9911796707
TMI Blog2016 (5) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferee is granted limited rights to reproduce the program. The Agreement categorically restricts the user to copy, publish, display, disclose, modify, merge etc. the software except for archival purposes and not allowed to exploit the computer software commercially. On identical facts and circumstances, honourable Delhi high court has held that what is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article, which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be chargeable to tax as business income. Therefore respectfully following the decision of Honourable Delhi high court we hold that that consideration received by the assessee on sale of software is not chargeable to tax as royalty such as equipment royalty, process royalty etc. Under Article 12 of DTAA but as business income under article 7 of the INDO Finland DTAA. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... f DTAA. 4. That on the facts and circumstances of the case & in law, the Ld. AO/ DRP erred in not allowing the TDS credit for the payments received on net of tax contracts in spite of charging to tax the gross amount of the payments. 5. That on the facts and circumstances of the case & in law, the Ld. AO/DRP erred in not applying the correct conversion rate on the grossed up amount of USD 39,55,712 and coming to the wrong INR equivalent of ₹ 17,17,49,104/-. 6. That on the facts and circumstances of the case & in law, the Ld. AO erred in applying the tax rate of 15% on all the receipts without appreciating that the agreements entered with Vodafone Essar and Idea Cellular were post June, 2005 and accordingly receipts, even if treating the same as royalty thereof ought to be taxed at the rate of 10% in view of the provisions of section 115A of the Act. 7. That on the facts and circumstances of the case & in law, the Ld. AO/DRP erred in levying the interest under section 234A and 234B of the Act." 3. The assessee has raised the following grounds of appeal in ITA No.5587/Del/2011 for the Assessment Year Assessment Year: 2008-09:- 1. That on the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof ought to be taxed at the rate of 10% in view of the provisions of section 115A of the Act. 6. That on the facts and circumstances of the case & in law, the Ld. AO/DRP erred in levying the interest under section 234B of the Act." 4. The assessee has raised the following grounds of appeal in ITA No. 699/Del/2013 for Assessment Year: 2009-10:- 1. THAT on the facts and circumstances of the case & in law, the impugned order passed by the Assistant Director of Income Tax, Range - 1, (International Taxation) New Delhi ("Ld. AO") under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act") is bad in law and void ab-initio. 1.1 THAT on the facts and circumstances of the case & in law, the Ld. AO grossly erred in assessing the income of the Appellant at ₹ 52,94,74,960/- as against the nil income declared by the Appellant in the return of income. 2. THAT on the facts and circumstances of the case & in law, the Ld. AO/DRP erred in holding that the receipts in the hands of the Appellant from sale of "standard software" are in the nature of royalty under section 9(1) (vi) clauses (i), (iii), (iva) & (v) of the Act and unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n not disposing of the objection raised by the Appellant in relation to taxing the receipts on account of the invoices raised directly on customers after grossing up the same. 5.1 THAT on the facts and circumstances of the case & in law, the Ld. DRP erred in not issuing any direction to the Ld. AO who erred in grossing up the receipts without appreciating that the same can be done only in the hands of the payer for the purpose of deduction of taxes and not for computing the income 6. THAT on the facts and circumstances of the case & in law, the Ld. AO/DRP erred in levying the interest under section 234B of the Act. 5. Based on above grounds of appeal it is apparent that for all the three appeals facts, Assessment order and order of DRP is similar and therefore the grounds of appeal of assessee are similar. Hence we first take up the appeal of Assesseefor 2007-08, discuss facts of the case, rival arguments and our decisions and reasons therefore. Then we will follow the same for respective subsequent two years i.e. A. Y. 2008-09 and 2009-10. 6. Hence, Ground 1 to 3 of the appeal of the assessee are taken up first and decided as under. 7. Comptel Oyj, (herein after referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treaty‟). 11. Therefore, it is important to analyze the nature of software in consideration. This was explained by the assessee and there is no dispute about that which is as noted by ld. AO as under :- "3. Nature of the Software licenses granted to parties in India: As per the website of the assessee, "Comptel Dynamic OSS (Operations Support Systems) products and solutions focus on fulfillment, resource management, convergent mediation and charging. Our expertise allows Communications Service Providers (CSPs) to focus on their core business: developing and delivering innovative and profitable services, collecting usage information and charging customers". "Comtel's products and solutions are designed to adapt to all common telecoms network and IT environments and to evolve to meet the demands of future services". 3.1 The software is delivered at the site of the end customer. The assessee, regarding the nature of software, on 07.10.09 submitted the following: Meaning of Mediation Software's Comptel Mediation and Charging Solutions collect the convergent real time usage data to ensure accuracy of customer billing and their credit management. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er bills on the basis of the collected real-time usage data Moreover, the solution allows various charging options, meaning that billing can be based on volume, content value, QoS (Quality of Service) or lime, or any combination Of these. Comptel Instant Link release 6 introduces a new combination of customer-driven enhancements and innovative product features It also includes a renewed provisioning logic configuration tool Instant Link Business Service Tool 3, which provides an easy-to-use front-end for flexible ^ service creation and management For example, the superior configuration ability provided with Instant Link Business Service Tool 3 gives operators the much-needed flexibility for competitive reactions, differentiation in service launches Furthermore, the variety of usability, and maintenance improvements now introduced are based on the continuous dialogue with our customer base and targeted to personnel responsible for daily operational tasks. The further, description of the software as per the website of the assessee are: 1. Comptel Convergent Mediation is the scalable platform for managing the collection and transformation of network transactions from various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inning, patented Mediation and Charging Platform used by over 1 80 customers around the world. It has a proven track record of providing communications service providers with a future-proof solution for all 3G, NGN and IMS services. 4. Business Model: The assessee has submitted a detailed note on the business model along with the arguments on taxability built in on 07.10.09. The same is reproduced betow: The Assessee has already submitted that for the purpose of selling the softwares, it has entered into an agreement with IBM United Kingdom Ltd, which is the Channel Partner of the Comptel for the purpose of Sale and delivery of the mediation softwares. The agreements in this regard have already been filed by the assessee as hereunder: -Base Agreement dated February 1, 2003 -Master Statement of Work dated February 1, 2003 -Statement of Work between IBM Global Services India Pvt Ltd and Comptel Corporation effective from November 22,2004 to November 21 ,2013 Relevant clauses of the agreements and interpretation thereof is provided as hereunder: Base Agreement dated February 1,2003 It is a Software & Service Engagement Agreement entered between the Assessee as sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belong to and remain exclusively with Supplier. Buyer acquires only the right to transfer the EULA in respect of the Program Products to Customer strictly in accordance with this Agreement, and does not acquire any right of ownership, title or interest in the Program Product by virtue of such transfer. All rights not expressly grouted to Buyer are reserved by Supplier. Buyer acknowledges that the Program Products and its sequences, structure and organization are property of Supplier, that Supplier retains exclusive ownership thereof, as set forth above, and that ihe same constitutes Confidential Information of Supplier that shall be subject to (he undertakings as !o confidentiality and non-use set forth in the AECI. A perusal of the aforementioned clause makes it obvious that all the intellectual property rights along with title and interest m the program products are the property of the assessee the buyer only acquires a right to transfer the EULA to its end customers. End User License Agreement (EULA) is a part of the MSOW as Attachment 1.. We are annexing herewith a copy of MSOW along with the attachments as Annexure 2, The EULA provides the Software License Terms and Condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that at no point of time the assessee has transferred the Intellectual Property Rights in the nature of patent, copyright and trademark etc. and ownership of the same remains with the assessee only. What the customer has got is only a right to use a copyrighted article which is a standard software? This fact is also evident from the restrictions put by (he assessee on the customer to use the standard software as hereunder: Quote 1. Restrictions The End User acknowledges and aggress not to, and not to permit others to (unless, and to the extent only as, permitted by a express provision contained in these Terms and Conditions): (a) reproduce, copy, publish, display, disclose, rent, lease, sub-license, modify', loan, distribute or create derivative works based on she licensed Standard Software, or any part thereof ; (b) translate, reverse engineer, decompile, disassemble, re-engineer or otherwise attempt to discover the source code or the structural framework of the licensed Standard software, or any portion thereof; or (c) merge any portion of the. Standard Software with other software or otherwise use the Standard Software, or any portion thereof, other than as j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, conceived or reduced to practice by Supplier Personnel in Performance of this Agreement. "Joint Inventions" means inventions made by Supplier Personnel jointly with Buyer Personnel. No Invention shall be regarded as a joint Invention unless the Personnel of both Parries have contributed significantly thereto Unless the Buyer is able to produce sufficient evidence to the contrary, all inventions in relation to the Program Products shall be regarded as having been made solely by the Supplier or its Personnel and shall vest exclusively in the Supplier. "Participation Agreement" or "PA" means an agreement signed by one or more Affiliates which in cooperates by reference the terms and conditions in this Base Agreement, the SOW attached hereto, and other attachments or appendices specifically referenced in the P.A. "Services" means work that Supplier performs far Buyer as described in a SOW for Customer, "Statement of Work" or "SOW" means either (A) the document attached to this Base Agreement which describes the Deliverables and Services, including any requirements, specifications or schedules typically included in a W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant customer as aforesaid. 8.3 Tools Supplier will not include Tools in Deliverables unless they are listed in the relevant SOW, For the sole purpose of supporting the Customer as expressly specified in the relevant SOW, Supplier grants Buyer nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared derivative works of such Tools as have been prepared by it and to use, have used, execute, reproduce, transmit, display, perform, transfer, distribute, and sublicense such Tools or their derivative works, and to grant others the rights granted in this Subsection all to the extent as is necessary to support the relevant Customer as aforesaid. 8.4 Invention Rights Supplier owns Inventions. Supplier grants to Customer an irrevocable, nonexclusive, worldwide, perpetual, paid-up license under Inventions (including any patent applications filed on or patents issued claiming Inventions) to use the relevant Deliverables in accordance with and subject to the End User License Agreement, For the sole purpose of supporting the Customer as expressly specified in the relevant SOW, Supplier grants Buyer a nonexclusive, worldwide, paid-up, license t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge licenses, Buyer will notify Supplier when to begin invoicing Customer, if applicable AH title to, ownership of and interests in the Program Products shall belong to and remain exclusively with Supplier, as more in detail defined in the MSOW The Program Products supplied and licensed hereunder shall be limited to Object Code (such term being defined in the MSOW), 9.3 Exceptions to Indemnification Supplier shall not be liable to Buyer, Buyer's personnel or Customer, and shall have no obligation to indemnify Buyer, Buyer's Personnel or Customer not taken any other action as set out in Section 9-2 for Infringement: 1 . in case Buyer, its personnel or Customer make any authorized changes or modifications to the Deliverables when (he claim would not have occurred but for such changes or modifications; 2. which are based upon use of the Deliverables, or any part thereof, in combination with software not supplied by the Supplier would have been avoided in the absence of such combination, or any use of the Deliverables in a manner for which they were not designed or for which they were not agreed; 3. supplier's implementation of a Buyer originated design and suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s or Buyer's Customer's premises without Buyer's authorizations; 2. will use Buyer Assets only for purpose of this Agreement and reimburse Buyer for any unauthorized use; 3 . will only connect with, interact with or use programs, tools or routines that Buyeragrees are needed to provide Services; 4. will not share or disclose user identifiers, passwords, cipher keys or computer dial port telephone numbers; and 5 in the event the Buyer Assets are confidential, will not copy, disclose or leave such assets unsecured or unattended., Buyer may periodically audit Supplier's dam residing on Buyer Assets. 12.5 Supervision of Supplier's Personnel Supplier will provide continual supervision of its personnel provided under this agreement, at no additional cost to buyer. Supplier's supervisor shall have full supervisory authority over all day to day employment relationship decision relating to supplier's personal including those decision relating to wages, hors, terms and conditions of employment, hiring discipline, performance evaluations, termination counseling and scheduling. Supplier's supervisors responsible for each work location will be responsible l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the relevant SOW for Customer. A SOW for Customer will always include as an integral part the Supplier's Standard Statement of Work ("STOW"), a template of which is attached hereto as Attachment , 4. Subject to Section S5.10 ("Prior Communications and Order of Precedence"), of the Base Agreement except as otherwise explicitly slated in such a SOW for Customer the terms of this SOW and the Base Agreement shall be deemed to be incorporated in that SOW for Customer, 2. DEFINITIONS "Acceptance Criteria" means the criteria specified in an Acceptance Test Specification,which criteria the Deliverables shall be required to meet during an Acceptance Test "Acceptance of Functional Specifications" means Buyer's review and acceptance of the Functional specification in accordance with Section 4.4 hereof. "Acceptance Tests" means the tests proposed by Buyer and accepted by Supplier whereby Buyer shall establish whether the Deliverables substantially fulfill the Acceptance Criteria. "Acceptance Tests Specification" means the Acceptance Tests procedure that Buyer shall submit lo Supplier for Supplier's approval, unless o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upplier to Buyer for Buyer's use in performance of marketing activities. Buyer's use of Marketing Materials may include transmission of them through electronic marketing services. "Productive Use" means use of the deliverables in Customer's ordinary operating environment (other than in connection with an Acceptance Test). "Ready For Acceptance1' or "RFA" means a written notification by Supplier to Buyer thai the Deliverables are ready for the Acceptance Tests. "Ready For Installation" or "RJFI" means a written notification by Buyer to Supplier of Buyer's having satisfied the conditions specified herein and in SOW for Customer (including the STOW), such (hat Customer's Systems are in a ready for installation stale. "Supplier Maintenance Support" means the services described in Attachment in which are based on Supplier's standard maintenance and support services to be provided lo Customer. The terms set out in Attachment 3 may be changed by the Supplier from time-to-time, as the Supplier shall in its sole discretion deem fit. Except as may be otherwise agreed in writing by buyer or Customer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imely deployment of Program Products for testing by Buyer and/or Customer 4.6 Training Services lo Buyer Upon Buyer's request. Supplier will provide training in Helsinki, Finland or oilier locations as may be agreed by the parties, to Buyer and such Buyer Personnel that the parties agree as having a need support the basic sales, implementation and support of program products, at no additional charge. a) At least two training sessions for Program Products stated herein; and b) At least one fining session for each Major Enhancement release of a Program Product The parties shall review find agree training requirements for Program Products upon execution of this SOW Any further training sessions shall be agreed to in each P,A. Upon Buyer's reasonable request, supplier also agrees to provide without charges, training to buyer on the implementation and systems integration of program products, including customization or modification of program products to support customer's systems as has been agreed in an SOW for customer and/ or STOW. Unless otherwise agreed by the parties, Supplier's obligation to provide such training without charge will be limited to a maximu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Deliverables, and submit for Supplier's preview and acceptance within (unless otherwise specified in the relevant SOW for Customer) a period not less than six (6) weeks prior to the date of issue of the RFA in respect of a Deliverable or sets of Deliverables agreed in the relevant SOW for Customer Supplier shall notify Buyer in writing of its acceptance (or rejection) of Acceptance Test Specification no later than five (5) business days thereof If the Supplier rejects the Acceptance test Specification proposed by Buyer, then the notice shall include a detailed description of the portions of the Acceptance Test Specification not accepted and the reason for the rejection. In case Supplier has not Buyer of its rejection of the Acceptance Test Specifications within the relevant, then they will be deemed accepted by Supplier. Acceptance Test Failure IF, during any Acceptance Tests, the Deliverable fails to meet the Acceptance Criteria, Buyer shall promptly provide written notice to Supplier of such Failure, listing the Errors in reasonable detail Supplier, with appropriate support from Buyer, shall use diligent efforts promptly to correct any such Errors, and deliver resoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls so as to enable the Buyer to supply certain Program Products to Customers designated by the parties. Program Product Evaluation License for Customers Supplier shall upon Buyer's reasonable request and subject to a relevant SOW for Customer, grant Buyer the right to offer a non-charge and limited period evaluation license to potential Customers, subject to the terms and conditions of the then current Supplier software evaluation license agreement End User License Agreement Program Products provided by Buyer to Customers will be subject loan EULA. Buyer will provide Program Products to customers under the terms of tie EULA Supplier shall be entitled to refrain from delivering Program Products to a Customer until relevant Customer has signed the EULA and furnished such signed copy to Supplier The current version of Supplier's EULA is as appended hereto as Attachment 1 Buyer is not a party to the EULA and does not assume any obligation for violations of it In the event Buyer reasonably requests that Supplier modifies the EULA to comply with compelling legislation of a country in the Territory, Supplier agrees to: 1) consider such a request on a timely basis; and 2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t out in this Section 6, (i) reproduce, copy, publish, display, disclose, rent, lease, sub-license, modify, loan, distribute or create derivative works based on Program Products, or any part thereof; (Si) translate, reverse engineer, decompile, disassemble, re-engineer or otherwise attempt to discover the Source Code or the structural framework of Program Products, or any portion thereof. Buyer shall reproduce all copyright, trademark and other proprietary notices affixed to the Program Products, and/or any portion thereof; as applicable, on all copies made pursuant to the Agreement, Buyer agrees never to remove any such notices or any other form of product identification. Program Products The parties hereby agree that all title to, ownership of and interests in all or any portion or component of the Program Products (whether Deliverables or not and including all updates, upgrades, modifications and enhancements thereto, and related documentation therefore, if any, whether licensed heralds or provided in connection with the provision of any Services hereunder) as well as all rights pertaining thereto, including but not limited to patent, copyright and trademark rights or any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no published or established license fee Program Products for new implementations, new offerings and certain licensing configurations as may be determined by Supplier, Supplier shall provide Prices for such Program Products in its response to Buyer's request for proposals and quotations to support specific Customer bids. Supplier agrees that the Prices for such Program Products shall in any event not be less favourable than the rate that it offers to other similar companies with similar engagements. Notwithstanding the above, in the event that Prices for Program Products do not facilitate Buyer's ability to offer competitive pricing for Customer bids that the parties have agreed to be significant bids. Supplier agrees to consider, whether it would be commercially viable lo provide additional discounts or reductions to Prices, to enhance or facilitate Buyer's ability to offer more competitive pricing to Customer. Unless otherwise agreed by die parties in writing, any changes to Prices above for such significant Customer bids shall only apply for the specific Customer bid. Buyer at all times remains free to determine its own prices with and to Customers for Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osals to Customer, Supplier agrees to review Prices offered for such Services and consider providing discounts off its standard professional service rates, provided, however, that the Supplier is not obliged to provide any discounts that it does not see as commercially viable.
11-4 Buyers Terms of Payment
Except as otherwise stated in a SOW for Customer, Buyer's payment shall be made net forty-five (45) days from date of receipt of invoice by Buyer shall be deemed to have received each invoice latest on the dale that the relevant invoice is sent per facsimile to Buyer, as confirmed by the transmission report of the facsimile machine.
Title: Statement of "Work Mater Agreement #49003UKOI84 PA #49G4IN0575 Statement of Work £490 X X X X Extracts X X X X X X X X Extracts X X X X ..... lity and DNS data population.
• Configuration of tables for the Lookup Server - this does not include population Ihese tables.
•> Any other items that Comptel may require to provide this that are not included ID IBM's responsibilities,
3.0 DESCRIPTION OF DELIVERABLES AND SERVICES The following Deliverables shall be supplied by the Supplier lo the Buyer: Comptel Licenses, as detailed in Exhibit C:
•> Coinptel Online Link Basic License
o Lookup Server License
» Comptel Online Link NE Interface to D2CP Volu BiU
e Comptel Online Link NE Interface to Ericsson IN (Diameter) Compte! Documentation, as detailed in Exhibit A:
• Comptel Online Link 2.2 Customer Library TOC
« Comptel Onlbe Link 1.2 Release Notes
" Comptel Online Link Functional Description
"> Comptel Online Link Installation Guide
« Comptel Online Link Operation & Maintenance Guide Comptei Training, as detailed !n Exhibit A:
o Compte! Online Link Overview (0.5 day)
•> Comptel Online Link Administration (0.5 day)
o Comptel Online Link Configuration (0.5 day)
" Complel Online Link Configuration - Laboratory exercise (O.Sda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures Ltd) with the 1° line support services, as further defined in Exhibit D.
7,0 MUTUAL RESPONSIBILITIES
No changes can be made lo this SOW without the prior written agreement of both parties. The detailed responsibilities are illustrated in Exhibit A
8.0 DELIVERY SCHEDULE/PROJECT PLAN
This is attached in Exhibit A,
9.0 PRICE AND PAYMENT SCHEDULE
The Bill Material and indicative Pricing, based on projected growth over the Gamine 10 years, is attached as Exhibit C Please note that the years given in Exhibit C are calendar years, with year 1 being 2004.
The Comptel product licenses and delivery services provided for year 1 arc sold at a fixed price, in Euros.
It is important to note that while Comptel initially grant the right to use the Comptel Online Link product to a capacity level of 300 IPS, the payments are phased over a 3 year period, starting from 2004. with a payment for 50 TPS capacity, followed by an additional payment for an upgrade to 150 TPS in 2005, and the final payment for the 300 TPS level, as well as deferred payment for the Lookup Servers for the 4 sites, to be made in year 2006
The minimum commitment of the Customer covered y this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b licensable and personal right and license to use the Program Products for the performance of outsourcing services for the exclusive benefit of Bharti Tele Ventures Ltd.(outsourcing services) Subject to the preceding sentence the terms and conditions of the supplier's EULA (attachment to the Master Statement of Work) shall be applicable to buyer (as if buyer were the customers)
Buyer shall have the right to assign the license to use the program products to its customer at no additional cost, provided that buyer gives supplier thirty (30) days prior written notice of its intent to assign such rights and provided further that buyers customer signs supplier's end user license agreement (EULA) and/ or such other contractual document (s) as may be reasonably required for such program product support.
12. At para no 4 to 8 of assessment order , Ld. AO has held that the consideration received by the assessee falls in the category of royalty both under the Income tax Act u/s 9 (1) (vi) clauses ( i), (iii), (iva) and clause (v) of explanation 2 and article 13 (3) (a) & (b) of Indo Finland DTAA. According to him
a. The software for use of which the license is granted is a technical or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt wherein the Hon‟ble High Court on similar facts held that receipts are not in the nature of royalty and not taxable in India.
S.No.
Facts
Comptel OYJ
Infrasoft Ltd.
1.
Subject matter of transfer is a standard software used for a particular industry Used for Telecom industry
Used for civil engineering work
2.
Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be used in accordance with the Agreement
3.
As per the Agreement, all the intellectual property rights in the form of patent, copyright, trademark etc. are the property of the seller only and at no point of time,it has been transferred to either the buyer/ customer.
4.
As per the Agreement, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program.
5.
The Agreement categorically restricts the user to copy, publish, display, disclose, modify, merge etc the software except for archival purposes.
6.
The licensee is not allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Treaty is narrower than the definition contained under section 9(1) (vi) of the Act. According to him under the Treaty the income of the Appellant should have been generated by the "use of or the right to use of" any copyright to be taxable as royalty income.
g) He further submitted that it is the settled proposition that in case of the assessee who is a non-resident and having tax residency certificate then the provision of DTAA will prevail over Domestic tax laws.
Therefore, his contention was that it is the sale of standard software cannot be royalty in terms of Domestic tax Laws as well as per Indo Finland DTAA and therefore it is chargeable to tax as business income of the assessee according to article 7 of DTAA. Hence, the taxability of these software sales is not royalty as held by AO.
16. Before us,Ld. DR vehemently contended and submitted that the software is a not a standard software as per reasons given by ld. AO in his order. He further stressed up on the order of DRP for subsequent years and stated that retrospective amendment of section 9 (1) has been considered by DRP. He further submitted that when there is an amendment in the law there is no ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act as well as Article 12 of the DTAA, the AO came to the conclusion that the amount received by the Assessee company from sales/licensing of the software was royalty in terms of the said definition. The reasoning of the AO to arrive at this conclusion is as under:-
(i). The software is licensed not sold. The copyright of the software remains with the Assessee however it allows the use of copyright to the person making payment to it. As per the Indian Copyright Act, 1957 as amended in 1994 software are entitled to copyright protection. The Assessee possesses Copyright in the software, which it can enforce in India if any violation of such right is notices by it. Further the Indian Copyright Act recognizes 'copyright' as doing or authorizing the doing of any of the following acts in respect of a work or any substantial part thereof namely,- in case of a computer programme to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer program. It is therefore clear that the Assessee has authorized to use of the copyright of the customer in India.
(ii) The software owned by the Assessee is patented software. Consideration for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite and, when applicable, one set of support information to the Licensee. Licensee shall pay Infrasoft a fee for additional copies of any printed support information supplied by Infrasoft.
Licensee may make one copy of the software and associated support information for backup purposes, provided that the copy shall include Infrasoft's copyright and other proprietary notices. All copies of the Software shall be the exclusive property of Infrasoft.
The Software includes a license authorisation device, which restricts the use of the Software as specified in the Infrasoft License Schedule.
The Software shall be used only for Licensee's own business as defined within the Infrasoft License Schedule and shall not, without prior written consent from Infrasoft:
be loaned, rented, sold, sub-licensed or transferred to any third party used by any parent, subsidiary or affiliated entity of Licensee
Used for the operation of a service bureau or for data processing
If Licensee was granted an educational license, as identified on the Infrasoft License Schedule, the Software may only be used for instruction or research purposes and not for any commercial purposes.
Licensee may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a license authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft License Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sub-licensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including license in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty.
88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.
89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty either under the Income-tax Act or under the DTAA.
92. The licensees are not allowed to exploit the computer software commercially, they have acquired under license agreement, only the copyrighted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-license or transfer the copy of software to any third party without the consent of Infrasoft.
93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The license agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right to use the copyrighted material or article, which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be chargeable to tax as business income. Therefore respectfully following the decision of Honourable Delhi high court we hold that that consideration received by the assessee on sale of software is not chargeable to tax as royalty such as equipment royalty, process royalty etc.Under Article 12 of DTAA but as business income under article 7 of the INDO Finland DTAA.
21. Before us an argument was advanced by the revenue that the retrospective amendment has been made with effect from 1-6-1976 by the Finance Act 2012 by inserting explanation 4 to section 9 (1) (vi) which is as under :-
"Explanation 4.- For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).
22. It was further argued that terms „right‟, „rights‟ or „information‟ [ which are mentioned in explanation 4 inserted in IT Act wef 1-4-1976] is not defined under the DTAA therefore with the aid of Article 3 (2) of the India Finland DTAA , the meaning of these words contextually defined in the Income Tax Act should apply for this purposes. LD. DR relied up on two decision namely Viacom 18 Media (P.) Ltd. [2014] 44 taxmann.com 1 (Mumbai - Trib.) and Vodafone South Ltd. [2015] 53 taxmann.com 441 (Bangalore - Trib.) for advancing this argument. Article 3 (2) of the DTAA provides that
"2. As regards the application of the agreement at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is with the payer;
(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 down linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;"
The above Explanations have been inserted with retrospective effect from 1.6.1976. The Memorandum explaining the Provisions in the Finance Bill, 2012, in the context of the above provisions states:-
"Section 9(1)(vi) provides that any income payable by way of royally in respect of any right, property or information is deemed to be accruing or arising in India. The term "royalty" has been defined in Explanation 2 which means consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. Some judicial decisions have interpreted this definition in a manner which has raised doubts as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India so long as the right to use has been transferred to a resident taxpayer for valuable consideration.
He, thus submitted that the question of "copyrighted article" or actual copyright docs not arise in the context of software both in the DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Corpn. v. Asstt. DIT [2010] 42 SOT 550 (Delhi) pointing out that even software bought off the shelf, does not constitute a "copyrighted article" as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft, [2009] 310 ITR 320 / 177 Taxman 81 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 361 ITR 575 was considered and not followed holding that:-
"31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation, the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Todayrecognizes that the question will have to be decided and the submission argued, Verizon cites no reason for the extension of the amendments to the DTAA."
As the Ld. DR has cited two decision of coordinate benches to support the case of the revenue;however, both the cases were following the decision ofHonourable Madras high court of Verizon Communications Singapore (P.) Ltd. v. ITO (Intl. Taxation) [2014] 361 ITR 575/39 taxmann.com 70. Decision of Honourable Madras High court has not been followed by Honourable Delhi high court, therefore respe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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