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TMI Blog2018 (1) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Therefore, we hold that payment received by the assessee was not in the nature of Royalty and cannot be therefore brought to tax. - Decided in favour of assessee. - ITA NO.1535/MUM/2014 - - - Dated:- 8-1-2018 - SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI MANJUNATHA, HON'BLE ACCOUNTANT MEMBER For The Assessee : Shri M.P. Lohia Shri Nikhil Tiwari For The Department : Shri Samuel Darse ORDER PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Disputes Resolution Panel I, Mumbai dated 11.12.2013 for the Assessment Year 2010-11. 2. The following grounds are raised by the assessee: - 1. erred in assessing the total income of the Appellant at ₹.11,37,32,921/- as against ₹.6,64,72,920, reported by the Appellant. In its revised Return of Income ( ROI ). Supply of off the shelf software treated Royalty : 2. erred in holding that receipts from Reliance Industries Limited ( RIL ) of ₹.4,72.60,001 on account of supply of off the shelf software to be royalty under Section 9(l)(vi) of the Act and Article 12 of the Double Taxation Avoidance Agreement between India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table billing operation with strong focus on customers and Revenue management. The software licensed by assessee is standard products already developed and made available to other customers. 5. However, the Learned Assessing Officer (AO ) held that the amounts receivable by Intec Ireland for supply of off the shelf software to Reliance are for grant of copyright and accordingly, the receipts are in the nature of Royalty as per amended Section 9(1)(vi) of the Act and Article 12 of the India-Ireland Tax Treaty. 6. The DRP accepted the view of the learned AO and held that the amount received by the assessee from Reliance was for the use of or right to use of copyright and hence, in the nature of Royalty as defined under Article 12 of the India Ireland Tax Treaty. In para 5.4 of the DRP order, the DRP after perusal of the documents submitted by the assessee has accepted the fact that the software supplied by lntec Ireland to Reliance is in the nature of a shrink wrapped/ off the shelf software. Therefore, in the facts of the present case, the DRP accepts that in assessee s case the present software is in the nature of a shrink wrapped/off the shelf software. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Scope of permitted use clause, para 2(b) of the Agreement, Para 2 (b) (i) provides that Reliance shall have no right to modify, adopt, translate, reverse engineer, decompile, disassemble, or create derivate works based on the software. Para 2(b) (ii) provides that Reliance will use the software only for internal training purposes and to process its own data and that of its affiliates. Further, Reliance will not use the software to offer time sharing, service bureau or other computer based services to third parties. Para 2(b) (iv) provides that Reliance will use the software only on specified equipment and location as agreed between the parties. Para 2(b) (v) provides that the software should be used within a single operating environment as selected by Reliance. Para 2(b) (vi) provides that Reliance will only make copies of the software for specified purposes (such as primary copy for production, training, testing, etc) as mentioned in the Agreement and for back-up and archival purposes. Learned Counsel for the assessee submits that Standard software clause, para 14(c) of the Agreement as per this clause, the software supplied by the Assessee to Reliance is a standard product al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the issue of taxability of revenues received from supply of off the shelf/ shrink wrapped software from Reliance under the same agreement has been decided by the Hon ble Mumbai Income Tax Appellate Tribunal ( Tribunal ) in favour of Intec Billing America vide its order dated 5 February 2010 (ITA No 3196/Mum/07 for AY 2002-03) ( Intec America ) (formerly known as ADC Software Systems USA). The Hon ble Tribunal after examining various clauses of the Software Licence Agreement held that the Intec Amecia has licensed off the shelf/ shrink wrapped software and therefore, it was held that payments from Reliance are not taxable as Royalty under the India USA Tax Treaty. Learned Counsel for the assessee submitted that Intec America has assigned all the rights in the software to Intec Ireland (a group company) vide letter dated 8 April 2005. The said assignment was governed by the terms of Clause 10(b) of the software license agreement signed between Intec America and Reliance. Learned Counsel for the assessee further submitted that Tax Treaty between India America and India Ireland is pari materia with regard to the article on Royalty and more so on taxation of software royalty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able in India as royalty. 16. Learned Counsel for the assessee submitted that recently, the Delhi High Court in case of Halliburton Export Inc. (ITA No. 3631 of 2016) which approved the Delhi Tribunal s decision in its own case (152 ITD 803) (copy of the decision is enclosed at pages 213 to 228 of the paper book) has held that the right to use a programme is totally different from the right to use a programme embedded in a software and the payment made for the same cannot be said to be received as consideration for use of or right to use of any copyright to bring it within the definition of royalty under a DTAA. The Hon ble High Court also held that where the provision of the treaty is more beneficial to the assesse, the treaty would prevail over the Act. The Delhi High Court relied on its own decision in case of DIT vs Infrasoft Limited [220 Taxman 273]. 17. He submitted that the Mumbai Tribunal recently in case of Capgemini Business Services (India) Ltd [TS-100-ITAT-2016(Mum)] (copy of the decision is placed at pages 325 to 346 of the paper book) after considering all the factors, examining all the decisions available on this issue, relevant provisions of the Copyright Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty . 23. Ld. Counsel for the assessee submitted that in view of the all the above judicial precedence, it can be said that the payments received by the Intec Ireland form Reliance is not for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process or information concerning industrial, commercial or scientific experience., but for use of a copyrighted article instead of use of the copyright . 24. As per the provisions of Section 90(2) of the Act, a non-resident assessee is eligible to be governed under the provisions of the Act or the Tax Treaty, whichever is more beneficial. As submitted above, Intec Ireland is a tax resident of Ireland and hence is eligible to claim the benefits of the Treaty. During AY 2010-11, Intec Ireland has received revenues of ₹.4,72,60.001 from Reliance for grant of software. The said receipts are not in the nature of Royalty but in the nature of Business Profits and since, lntec Ireland does not have Permanent Establishment ( PE ) in India within the meaning of Article 5 of India Ireland Tax Treaty. the said receipts are not taxable as Business Profits in India. Accordingly, the receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee submitted that, as it is evident from the nature of software and the terms of the software licence agreement. Reliance has not made any payments for use of a copyright or right to use a copyright in the software. The Assessee has only supplied license to use the software which was right to use copyright in the software and not any rights in the said software. Accordingly, receipts from Reliance are not taxable as Royalty in the hands of Assessee under Article 12 of India-Ireland Tax Treaty. Issue in appeal in relation to the impugned agreement in the case is covered in lntec Billing America s case for AY 2002-03. 30. The Ld. Counsel for the assessee submitted that the provisions of DTAA will prevail over retrospective amendment made under the Act. The definition of Royalty is provided under Section 9(1)(vi) of the Act and under Article 12(3) of the India Ireland Tax Treaty. In this regard, it is submitted that the Finance Act 2012 has incorporated Explanation 4 to Section 9(1)(vi) of the Act which reads 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matically amend the definition of Royalty in the DTAA. Accordingly, the said revenues would not be taxable as Royalty in India by virtue of Article 12 of the India Ireland Tax Treaty. 35. Ld. Counsel for the assessee further submitted that the Jurisdictional Mumbai ITAT in case of WNS North America [152 TTJ 145] has held that despite the retrospective amendment to the Act, the amendment will not apply to the treaty per se. It was further observed that if there is some provision in the treaty which is contrary to the provision of the domestic law, then it is the contrary provision of the treaty which shall override the provision in the domestic law in the computation of income as per the treaty. Further, the Hon ble ITAT held that since the explanation inserted vide retrospective amendment to the Act, making the definition of royalty inclusive in nature, was not a part of royalty definition under the relevant DTAA, such retrospective amendment should not be read in the DTAA also. 36. The Jurisdictional Mumbai ITAT decision in case of B4U International Holdings Limited ( B4U ) [181 ITR (Trib.) 62] has held that despite the amendment to the Act (vide the Finance Act 2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olid Works Corporation [ITA.No. 8721/M/2010] Mumbai Tribunal. (v) Reliance Industries Ltd Ors [47 CCH 94 (Mum)] (vi) Baan global BV [ITA.No.7048/M/2010] Mumbai Tribunal. (vii) Galatea Limited [47 CCH 325] Mumbai Tribunal. (viii) Halliburton Export Inc [152 ITD 803 (Del Tribunal) Dated 14 February 2014 approved by (ITA.No. 363/ 2016) Delhi (High Court)] (ix) Qad Europe B.V. [ITA.Nos. 83 84/Mum/2007] Mumbai Tribunal (x) First Advantage Private Limited [ITA.No. 3031/Mum/2010 ITA.No. no. 3032/Mum/2010] Mumbai Tribunal (xi) Dassault Systemes, Mumbai Tribunal [79 taxmann.com 205] (xii) National Stock Exchange of India, Mumbai Tribunal [ITA.No. 7735/Mum/2011] (xiii) Mckinsey Knowledgement Centre India Private Limited, New Delhi Tribunal [ITA.No. 407/Del/2013]. 40. Ld. DR strongly supported the orders of the DRP. Ld. DR submitted that during the course of hearing, it was argued on behalf of the assesse that the matter was covered in favour of the assessee by Mumbai Tribunal s orders in various cases wherein consideration paid for purchase/supply/licence of software has been held to be not Royalty. In this re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of DIT(IT) Vs. Reliance Infocomm Ltd. (Mum Trib.) dated 06.09.2013 in which case the Hon ble Tribunal in deciding the appeals in favour of various other assessees, though available at the time of passing of orders by AO/DRP was not relied upon in the instant case before the AO/DRP. Therefore, they did not have the occasion to examine whether the ratio of the said case applied to the instant case. Therefore, in my humble submissions, it may not be appropriate to say that the case of the assessee is covered by the favorable decisions of Delhi High Court. Therefore, in my respectful submissions, the assessee s case needs to be examined afresh on facts and on law before extending it the benefit of favorable decisions. I may also mention here that on similar facts, the Tribunals have set as aside, the appeal of the assessee back to CIT(A) in the following two cases. 1. Global Tele Systems Ltd., Dated 20.04.2016, Mumbai Tribunal 2. Appeal T Ltd. 152 ITD 0873, Ahmedabad Tribunal In view of the above submissions, the matter may kindly be set aside back to the file of the AO/DRP. 44. ALTERNATE PLEA: In case, the matter in the present Appeal is treated as covered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 15.10.2011, CIT V. Wipro Ltd. (2011),355 ITR 0284(Kar)/ 203 Taxman 621 (Kar.) HC, dated: 15.10.2011 and CIT Vs. CGI information Systems and Management consultants (P) Ltd., (2014) 48 Taxmonn.com 264 (KAR), dated: 9-6-2014. The High court of Karnataka has decided the issue of software Royalty, both before the insertion of Explanations 4, 5 and 6 in Section 9(1)(vi) of the l.T. Act by the Finance Act 2012 and even after their insertion. The insertion of these Explanations has not altered the views of Hon ble High Court of Karnataka and on the contrary the views of the Hon ble High court have been reaffirmed. The basic features of all these decisions rendered by the Karnataka High Court are as follows: (i) that the consideration paid is for the rights in respect of copyright and the user of the confidential information embedded in the software/computer programme amounts to royalty both under the Act and under the DTAA.( para 45 of Synopsis, supra) (ii) that what is transferred is right to use the software, an exclusive right, which the owner of the copyright i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y given under the Act as well as under the DTAA by the Karnataka High Court in the cases of Synopsis International, supra and Samsung Electronics, supra deciding the issue in favour of the Revenue. This order of the Tribunal has since been recalled by the Tribunal vide an order dated: 18/11/2016 on a MA filed by the assesse. The main grounds for recalling of the aforesaid order of the tribunal were twofold: (i) The decision of the coordinate bench of the Tribunal in the case of Solid Works Corporation (51 SOT 34) was not considered. (ii) Misreading of Delhi high court decision in the case of DIT Vs. Ericsson A.B (ITA No. 504/2007 dated 23.12.2007) 50. The department is considering filing of Writ Petition before the Bombay HC against the aforesaid order of the Tribunal recalling its order in the case of Reliance Infocomm. 51. The Finance Act, 2012 has among others, inserted Explanation 4 to Section 9(1)(vi) retrospectively, which reads as follows: Explanation 4- For the removal of doubts, it is hereby clarified that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Act into the DTAA by virtue of article 3(2) of the DTAA. (vii) The said decision in the case of Siemens AG, supra was rendered in 2008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act 2007 doing away with the requirement of PE for Royalty etc. (viii) In the case of Siemens AG, supra, the basic question before the Hon ble High Court was whether the definition of Royalty as per Explanation 2 to S.9 inserted by the Finance Act 1976 w.e.f. 01-06-1976 could be imported into the old DTAA (1960) when at the relevant point of time of application of treaty, Royalty had not been defined both under the then DTAA and the I.T. Act and what was the character of payment under the DTAA. (ix) It is not disputed by the Revenue that the provisions of DTAA, if beneficial to the assesse shall prevail over the provisions of the l.T. Act. 54. Ld. DR submitted that a perusal of Bombay High Court decision in the case Siemens AG. supra would reveal that: (i) In the operational part (paras 29 to 31) of the judgement in the case of Siemens AG, supra, nowhere it is mentioned that amendments in the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee which was earlier known as ADC Software System, America. The said assessment has been subsequently assigned to Intec Ireland the Assessee in entirety by assignment letter dated 08.04.2005. 58. The key features of the said software provided by the assessee are that the software provided by Intec Ireland is a comprehensive business solution addressing transaction management, billing and customer care issues related to telecom industry players. It provides solution for efficiently managing high volumes of transactions and keeping audit trails for all the transactions, thus preventing data loss and frauds. It is a high-end integrated software comprising of number of functional modules/ packages targeted at specific business areas. These modules can be used independently or in conjunction with each other to address specific requirements of the user. These modules support invoice generation, product pricing, product rating accounts receivables and billing operations. Further, they also support localization of language, currency, calendar and regulatory and taxation framework of the user. In simple terms, the said software could be equated to Microsoft Excel - wherein the user f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim benefits of the double taxation avoidance agreement between India and USA (India-US tax treaty). Considering the restrictive and limited rights granted to RIL under the software licensing agreement, based on the OECD Model commentary and UN Model Commentary, fees earned by the assessee are in the nature of business profits and not royalty . The assessee does not have a fixed place of business in India and also has not undertaken any activity in India pertaining to licensing of software. Accordingly, the assessee does not have a Permanent Establishment (PE) in India in terms of Article 5 of India-US tax treaty. In absence of the assessee s PE in India, the business profits earned by the assessee cannot be taxed in India. However, the Assessing Officer did not accept argument of the assessee and passed the assessment order taxing the income earned from Reliance at 15% on a gross basis as royalty under Article 12 of the India US tax treaty. 4. On appeal by the assessee, learned CIT(A) held that the payment in question was not in the nature of royalty and was payment for purchase of copyrighted article. It was in the nature of business profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sale tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become good . We see no different between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus, a transaction of sale of computer software is clearly a sale of goods within the meaning of the term as defined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter considering all the decision available on the issue including the one relied on by the Assessing Officer and the Ld.DR in the case of Samsung Electronics Company Ltd. Others (supra), Verizon Communication Singapore (supra), Reliance lnfocom Ltd. (supra) and Viacomm 18 Media Pvt. Ltd. (supra) held that where the payment is made for the copyrighted article the same cannot be considered as payment for the transfer of the copyright and cannot be taxed as royalty by observing as under:- 49. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, such as the use of it for the purpose for which it is supplied and to make backup copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is purchased etc. as provided under section 52, then in that event it cannot be said to be an infringement of copyrights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us. In the case laws cited by the Revenue of the Hon ble Karnataka High Court in the matter of CIT vs. Samsung Electronics Company Ltd. (supra) and ClT vs. Synopsis International Old Ltd. (supra) though a view in favour of the Revenue has been taken, but, the Hon ble Delhi High Court in the case of D1T vs. Infrasoft Ltd. (supra) which is a latter decision and has discussed the Samsung case also has taken the view in favour of the assessee. The Hon ble Delhi High court has taken the identical view favoring the assessee in the case of D1T vs Nokia Network (supra) and in the case of DIT vs. Ericson A.B. (supra) also. The Hon ble Bombay High gaud in the case of The Addl. Commissioner of Sales Tax vs. M/s Ankit international, Sales Tax Appeal No.9 of 2011 vide order dated 15 September, 2011 while relying upon the decisions of the Hon ble Supreme Court in The Commissioner of Income Tax V. Vegetable Product Ltd. (1973) 88 ITR 192 and in Mauri Yeast India Pvt. Ltd. V. State of UP. (2008) 14 VST 259(SC) (2008) 5 S.C. C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 20 of the Supply Contract. Distinction has to be made between the acquisition of a copyright right and a copyrighted article. 60.......We also find force in the submission of Mr. Dastur that even assuming that the payment made by the cellular operator is regarded as payment made by way of royalty as defined in Explanation 2 below Section 9(1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower that the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a Lumpsum payment as is the position in this case. 64. The Hon ble Delhi High Court in the case of Ericsson Radio Systems AB (supra) observed as under: - Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-11 thereto, it is necessary to establish that there is transfer of all or any r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 67. As rightly submitted by the Ld. Counsel for the assessee that the definition of Royalty under the Indo-Ireland Tax Treaty is pari-materia as that under Indo-US Tax Treaty and the Coordinate Bench of the Tribunal had already decided the issue of taxability of supply of software under the same agreement in favour of the Intec- Ireland with reference to the Indo-US Tax treaty for the Assessment Year 2002-03, wherein it has been held that receipts from supply of software are not ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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