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TMI Blog2017 (8) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... services under the section 44BB of the Act, and now, it is contested before us that said income should fall under section 44D/44DA of the Act. In our considered opinion, once the Assessing Officer has accepted the taxability of income under section 44BB of the Act, he cannot be allowed to change the stand taken by him in the assessment order. Even otherwise, in view of the decision in the case of Oil and Natural Gas Corporation Limited v. CIT [2015 (7) TMI 91 - SUPREME COURT], if the substance of the contract/agreement is connected with the prospecting, extraction or production of mineral oil, the income has to be assessed under the provisions of section 44BB of the Act. In the case, the assessee supplied software and provided software maintenance/support services in respect of software supplied, which were to be utilised in exploration of mineral oil, and thus the relevant income from sale of software and software maintenance/support services has been rightly assessed under section 44BB of the Act. The amendment brought by the Finance Act, 2011 cannot be made effect from the retrospective effect as that it adversely affects the interest of the assessee. It is well settled law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I. T. A. No. 4976/Delhi/2012 has been preferred by the Revenue against the order of the learned Commissioner of Income-tax (Appeals) dated July 5, 2012 for the assessment year 2009-10. In these appeals, the issues involved are interconnected and thus all these appeals were heard together and disposed of by this consolidated order for convenience and brevity. 2. First we take up the appeal of the Revenue having I. T. A. No. 1182/Delhi/2012 and the appeal of the assessee in I. T. A. No. 1225 related to the assessment year 2007-08. The grounds raised by the Revenue and the assessee in their respective appeals are reproduced as under : Grounds of appeal of the Revenue in I. T. A. No. 1182/Delhi/2012 (i) Whether on the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) had erred in characterising income from supply of off-the-shelf software and services ancillary and subsidiary thereto squarely covered in the definition of section 9(1)(vi) of the Act and article 12 of the Indo-Canada Double Taxation Avoidance Agreement and taxable as royalty, as step-in-aid to actual mining of mineral oils and thus chargeable under section 44BB ignoring th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant as the same does not fall within the purview of section 44BB of the Act. (iii) The appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein and to such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 3. The facts in brief as culled out from the orders of the lower authorities are that the assessee, a firm constituted under the laws of Alberta Canada, is a resident of Canada. During relevant period, the assessee supplied software for seismic data processing and geological data interpretation to the companies involved in exploration and production of mineral oil. The assessee was also engaged in upgradation and maintenance of software already supplied for the purpose of exploration and production of mineral oils. For the year under consideration, the assessee filed return of income on October 30, 2007 declaring a total income of ₹ 8,09,010. The assessee offered receipts amounting to ₹ 80,90,071 from upgradation and maintenance services under section 44BB of the Income-tax Act, 1961 (in short the Act ) and the receipts amounting to ₹ 6,39,25,481 from supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ception in Explanation 2 to section 9(1)(vi) of the Act i.e. project undertaken by the recipient was not considered in the said instruction and thus the receipt from sale of software and support services, for a project not undertaken by the recipient, were in the nature of royalty under the provisions of section 44D/44DA read with section 115A of the Act. In respect of grounds raised in the assessee's appeal, the learned senior Departmental representative relied on the order of the Assessing Officer. 5. On the other hand, the learned counsel for the assessee submitted that the assessee during the course of the year under consideration, supplied software for the purpose of seismic data interpretation for their own business and at no point of time, the copyright or any other intellectual property right has been transferred to the purchaser of software. He further submitted that the issue of sale of software and taxability as royalty thereon, is no more res integra in view of the judgments of the hon'ble High Court of Delhi in the case of DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi), DIT v. Ericsson A. B. [2012] 343 ITR 470 (Delhi) and DIT v. Infrasoft Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar property as mentioned in the definition of royalty as defined in clause (iii) of Explanation 2 to section 9(1)(vi) of the Act or it may even fall within some clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. The relevant clause (iii) and (iv) of Explanation 2 to section 9(1)(vi) are reproduced as under : Explanation 2.-For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'capital gains') for-. . . (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 ; 9. The learned Commissioner of Income-tax (Appeals) after taking into consideration the submission of the assessee that the consideration received for sale of the software by the assessee was for sale of the copyrighted product and following the decisions relied on by the assessee including the decision in the case of Ericsson Radio Systems A. B., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se on the issue of taxability of such sale in India, concluded that the place of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and the determinative factor would be as to where the property in goods passes. In the present case, the finding is that the property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) (supplies) to be segregated from the installation and only then would question of apportionment arise having regard to the express language of section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arise in India. 11. In the case of DIT v. Ericsson A. B. [2012] 343 ITR 470 (Delhi) also the hon'ble High Court held that since the transaction relates to supply of goods and both the transfer of property in goods and risk passed outside I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright in it. It does not amount to transfer of all or any right including licence 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. The licence 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 utilising 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. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act or under the Double Taxation Avoidance Agreement. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted 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- licence or transfer the copy of software to any third party without the consent of Infrasoft. The licensee has been prohibited from copying, de-compiling, deassembling, or reverse engineering the software without the writ ten consent of Infrasoft. The licence agreement between the assessee- company and its customers stipulates that all copyrights and intellectual property rights in the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The licence granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi) as not amounting to acquiring a copyright in the software. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. The question of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Reliance Industries Ltd. and while examining the deductibility of tax at source on payment made by M/s. Reliance Industries Ltd. to the assessee, the Tribunal has examined whether the payment made by M/s. Reliance Industries Limited to the assessee was in respect of royalty under the Double Taxation Avoidance Agreement. The relevant finding of the Tribunal is reproduced as under : 49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD-ROM which can be said to be sale of 'goods' by the owner. The consideration paid by the assessee thus as per the clauses of the Double Taxation Avoidance Agreement cannot be said to be royalty' and the same will be outside the scope of the definition of 'royalty' as provided in the Double Taxation Avoidance Agreement and would be taxable as business income of the recipient. The asses see is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a licence provided by the owner in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re :- (i) The intended beneficiary should be a non-resident. (ii) He should be engaged in the business of providing services, facilities and equipment for extraction or production of mineral oils. (iii) The provisions of sections 42, 44D, 115A or 293A should not apply. This section requires there to be a proximate and live nexus with the activity of prospecting, extraction or production of mineral oils. For examining this proposition help is taken of certain case laws which would be discussed later 4.6 The principles contained in the following case laws will also be used to determine the issue of nexus of appellant's business with activities allowed for computing income under section 44BB of the Act : (1) ONGC as Agent of Sea House Inc v. IAC reported in [1989] 29 ITD 422 (Delhi) (2) CIT v. ONGC Ltd. (No. 1) reported in [2009] 309 ITR 244 (Uttarakhand) (3) ARB Inc. v. Joint CIT reported in [2005] 277 ITR (AT) 209 (Delhi) ; [2005] 93 ITD 520 (Delhi) (4) ONGC v. Asst. CIT reported in [2007] 9 SOT 8 (Tri.-Delhi) ; [2007] 107 TTJ (Delhi) 551 ) (5) OHM Ltd., In re reported in [2011] 335 ITR 423 (AAR) ; [2011] 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or for that matters 'mining'. Also it needs to be seen whether the appellant's activities have any proximate nexus to prospecting for or extracting mineral oils. It is seen that the appellant markets software which analyses data which in turn aids in exploration of mineral oils. Thus this software would be a step-in-aid to the actual mining of mineral oils. In view of this position section 44BB, as requested for by the learned authorised representative vide his letter dated November 30, 2011, is applicable on the facts of this case. 4.8 Thus, it is held that all receipts from sale of software to the provision of maintenance, training, etc. are covered under section 44BB of the Act and will be taxed as such considering the law laid down as per the cases mentioned in paragraph 4.1 supra. 19. In the grounds raised before us, it is contended by the Revenue that income by way of royalty taxable under the provisions of section 44D/44DA read with section 115A, could not be covered under the provisions of section 44BB of the Act as clarified in the proviso thereto. 20. The relevant proviso below section 44BB of the Act reads as under : Provided that this sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under section 44BB or section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the Central Board of Direct Taxes had accepted the said test and had in fact issued a circular as far back as October 22, 1990 to the effect that mining operations and the expressions 'mining projects' or 'like projects' occurring in Explanation 2 to section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non- resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act. We do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nel of ONGC. 12 1535 Laboratory testing under simulated reservoir conditions. 13 1514 Consultancy for optimal exploitation of hydrocarbon resources. 14 2797 Consultancy for all aspects of coal bed methane. 15 6174 Analysis of data of wells to prepare a job design. 16 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys. 17 7226 Opinion on hydrocarbon resources and foreseeable potential. 18 7227 Opinion on hydrocarbon resources and foreseeable potential. 19 7230 Opinion on hydrocarbon resources and foreseeable potential. 20 6016 Opinion on hydrocarbon resources and forese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Training on implementation of six sigma concepts. 39 1516 Training on implementation of six sigma concepts. 40 6023 Training on drilling project management. 41 2796 Training in safety rating system and assistance in development and audit of safety management system. 42 1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages. 43 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. 44 1523 Supply, installation and familiarisation of software for processing seismic data. The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been inserted by the Finance Bill, 2010 with effect from April 1, 2011 only. Since, the assessment year in consideration before us is the assessment year 2009-10, the said proviso was not applicable over the facts of the instant case. The Revenue has contended before us that said amendment in the Act was only clarificatory in nature and thus its application has to be read into the main provisions with effect from the time the main provision came into effect in view of the decision of the hon'ble Supreme Court in the case of Sedco Forex International Drill Inc v. CIT [2005] 279 ITR 310 (SC). 26. In our opinion, the amendment brought by the Finance Act, 2011 cannot be made effect from the retrospective effect as that it adversely affects the interest of the assessee. We are in agreement with the findings of the hon'ble Supreme Court in the case of Sedco Forex International Drill Inc v. CIT [2005] 279 ITR 310 (SC) that clarificatory provisions should be made applicable from the date when the main provision was introduced. The relevant paragraph of the judgment is reproduced as under (page 318) : As was affirmed by this court in CIT v. Goslino Mario [2000] 241 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of taxability of receipts from sale of software has been tested on the touchstone of the treaty principle and, therefore, it was not permissible to go to the Act and tax the transaction. However, on a perusal of the order of the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals), we find that the issue of sale of software was examined by them only from the angle of the taxability under the Income-tax Act, 1961 and not from the perspective of relevant treaty. The learned counsel for the assessee has first time raised this issue before us. We have decided that sale of software is not amounted to royalty under the relevant treaty. As far as the receipts from software maintenance and support services are concerned, the assessee itself has declared the said receipts under section 44BB of the Act. Thus, the contention of the learned counsel that it is not permissible to go to the Act to tax the transaction is not accepted being a composite transaction. 31. We find that global receipts pertaining to any contract having approximate nexus with the activity of prospecting for or extraction of mineral oil, are required to be taken for computing profit under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of section 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the assessee at 10 per cent. Therefore, in our view, the Tribunal fell into error in not appreciating the difference between the amount and the income. Amount paid or received refers to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under section 2(24) of the Income-tax Act and section 5 and section 9 deal with the income and accrued income and deemed income. Section 4 is the charging section of the Income-tax Act and definition as well as the incomes referred in sections 5 and 9 are for the purpose of imposing the Income-tax under section 143(3). Section 44BB is a complete code in itself. It provides by a legal fiction to be the profits and gains of the non-resident assessee engaged in the business of oil exploration at 10 per cent. of the aggregate amount specified in sub-section (2). It is not in dispute that the amount has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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