(1)(vi), clauses (i), (iii) and (v) of Explanation 2 of the Act and als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale and rental to the Distributor'. Next para of the Agreement provides that Corporate grants Distributor the non-exclusive `right to resell' and rent licenses for the Products in the specified territories. Clause 3 of the Agreement contains obligations of Datamine Corporate. It provides that the Corporate shall make available to the Distributor a reasonable number of Not-For-Resale copies of the Products to allow the Distributor to market the Products. It has specifically been provided that: 'the Distributor may not copy the software except for reasonable back-up purposes, nor shall the Distributor sell or pass on these Not for sale copies to any other organization'. Clause 4 of the Agreement contains `Obligations of Distributor', whose relevant part obliges : "4.1. The Distributor ... to install the Products on the customer's computer and to carry out training courses in the use of the Products." A perusal of this clause divulges that the Distributor is obliged `to install the Products on the customers' computer'. Clause 8 of the Agreement has been captioned as 'Confidentiality and Intellectual Property Rights.' Para 1 of this claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the software products as you have purchased seats. You may not: a. Contrive for the software to be executed by more than the number of simultaneous users for which you have purchased seats; b. modify, translate, reverse engineer, decompile, disassemble or create similar or derivative software programs based on software products you have purchased; or c. assign, rent or lease any rights in the software or accompanying documentation in any form to any third party without the prior written consent of DCL or its authorized channels which, if given, is subject to the third party's consent to the terms and conditions of this agreement." 6. This clause fairly indicates that the end user can install the software on any number of computers, make copies for back up purposes for his own use only but with the qualification that he cannot operate/execute simultaneous copies of the software product more than the purchased seats. For example, if three copies of a product are purchased, these three software can be installed in any number of computers, but, at a time the usage cannot by of more than three seats. If only one copy is purchased, that can be installed by the end custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the provisions of the domestic law. In such a case, if any retrospective amendment is made to the provisions of the Act governing the deductibility of the expenses, the same shall apply under the Treaty as well. 8.2. Article 3(3) of the DTAA provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning tax to which the Convention applies. The nitty-gritty of Article 3(3) in the present context is that if a particular term has not been defined in the Treaty but the same has been defined in the Act and further there is a retrospective amendment to that term under the Act, then it is this amended definition of the term as per the Act, which shall apply in the Treaty as well. If however a particular term has been specifically defined in the Treaty, the amendment to the definition of such term under the Act would have no bearing on the definition of such term in the context of the Convention, unless the DTAA is also correspondingly amended. A country which is party to a Treaty cannot unilaterally alter its provisions. An amendment to a Treaty can be made bilaterally aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 10. Para 1 of this Article provides that `Royalties' arising in India and paid to a resident of UK may be taxed in UK. Para 2 provides that such royalties may also be taxed in India. As the assessee is a resident of UK, income from royalties arising in India, is otherwise chargeable to tax in India at the stipulated rate of tax. But in order to tax any amount under this Article, it is sine qua non that the receipt must fall within the scope of `Royalties' as defined in para 3 of the Article 13. The AO has enclosed the case of the assessee within sub-para (a) of para 3. It is apparent that sub-para (b) of para 3 of Article 13, dealing with consideration for the use of any industrial, commercial or scientific equipment etc., has absolutely no relevance in the present context as no equipment has been transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e' in para 3(a) of the Article 13 along with literary, artistic or scientific work, patent, trademark etc. Such language of the DTAA is in sharp contrast to the specific use of the term `computer software' or `computer software programme' together with literary, artistic or scientific work, patent, trademark etc. in many DTAAs. To illustrate, Article 12 of the DTAA between India and Malaysia defines 'Royalties' to mean `payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work........... plan, know how, computer software programme, secret formula or process.....' Similarly, the DTAA between India and Kazakhstan defines the term 'royalties' in Article 12(3)(a) to mean : 'payments of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work including software, cinematograph films...'. Similarly, the DTAA with Turkmenistan also defines `Royalties' in Article 12 to mean : 'payments of any kind received as consideration for the use of or the right to use any copyright of literary, artistic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 14 of this Act defines `Copyright' to mean : `the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely :- "a. in the case of a literary, dramatic or musical work not being a computer programme,- i. to reproduce the work in any material form including the storing of it in any medium by electronic means, ii. to issue copies of the work to the public not being copies already in circulation, iii. to perform the work in public, or communicate it to the public, iv. to make any cinematograph film or sound recording in respect of the work, v. to make any translation of the work vi. to make any adaptation of the work vii. to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub clauses (I) to (vi) b. in the case of a computer programme- (i). to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme : Provided that such commercial rental does not apply in respect of computer programmes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding consideration for the use of a literary or artistic work, etc. within the ambit of `Royalties' as per Article 13(3)(a) of the DTAA. 12.7. There is another dimension of this issue. While going through the Distributors Agreement, we have noted that the assessee has simply purchased shrink-wrapped software or off-the-shelf software from the Corporate. The assessee was not allowed to use the copyright of such software, which obviously vest in the Corporate. Since the assessee itself has not acquired any copyright in the mining software, it cannot resell or transfer anything more than what it has acquired. We, therefore, hold that the consideration received by the assessee for sale of shrink wrapped software cannot be considered as `Royalties' within the meaning of Article 13 of the DTAA as the same is a consideration for sale of a copyrighted product and not use of any copyright. 13.1. Now we take up the contention of the ld. DR that provisions of section 9(1)(vi) should be applied to determine the taxability of the amount. It was contended that as the ld. AR has admitted the amount of sale of software covered under Explanation 4 to section 9(1)(vi), the same s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DTAA. 14.1. Be that as it may, we find that there is another aspect of the matter. This is without prejudice to our finding that consideration for sale of software does not fall within the scope of the term `Royalties'. Even if the view point of the AO is accepted for a moment, with which we do not really agree, that such amount falls under para 3(a) of Article 13, in our considered opinion, even then the amount cannot be taxed as `Royalties' because of the operation of para 6 of Article 13, which reads as under : - "6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - towards Annual maintenance contract. The assessee declared such amount as business receipts and offered it accordingly. The AO treated this amount also as `Royalties'. The assessee was unsuccessful before the DRP and that is how this issue has come up before us. 16.2. We find from page 29 of the assessment order that the AO has discussed the nature of this receipt as annual maintenance contract primarily relating to providing updates and new versions of the software. He noticed that: 'this activity is simply an extension of original process and its characterization will be same as that of the original software.' He, therefore, held this amount to be falling under clause (vi) of Explanation 2 below section 9(1)(vi) of the Act. In the next para, he again held this amount as `royalties' under the DTAA. Thereafter, he discussed the relevance of para 4 of Article 13 of the DTAA, being 'Fees for technical services.' He also held such receipts as falling within the description of 'Fees for technical services' within the meaning of Article 13(4)(a) of the Indo-UK DTAA. In the ultimate analysis, he held such receipts on page 31 as royalty and clubbed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 5. The definitions of fees for technical services in paragraph 4 of this article shall not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article; (b) to (e) ....." 17.3. Para 5 excludes receipts from the ambit of `fees for technical services'. It is noticeable that provisions of para 4 are subject to paragraph 5. It means that if a payment falls under para 5, then it shall be remov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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