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TMI Blog2016 (12) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, in our considered view, based upon the facts and circumstances of the case and legal position as discussed above, the impugned amount received by the assessee is in the nature of business profits assessable under Article 7 of India Netherlands DTAA and would not be taxable as ‘Royalty’ under Article 12 of the DTAA. Thus, this ground is decided in favour of the assessee. - I.T.A. Nos.83 & 84/Mum/2007 - - - Dated:- 21-12-2016 - Shri Amit Shukla (Judicial Member) And Shri Ashwani Taneja (Accountant Member) Appellant by : S/Shri PJ Pardiwala / Jitendra Jain Respondent by : Shri Harshad Vengurlekar, Sr DR ORDER Per Ashwani Taneja, AM This appeal has been filed by the assessee against the order of Commissioner of Income-tax (Appeals)-V, Mumbai [in short, CIT(A)] dated 19-09-2006 passed against the assessment order dated 237-1-2003 u/s 143(3) of the Act for AY. 1998-99 on the following grounds: Ground 1- Assessment under Section 147 is bad in law 1.1 The learned Commissioner of Income-tax (Appeals) - V, Mumbai ['the CIT(A)'] erred in upholding the AO's action of issuing notice under Section 148 of the Income-tax Act, 1961 ('the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not apply to it. 4.2 The learned CIT(A) failed to appreciate that the maintenance and support services in relation to such software was provided by the Appellant and as such was the rightful owner of such income. 4.3 The Appellant therefore submits that the higher tax rate of 20% applied by the learned AO and confirmed by the learned CIT(A) on this count is unwarranted and be deleted. 2. Ground 1 was not pressed during the course of hearing, therefore, dismissed. 3. Ground 2: In this ground, the assessee is aggrieved by the action of the lower authorities in re-characterisation of income received from licensing of software as Royalty under the Double Taxation Avoidance Agreement (DTAA, in short) between India and Netherlands after disregarding the claim of the assessee that the aforesaid income was in the nature of business income and in absence of permanent establishment (PE) of the assessee in India, it would not be taxable in India. 4. The brief facts are that the assessee is a non resident and filed its return declaring total taxable income (comprising of maintenance service charges) of ₹ 3,30,45,600/-. The assessee s case was reopened by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perly appreciated the facts of this case. The clauses of the agreement clearly reveal that the ownership rights were not transferred. The rights were given only for the limited purpose of use by the customer or its group companies. No rights were given for commercial exploitation of the software. With regard to the beneficial ownership, it was submitted that the lower authorities have not appreciated the facts properly. The assessee was clearly and undoubtedly the beneficial owner of the income received from sale of software. Our attention was drawn upon various replies submitted before lower authorities wherein it was demonstrated that the assessee was the beneficial owner of the software business done with the customers in India. Therefore, the entire risk and responsibilities and returns of the business were enjoyed by the assessee. Our attention was also drawn upon the financial statements showing that huge value addition was made by the assessee. Further, our attention was also drawn upon the tax residency certificate issued by Netherland tax authorities to show that the assessee company was tax resident of Netherland. Under these circumstances, the assessee should be deemed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. This issue has come up repeatedly before us in many cases. Therefore, before taking a decision on the facts of this case, we deem it appropriate to take guidance from the judgement of Hon'ble Bombay High Court wherein identical issue was involved, in the case of Mahyco Mosanto Biotech (India) (P) Ltd (supra) wherein while analysing this issue Hon'ble High Court observed as under: At this stage, we find that a parallel to practical, every-day examples would be useful. Take, for instance, the example of when one buys a book from Amazon for their Kindle device. In this case, Amazon can transfer the intellectual property of the book to multiple other users simultaneously, but each single transaction would still be a sale. This would also be true of the example of a music CD. The CD is the 'medium' by which the intellectual property, viz. the songs, passes to the buyer. The manufacturer can sell it to an end-user or to an intermediate retailer. The same song can be put on countless CDs. This too is a sale. When one buys a car, one buys the technology that is contained in the body of the car; the body is just the medium. On ITunes, when one buys a song, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware may be downloaded too, without any 'physical medium' intervening - the medium is as intangible as the goods. It is impossible, we think,and does not stand to reason to suggest that unless, say, Microsoft or Adobe wholly cede all control over their software products there is no sale, and when they allow a user to download and use their software they are only providing a service. Indeed, this is demonstrably incorrect. Microsoft and Adobe both have alternative distributions models. One may 'purchase' a license to Microsoft Office or Adobe Photoshop. This may be a one-off, standalone product, delivered either by download or on physical media. That is for the user to keep and do with it what he wishes (except, of course, attempting to decompile it). He does not have to use it all; he can destroy the media and all personal copies of it. The same software is also available nowadays for a subscription - for an annual or monthly fee, the software can be downloaded and used; if the subscription ends, at the very least updates end and very possibly the software will not function optimally. The latter may be a service, very like car rental or book borrowing from a libra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty rights over the Bollard Technology; Monsanto India's and its parents' patents, copyright, marks and other intellectual property rights are preserved intact, unaffected by the sub-licensing. But the identified technology, the one infused in the fifty seeds given to the sub-licensee, is for the sub- licensee to use as he wishes. Viewed from this perspective, Mr. Venkatraman's clients' underlying fears are, we believe, unfounded. (emphasis supplied) 11. Identical issue also came up before the co-ordinate bench of ITAT in the case of DDIT vs Reliance Industries Ltd (supra) wherein the bench analysed the provisions of copyright and discussed in detail its applicability to determine whether there would be any transfer of copyright at the time of sale of software. The observations of the Hon'ble Bench can be summarised as under: A perusal of the above provisions of the Copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in are restricted for use solely by Licensed Participants and may not be assigned, transferred, or sub licensed, except as explicitly agreed under this Agreement as set forth in Article 13.6, without the prior written permission of QAD. Each Licensed Participant shall be authorized to make use of the Products in the form in which they are provided to Licensed Participant (machine readable object code) solely for Licensed Participant's own internal data processing operations. Licensed Participant agrees not to use the Products for timesharing, rental or service bureau. Article 4-Transfer of Programs on Hardware System-Upgrade of License: 4.3 Upgrade Fee: A license to Programs may be Upgraded, such as to a higher number of users classification, by payment of QAD of an Upgrade fee equal to the difference between the then current license fee list price in effect for Participant for the licensed Programs at the desired Upgrade level and the license fees paid to date for that license. Article 9-Modiflcation Rights: 9.1 Modifications: QAD provides some portions of Products in source code form and other portions in object code form. Participant may modify any sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company. Hence, the limited right of modification qua the source code granted to HLL cannot be viewed adversely. vii) The rights in modification to Programs shall vest in QAD. viii) The Computer Program is governed by The Copyright Act, 1957. ix) HLL is not permitted to do any act referred to in Section 14 of the Copyright Act, 1957. x) The assessee Company has therefore not granted to HLL any right in a copyright. 15. Having examined various clauses of the agreement, we have also gone through relevant provisions of the Copyright Act, 1957. It was noted by us that as per section 2(a) of the Copyright Act, adaptation means,- i) in relation to a dramatic work, the conversion of the work into a non-dramatic work; ii) in relation to a literary work or an artistic work, the conversion of the work into a dramatic work by way of performance in public or otherwise; iii) in relation to a literary or dramatic work, any abridgement of the work or any version of the work in which the story or action is conveyed wholly or mainly by means of pictures in a form suitable for reproduction in a book, or in a newspaper, magazine or similar periodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chases such software through the assessee, a distributor of the software product. A copy of this Agreement is placed at page 122 onwards of the paper book. Clause Usage rights clearly states that Datamine Corporate Ltd. (DCL) grants to the end user: the perpetual right to use the number of seats of the software products. It further provides that: the perpetual right to use the software refers only to the version of the product that was available when the purchase was made and does not entitle you to receive further updates or enhancements to the software .. . A significant clause of the Agreement states that: This agreement does not transfer the intellectual property rights to the products to you. Then, there have been specified certain dos and do nots, which are as under:- Under this agreement you may: a. Install the software on any number of computers over which you have control; b. make copies of the software in machine readable form for backup purposes; c. Make copies of any documentation for your use only; and d. execute as many simultaneous copies of the software products as you have purchased seats. You may not: a. Contrive for the software to be execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of Article 13 of the DTAA. This argument was vehemently countered by the ld. DR, who submitted that insertion of Explanation 4 to section 9(1)(vi) should also be read into the DTAA and thus going by the language of Article 13 of the DTAA as so amended, the case of the assessee falls within the same. 8. 1. We first take up the contention of the ld. DR that the retrospective amendment to the provisions of the Act should be considered for determining the taxability of the amount even under the DTAA. This contention, in our considered opinion, is partly correct. Any amendment carried out to the provisions of the Act with retrospective effect shall no doubt have the effect of altering the provisions of the Act but can not per se have the effect of automatically altering the analogous provision of the Treaty. There are certain provisions in some Treaties which directly recognize the provisions of the domestic law. For example, Article 7 in certain Conventions provides that the deductibility of expenses of the permanent establishment shall be subject to the provisions of the domestic law. In such a case, if any retrospective amendment is made to the provisions of the Act governi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as `Royalties , defined as per Article 13, whose relevant part reads as under : - ARTICLE 13 Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (3) For the purposes of this Article, the term royalties means : (a) payments of any kind received as 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; and (b) payments of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -built processes or technology which facilitated in the manufacturing of a refrigerator. In the same manner, several processes may be involved in making a computer software, but the customer uses the software as such and not the processes involved into it. We, therefore, refuse to accept the view point of the Revenue that the assessee received consideration from end users for the use of or the right to use any `process . 12.1. As regards second count, the ld. DR accentuated on the language of para 3(a) of the Article 13 to canvass a view that the assessee received the amount for allowing use of copyright in the mining software. A bare perusal of this para deciphers that the term royalties has been defined to mean a consideration for the use of or the right to use any `copyright of literary, artistic or scientific work , patent, trademark and design etc. This contention raised on behalf of the Revenue needs to be dealt in two segments. Firstly, we find that there is no specific mention of `computer software 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terary or artistic work, etc., enables the user to take copies of such literary or artistic work etc. for its purpose, the simplicitor user of such literary or artistic work, etc., does not confer in the user any such right to copy. 12.3. At this juncture, it becomes relevant to see as to whether the end customers have been given a copyright of the software or the software as such. The ld. DR harped on the relevant parts of the assessment order to put forth that it has been specifically mentioned in the End user Agreement that the customer gets simply the right to use the product under the license, which is non-transferrable. It was argued that there are several restrictions placed as per the terms of the license which prevent the customer from using it as per its own sweet will. 12.4. This contention of the ld. DR can be better appreciated after having a look at the relevant sections of The Copyright Act. Section 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra the relevant clauses of the End user Agreement and seen what has been precisely transferred to the end users of the software. It clearly emerges that none of the elements of `Copyright as mentioned in section 14 of the Copyright have been transferred to the end user inasmuch as he cannot do any of the things as set out in clauses (a) (i) to (vi) of section 14, to the extent applicable, nor can he sell or give on commercial rental any copy of the computer program. On the other hand, what has been permitted to him is all that is permissible under section 52 of the Copyright Act, to the extent applicable, which simply facilitates him to use the software without infringing copyright. This conclusively demonstrates that the end users have paid consideration for the use of a computer software and not copyright of a computer software. As the DTAA treats consideration for the use of copyright of a literary or artistic work, etc. as royalties, there can be no question of including 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 4 and 5 are subject to the contrary provision, if any, in DTAA. Such provisions of a DTAA shall prevail over the Act and work as an exception to or modification of sections 4 and 5. Similar view has been taken by the Hon ble Bombay High Court in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.). In the light of the above discussion, it becomes vivid that if the provisions of the Treaty are more beneficial to the assessee vis-a-vis its counterpart in the Act, then the assessee shall be entitled to be ruled by the provisions of the Treaty. We have held above that amount from sale of softwarefalls under Article 7 (Business profits) and not under Article 13 (Royalties). Since the position as per the DTAA is more beneficial to the assessee in comparison with that under the Act, in which the receipts admittedly fall under section 9(1)(vi), we hold that the assessee is entitled to exercise option in his favour by choosing to be governed by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia (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. 15. In the final analysis, we approve the assessee s stand on the sale of computer software as business profits, by jettisoning the Revenue s viewpoint of royalty. This ground is allowed. 19. Thus, from the perusal of the aforesaid decision, it is clear that all the arguments have been duly analysed and addressed by the bench while deciding this issue. The articles of DTAA between India and Netherlands are identically worded. No amendment has been brought out in the DTAA so far. Article 12(4) of DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on account of sale of software would not fall within the definition of Royalty as provided in Article 12(4) of the DTAA. Under these circumstances, it will not be legally permissible for us to refer to the provisions of the Act to decide the taxability of this amount in the hands of the assessee in India. Thus, in our considered view, based upon the facts and circumstances of the case and legal position as discussed above, the impugned amount received by the assessee is in the nature of business profits assessable under Article 7 of India Netherlands DTAA and would not be taxable as Royalty under Article 12 of the DTAA. Thus, this ground is decided in favour of the assessee. 22. Grounds 3 4: During the course of hearing it was stated that these grounds will become infructuous if Ground 2 is decided in favour of the assessee. Since we have decided Ground 2 in favour of the assessee, Grounds 3 4 are dismissed as infructuous at this stage. 23. As a result, appeal of the assessee is partly allowed. 24. Now we shall take up appeal for AY. 1999-2000 in ITA No.84/Mum/2007. 25. Ground 1 relates to reopening of assessment which has not been pressed before us, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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