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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 ..... the conditions in the first part of para 6, the amount shall not be considered as 'royalties' under paras 1 and 2 of Article 13, but shall fall for consideration under Article 7 of the DTAA, being, 'Business profits'. There is no dispute on the fact that the assessee is a UK company having its branch office in India (which is its permanent establishment) and the transactions in question are sale of computer software made by such permanent establishment to certain parties in India. This shows that all the requisite conditions for the applicability of first part of para 6 of Article 13 are fully satisfied. On such fulfillment, the amount of 'royalties' is liable to be considered under Article 7 (Business profits). As the assessee has declared such receipts under Article 7, the view taken by the authorities in this regard, shifting such amount from Article 7 (business profits) to Article 13 (royalties), being contrary to the mandate of the DTAA, is liable to be and is hereby set aside. Thus we approve the assessee's stand on the sale of computer software as business profits, by jettisoning the Revenue's viewpoint of royalty. - Decided in favour of assessee. Receipt towards Annu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of receipts from sale of software above, we have held in principle that such consideration does not fall within the definition of royalties given in para 3(a) of Article 13. Since the training of personnel of end users for which this consideration has been received is ancillary and subsidiary to the sale of software, the same, being covered under para 5, cannot be treated as 'Fees for technical services' as per para 4 of Article 13 of the DTAA. Ex consequenti, we allow this ground by approving the assessee's stand of including such receipts under Article 7 of the DTAA.- Decided in favour of assessee. Estimation of income from business at the rate of 18% on Consultancy receipts and Miscellaneous income - Held that:- We find that the AO has estimated income at the rate of 18% on Consultancy receipts and Miscellaneous income without pointing out any mistake in or rejecting books of account maintained by the assessee. It is trite law that unless the books are rejected after pointing out certain deficiencies, the declared profit of the assessee cannot be disturbed. In the absence of an iota of evidence justifying rejection of books of account, we overturn the impugned order on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the Act and also Article 13(3)(a) of Indo-UK Double Taxation Avoidance Agreement (hereinafter called `the DTAA'). The assessee failed to convince the Dispute Resolution Panel (DRP) on its line of reasoning, which countenanced the action of the AO in the draft order. In the final order, the AO treated `Software sales' amounting to ₹ 1.04 crore as `Royalty' which was subjected to tax accordingly. The assessee is aggrieved against such treatment. 4. We have heard the rival submissions and perused the relevant material on record. The assessee is a tax resident of UK having a permanent establishment in the shape of branch office in India. It has been taxed as a foreign company in respect of income from its branch office in India. The short controversy before us is to decide the nature of receipts amounting to ₹ 1.04 crore which the assessee claims as `Business receipts' from sale of software, whereas the Revenue has held it to be `Royalty'. Chain of transaction of sale of mining solutions is that the Indian branch receives orders of software from end users; such orders are then placed by the Indian Branch to its head office; the Head office, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of this clause indicates that the : ` Intellectual Property and other rights to the Products remain at all times with Datamine Corporate ... and do not pass in any way to the Distributor'. It further provides that the Distributor agrees that the Products are proprietary information and trade secrets of Datamine Corporate for which the distributor shall maintain the confidentiality. Para 8.2, which is quite relevant for our purpose, provides that the : `Distributor shall not attempt to register any Trade Mark, logos, company name, ... that may be identical to or confused with those already owned or registered by Datamine Corporate'. The above clauses of the Distributors' Agreement amply manifest that the Distributor, namely, the assessee acquires simply Software Products from Datamine Corporate for reselling to the end customers. The Product is nothing, but, CD which has to be simply installed by the assessee in the computers of end customers. All the intellectual property rights to the Products remain with Datamine Corporate and the assessee cannot use it or pass it over to anyone except by way of sale of Software Products. 5. Now, we espouse the `End user Agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led by the end customer on any number of computers, but, at a time only one can be used. Then, there is a warranty clause in this Agreement which provides that the warranty duration varies from product to product and during such warranty period, the Datamine group will repair any programme error that may have been found. A perusal of the above clauses of the End user Agreement divulges that the end user acquires perpetual right to use the software and the number of permissible seats to the user is equal to the number of copies purchased. It further shows that intellectual property rights vest in Corporate alone and the end user has simply a right to use the product, which is albeit perpetual. 7. Under such circumstances, the question arises as to whether the sale of software can be treated as `Royalty' as held by the authorities or `Business receipts' as canvassed by the assessee. The ld. AR was fair enough to concede that Explanation 4 to section 9(1)(vi) inserted by the Finance Act, 2012 with retrospective effect from 1.6.1976 brings consideration for right to use a computer software within the ambit of `Royalty'. It was, however, submitted that the DTAA has not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terally after entertaining deliberations from both the countries who signed it. If there is no amendment to the provision of the Treaty but there is some amendment adverse to the assessee in the Act, which provision has been specifically defined in the Treaty or there is no reference in the Treaty to the adoption of such provision from the Act, then such amendment will have no effect on the DTAA. 8.3. Reverting to the facts of the extant case, we observe that the term Royalties has been defined in the DTAA as per Article 13(3). Such definition of the term royalties as per this Article is exhaustive. Pursuant to the insertion of Explanation (4) by the Finance Act, 2012, with retrospective effect, no corresponding amendment has been made in the DTAA to bring the definition of `Royalties' at par with that provided under the Act. Subject matter of the Explanation 4 is otherwise not a part of the definition of `Royalties' as per Article 13 of the DTAA. As such, it becomes vivid that the contention of the learned Departmental Representative that the retrospective insertion of Explanation 4 to section 9(1)(vi) should be read into the DTAA also, cannot be accepted. 9. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no equipment has been transferred by the assessee to the end users, which is simply a software. Now coming to sub-para (a) of para 3 of the Article, we find that the term `royalties' has been defined to mean a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 11. The Department has covered the case with in the four corners of this Article on two counts. First is that the consideration from the alleged sale of software is nothing, but, for `use' of 'process'. In our considered opinion, this approach is not correct because the assessee has not allowed end users to use any `process'. Obviously, a `computer software' cannot be treated as a `process' because the end users by using the software do not have any access to the source codes. What is available for their use is software product as such and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of literary, artistic or scientific work, ..... computer software, any patent, trade mark...'. It is thus clear that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the concerned country. Since Article 13(3)(a) of the DTAA with UK does not contain any consideration for the use of or the right to use any `computer software', the same cannot be imported in to it. 12.2. The second segment, which is quite pertinent, is that Article 13(3)(a) encompasses consideration for the use of or the right to use any copyright of literary, artistic or scientific work etc. as `Royalties'. Even if we presume for a moment, with which we do not agree, that a computer software is covered with in any of the terms specifically mentioned in the Article, such as `information concerning commercial experience etc.', then also the instant sale consideration cannot be brought within the purview of Article 13. This is for the reason that in order to be covered with in the scope of this Article, it is necessary that user should get a copyright of `information concerning commercial ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply in respect of computer programmes where the programme itself is not the essential object of the rental. .......... Explanation - For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation. 12.5. When we consider the relevant parts of the End user Agreement, it clearly emerges that the customers have not been assigned any of the things which have been mentioned in section 14 of the Copyright Act, so as to constitute an assignment of a copyright of the computer software to the end user. Insofar as the view point of the ld. DR about the taking of copies of the Software by the end customer is concerned, we find that the same is for self use and thus covered by section 52 of the Copyright Act, which enumerates certain acts that do not amount to infringement of copyright. The relevant part of this provision is as under : - (1) The following acts shall not constitute an infringement of copyright namely- aa. The making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy- i. in order to utilize the computer programme fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered under Explanation 4 to section 9(1)(vi), the same should be taxed as such. 13.2. In this regard, we find that sub-section (1) of section 90 of the Act provides that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax in respect of income on which tax has been paid in two different tax jurisdictions. Sub-section (2) of section 90 unequivocally provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, ' the provisions of this Act shall apply to the extent they are more beneficial to that assessee'. The crux of sub-section (2) is that where a DTAA has been entered into with another country, then the provisions of the Act shall apply only if they are more beneficial to the assessee. In simple words, if there is a conflict between the provisions under the Act and the DTAA, the assessee will be subjected to the more beneficial provision out of the two. If the provision of the Act on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment or fixed base. In such case, the provision of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. 14.2. Para 6 of Article 13, to the extent applicable, states that 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. In simple terms, this means that the amount falling under para 3 of Article 13 cannot be taxed as Royalties under paras 1 and 2, if the beneficial owner of the royalties, being a resident of a Contracting State (UK), carries on business in the other Contracting State (India) in which the royalties arises through a permanent establishment situated therein (India). Once these conditions are satisfied, then the later part of para 6 comes into play, as per which the provision of Article 7 (Business profits) of this Convention shall apply. In other words, on the fulfillment of the conditions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held such receipts on page 31 as royalty and clubbed it with software sales of ₹ 1.04 crore to make `Income as Royalty' totaling ₹ 1,40,87,804. It is thus discernible that the AO finally treated receipts from annual maintenance contract as part of Royalty covered under section 9(1)(vi) of Article 13(3), as having the same character as that of the original software. While discussing receipts from sale of software amounting to ₹ 1.04 crore, we have held that the same is in the nature of business receipts covered under Article 7 and not Article 13 of the DTAA. Going by the AO's own version of receipts from annual maintenance contract having the same character as that of software sales, we consequently hold such receipts also falling under Article 7 of 'Business profits'. 16.3. Before parting with this issue, we want to clarify that we have not independently examined the character of receipt from annual maintenance contract as `Royalties' or 'Fees for technical services'. It is so because of the AO himself finally holding it to be of the same character as the sale of software, and thus royalty covered under Article 13(3) read with sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of para 4 are subject to paragraph 5. It means that if a payment falls under para 5, then it shall be removed from para 4, even if it is covered within that. When we read para 4 in juxtaposition to para 5 of the Article 13, the position which follows is that whereas Article 13(4) defines the term fees for technical services to mean payments, inter alia, for rendering of any technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of the right, property or information described in paragraph 3(a) of this Article, para 5 provides that `fees for technical services' in paragraph 4 shall not include amounts paid, inter alia, 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. This shows that in so far as consideration for services that are ancillary, subsidiary, and inextricably linked to the sale of property described in paragraph 3(a) of the Article 13 is concerned, the provisions of para 4 apply. If however, consideration is for services that are ancillary, subsidiary, and inextricably linked to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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