9911796707
TMI Blog2017 (3) TMI 142X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA is another question which will be discussed later. Therefore the definition of “Royalty” as given in the DTAA has to be adopted. whether the term ‘literary work’ as mentioned in the definition of royalty in the treaty would include ‘software’ or not? - Held that:- We are of the view that the view expressed by the Hon’ble Delhi High Court in the case of DIT Vs. Ericsson AB, New Delhi (2011 (12) TMI 91 - Delhi High Court), which is favourable to the Assessee, should be followed and therefore we hold that the consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a permanent establishment. In the present case there is no dispute raised by the revenue that NPL was not a tax resident of Singapore and that the benefits of DTAA between India and Singapore cannot therefore be available to the appellant. The amount paid by the appellant to NPL is not in the nature of royalty within the meaning of the DTAA between India and Singapore and therefore the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject to the terms and conditions set forth in this Agreement, and in particular, the payment of the Licence Fees by ITC in accordance with this Agreement, NewsPage grants to ITC a perpetual, non-transferable (except as set forth in this Agreement), irrevocable, non-exclusive, non-sub licensable right: 3.1.1 in respect of those components of the Software (together with any Customisations thereof) licensed by reference to the number of users, for up to the Designated Number of Users to Use the specified Version of the Software; and 3.1.2 in respect of those components of the Software (together with any Customisations thereof) licensed by reference to the number of installations permitted, for ITC to install and Use up to the Designated Number of Installations of the specified Version of the Software; 3.2 all as more particularly described and set forth in Schedule 1 and provided pursuant to this Agreement, all at the Location, in object code form and in accordance with the Documentation ( the Software Licence ), and not otherwise. The Software Licence granted is solely for 'ITC's business purposes (which shall not in any event to extend to include renting, leasing, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a decision on the issue that arises for consideration in this appeal. Clause 8 of the agreement deals with the intellectual property rights that are conferred under the agreement and it reads as follows :- 8. Intellectual Property Rights 8.1 Save for the Software Licence granted to ITC in Clause 3, all rights, title and interest in and to the Software (except in any Agreed Customisation(s) or Customisation otherwise commissioned by ITC), including without limitation, any patent, copyright, registered design, trade mark, goodwill or other industrial or intellectual property rights in connection therewith ( NewsPage IP ) shall vest solely and absolutely in NewsPage or its licensors and no additional right or license shall be granted to ITC by implication, estoppel or otherwise. All rights, title and interest in and to the Agreed Customisation(s) and Customisation, otherwise commissioned by ITC, including without limitation, any patent, copyright, registered design, trade mark, goodwill or other industrial or intellectual property rights in connection therewith ( ITC IP ) shall vest solely and absolutely in ITC and no additional right or license shall be granted to News ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement that the question whether the sums paid by the Appellant to NPL is in the nature of Royalty chargeable to tax in India has to be decided. 5. NPL is a foreign company and is a tax resident of Singapore. Under section 4 of the Act, the charge to tax is on the total income of every person. Section 5 of the Act explains the scope of total income of every person. Section 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received in India and any income which accrues or arises in India or is deemed to have, accrued and arisen in India shall be included in his total income. Section 9 of the Act lays down as to when income shall be deemed to have accrued or arisen in India. If the payment in question is held to be Royalty then it is chargeable to tax in India in terms of Sec.9(1)(vi) of Act in the hands of NPL and therefore there would be an obligation on the part of the appellant to deduct tax at source in terms of Sec.195 of the Act. However such chargeability to tax in India, where there is a treaty between the country of which NPL is a Tax Resident, would depend on the terms of the treaty between India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA is as follows: Article 12(3): The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 7. The stand of the Assessing Officer (AO) was however that the key features of the software that were licenced to NPL showed that the same was for smooth functioning of the business of the appellant and effective management and monitoring of its field formation. According to the AO the software helps in the day to day administration by providing effecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or scientific experience. 3) Industrial, commercial or scientific equipment 4) Literary, artistic or scientific work including cinematograph films. According to him, mere use in the case of first three categories was royalty and in case of fourth category alone it was necessary that there should be use of copyright right. According to him, the minor differences were- 1) in case of first category, instead of transfer of any right, the treaty uses the word 'right to use' 2) the treaty uses specific words 'copyright of literary, artistic or scientific work' whereas domestic law says 'copyright, literary, artistic or scientific work'. 3) The treaty does not use the word' a similar property' 4) There is a comma after the phrase 'secret formula or process' which is not there in the domestic law using the same phrase as 'secret formula or process or.' It means the word secret should also be applied to the word process. So, to qualify as royalty it should be a secret process. The AO held that the above differences do not change the position in respect of software once they are classified as process. They are also secr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternet with the permission of developer, it would not be an article. Consequently, it would be in the nature of royalty. According to him taxability of a payment for acquisition of the same property cannot be determined on the basis of method of deliver. According to him the fact that the payment is made for the use of contents in a CD is alone relevant. Therefore software cannot be classified as copyrighted article. 12. For the above reasons, the AO came to the conclusion that the payment in question was in the nature of Royalty and that the appellant ought to have deducted tax at source at the time of making payment to NPL. Consequently the appellant was held as an Assessee in default in respect of the tax that ought to have been deducted at source and consequent liability for tax and interest thereon was imposed u/s.201(1) 201(1A) of the Act. 13. On appeal by the Appellant, the CIT(A) concurred with the view of the AO. The CIT(A) s conclusions, were similar to the conclusions reached by the AO and hence not discussed. These observations are contained in paragraph 28 to 34 of his order. 14. Aggrieved by the order of the CIT(A), the Appellant has preferred the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific 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). Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion-4 to Sec.9(1)(vi) of the Act was inserted by the Finance Act, 2012 w.r.e.f 1-6-1976 which enlarges the definition of Royalty and therefore not beneficial to NPL in so far as it treats mere right for use or right to use a computer software as distinct from the definition in Article 12(3) of the DTAA which refers to use of or the right to use any copyright of literary, artistic, scientific work including . In view of Sec.90(2) of the Act NPL can opt to be governed by the DTAA which is more favourable rather than Explanation-4 to Sec.9(1)(vi) of the Act which imposes a tax burden on NPL. The question whether Explanation-4 to Sec.9(1)(vi) which was enacted after the DTAA can override the provisions of the DTAA is another question which will be discussed later. Therefore the definition of Royalty as given in the DTAA has to be adopted. 18. The next question before us, at this stage, is as to whether the term literary work as mentioned in the definition of royalty in the treaty would include software or not? As per the provisions of section 2(o) of the Indian Copyright Act, 1957, the term literary work includes computer programs, tables and compilations incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 and clause-8 of the Agreement dated 15.12.2008 between the appellant and NPL, clearly shows that the Appellant had only a right to use the computer software and did not have right to use copyright in the computer software . In other words none of the rights as is envisaged under Sec.14(a) or (b) of the Copyright Act, 1957 was conveyed by the agreement dated 15.12.2008. Therefore the payment in question made by the Assessee to NPL cannot be regarded as Royalty . As we have already observed the Act does not specifically include computer software in the term literary work and under such circumstances, if we apply the provisions of Act to define the scope of Literary Work , then perhaps the computer software will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the computer software will have to be included in the term literary work but to constitute royalty under the DTAA, the consideration should have been paid for the use of or the right to use the copyright in the literary work and not the right to use literary work itself. 21. What is the effect of insertion of Explanation-4 in the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insertion of Explanation-4 in the definition of Royalty in Sec.9(1)(vi) of the Act by the Finance Act, 2012, w.r.e.f. 1-6- 1976, has no effect whatsoever and the issue has to be decided in the light of the definition of Royalty as contained in the DTAA read with the relevant provisions of the Copyright Act, 1957. 23. The learned counsel for the Assessee also addressed arguments to the effect that the right to use the software in the present case is akin to sale of copyrighted article rather than sale of copyright. Reference was made to the decision of the Hon ble Delhi High Court in the case of Director of Income Tax Vs. Ericsson A.B., New Delhi ITA No.504/2007 dated 23.12.2007 wherein it was held that the license granted to the licensee permitting him to download the computer programme and storing it in computer for its own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purposes. The said process is necessary to make the program functional and to have access to it. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a permanent establishment. 25. The learned DR submitted that the Appellant, whose obligation is to deduct tax at source u/s.195 of the Act, cannot place reliance on the DTAA as NPL could do in defence of non taxability in India of income deemed to accrue and arise in India and in this regard relied on the decision of the decision rendered by the ITAT Bangalore Bench in the case of Vodafone South (supra). We have perused the said decision and we find that the observations of the Tribunal were made in the context of dispute raised by the revenue that the payee was not tax resident of a country, the benefits of DTAA between India and the said country were sought to be pressed into service by the payer. This is clear from a complete reading of paragraph 37 of the said decision. In the present case there is no dispute raised by the revenue that NPL was not a tax resident of Singapore and that the benefits of DTAA between India and Singapore cannot therefore be available to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
