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TMI Blog2018 (12) TMI 1202X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the same is outside the purview of taxation in view of India-Canada DTAA. Accordingly, this issue is decided in favour of the assessee. In so far as whether amendment in section 9(1)(vi) can be read into the Treaty, this issue now stands at rest for the various judgments of the Hon'ble Delhi High Court including that of DIT vs. Infrasoft Ltd. (2013 (11) TMI 1382 - DELHI HIGH COURT) wherein as held that the amendment in the domestic law cannot be read into the Treaty. In view of our finding given above, the issue of levy of surcharge and interest u/s 234B has become purely academic though as stated by the ld. counsel this issue now stands covered in favour of the assessee by the judgments referred and relied upon before us. From assessment year 2007-08 onwards there is a payment for purchase order of additional software for annual lease wherein certain addition has been made in the earlier membership and technology transfer agreement whereby certain technology executable has been given access to. The ONGC is paying annual lease charge with maintenance, which again, is not for purchase of any software and similar payment in assessment year 2005-06 has been held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case, in brief, are that the assessee is a non-resident company which received licence fees in terms of Membership and Technology Transfer Agreement No.I-097 dated 10.06.1992. In terms of the aforesaid agreement, ONGC was required to pay an annual membership-cum-licence fee over the tenure of the agreement which was for five years for acquisition of certain specified licences relating to Reservoirs Synch. Technology, i.e.:- a) IMEX-4 Licenses b) STARTS 1 License c) GEM-1 LICENSE d) Win Prop-1 license e) Results-8 license f) Builder-2 licenses. The aforesaid agreement was renewed periodically vide continuation to Membership and Technology Transfer Agreement No.I-097 dated 03.01.2002/16.01.2002 executed between the assessee and ONGC wherein the licence fee was determined for the period of five years. Further, in terms of the technology transfer agreements, as amended from time to time, any additional software comprising the CMG Technology could be procured by ONGC through an independent purchase order to be placed upon the assessee for mutually negotiated consideration. In the assessment year 2006-07, the assessee has received license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Before us, the ld. Sr. counsel for the assessee submitted that as per the terms of the agreement, the licences granted were on non-transferrable and on non-exclusive basis. Apart from that, the title of ownership was to remain with the assessee and ONGC had no right to sell or sub-license to any third party. This was pointed out from clause (4)(iii) of the Agreement. As per the agreement the licence was to be used only for internal purposes which are evident from clause (6) of the Agreement. Source code was last issued in 1997 only for the internal use by the ONGC and, thereafter, the software has been made available purely on licence basis. The source code of CMG software had not been made available to the assessee and the software licences have been transferred upon payment of licence fee. Thus, considering the fact that in terms of the agreement the assessee did not transfer any right to exploit copyright in the software to ONGC, as per the provisions of section 14 of the Copyright Act, 1957, the consideration received was in lieu of providing only right to use copyrighted article as against the right to use the copyright. Under Article 12(3) of India-Canada DTAA, the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. counsel are distinguishable and, in support, has strongly relied upon the judgment of the Hon'ble Karnataka High court in the case of CIT vs. Samsung Electronic Company Ltd. (2012) 345 ITR 494 (Kar.). 12. We have heard the rival submissions and also perused the relevant finding given in the impugned order as well as the material referred to before us. The sole issue involved is, whether the amount received by the assessee from ONGC for annual membership-cum-licence fee over the tenure of agreement for five years for the acquisition of certain specified licences relating to Reservoir Synch. Technology can be taxed as royalty ; firstly, u/s 9(1)(vi) of the Income-tax Act; or secondly, under Article 12(3) of India-Canada DTAA. First of all, we have to see whether the payment under the Membership Agreement is for Membership with CMG, i.e., Computer Modelling Group. Clause (4) (iii) provides that CMG will grant to the member a non-transferrable, non-exclusive licence fee to use the CMG technology. The relevant clause reads as under:- ( 3) In accordance with the provisions of this Membership Agreement, CMG hereby grants to the Member a non- transferable, non-exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication through participation in the CMG organization and voting at Annual Member Meetings and Technical Advisory Committee (TAC) Meetings. Member rights, privileges and obligations are also established through the Board of Directors which are elected by the members to direct CMG s operations. Member rights, privileges and obligations are therefore subject to change from time to time by CMG s Board of Directors and members participation. ( 7) The Member shall have the rights and privileges of Membership pursuant to this Membership Agreement only during the period the Member s Membership is in good standing. ( 12) ASSIGNMENT The Member agrees it will not at any time assign its interest or rights under this Membership Agreement without having obtained the prior written consent of CMG. MODIFICATIONS No waiver, alteration, or modification of any of the provisions hereof shall be binding unless in writing and signed by a duly authorized representative of the Member or its Member Representative and by a duly authorized representative of CMG. In the event the Member issues a standard-form instrument relating to this Membership Agreement, it is hereby sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and ( b) Payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 from activities described in paragraph 3(c) or 4 of Article 8. 15. The main emphasis is on payment for the use of or right to use any copyright of various nature which are not an exclusive rights to use any copyright in an article which is in the nature of terms defined therein and the said use of copyright has to be given to the end user. Here, as can be seen from the terms of the agreement, no use or right to use any copy right of any nature has been given to the ONGC. This coordinate Bench in the case of Adobe Systems Software, Ireland Ltd. (ITA No.5433/Del/2011, order dated 09.05.2018), have threadbare discussed the definition of royalty under Indo-Ireland DTAA which is quite similar to the definition given in the present DTAA after considering various definitions as well as the definition enshrined in the Indian Copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construed as an authority to enjoy any or all of the enumerated rights ingrained in a copyright. The parting of some kind of intellectual property right inherent in and attached to the software product in favour of the licensee/customer is what has been contemplated in the phrase, use and right to use the copyright in the treaty. 17. Since copyright has not been specifically defined under the treaty, therefore, the courts have held that the definition as enshrined in Indian Copyright Act, 1957 has to be seen. The relevant section of the copyright Act reads as under: 14. Meaning of copyright - For the purpose of this Act, copyright means the exclusive right 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, dramatic or musical work, not being a computer programme, - i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act- ( i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or ( ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware that had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or when any person- ( i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or ( ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or ( iii) by way of trade exhibits in public, or ( iv) imports into India, any infringing copies of the work: Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer. Explanation - For the purposes of this Section, the reproduction of a lite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyrights has to be complied with as provided in sections 18 19 of the Copyright Act, which reads as under: 18. Assignment of copyright ( 1) The owner of the copyright in an existing work or the prospective / owner of the copyright in a future work may assign to any person the copyright either wholly or partially and either generally or subject to limitations and either for the whole of the copyright or any part thereof: Provided that in the case of the assignment of copyright in any future work, the assignment shall take effect only when the work comes into existence. ( 2) Where the assignee of a copyright becomes entitled to any right comprised in the copyright, the assignee as respects the rights so assigned and the assignor as respects the rights not assigned, shall be treated for the purposes of this Act as the owner of copyright and the provisions of this Act shall have effect accordingly. ( 3) In this section, the expression assignee as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence. 19. Mode of assignment: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose. There is neither sale nor licence of the copyright in any kind of software or technology. Thus, under the treaty, such a payment cannot be held to be reckoned as royalty. 17. In so far as whether amendment in section 9(1)(vi) can be read into the Treaty, this issue now stands at rest for the various judgments of the Hon'ble Delhi High Court including that of DIT vs. Infrasoft Ltd. (supra) wherein the Hon'ble High Court has held that the amendment in the domestic law cannot be read into the Treaty. The relevant observations and the ratio laid down by the Hon'ble High Court in sum and substance are as under:- To be taxable as royalty income covered by article 12 of the DTAA the income of the assessee should have been generated by the use of or the right to use of any copyright. The Licensing Agreement shows that the license is nonexclusive, non-transferable and the software has to be used in accordance with the agreement. Only one copy of the software is being supplied for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of DTAA. 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 his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information for backup purposes with a condition that such copyright would include Infrasoft copyright and all copies of the software would 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, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee Company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licensee shall return the software including supporting information and licence authorization device to Infrasoft. The incorporeal right to the software, i.e., copyright remains with the owner and the same was not transferred by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of levy of surcharge and interest u/s 234B has become purely academic though as stated by the ld. counsel this issue now stands covered in favour of the assessee by the judgments referred and relied upon before us. 20. In the assessment years 2007-08 to 2010-11, similar issue is permeating, therefore, our finding given above will apply mutatis mutandis in these years also. However, from assessment year 2007-08 onwards there is a payment for purchase order of additional software for annual lease wherein certain addition has been made in the earlier membership and technology transfer agreement whereby certain technology executable has been given access to. The ONGC is paying annual lease charge with maintenance, which again, is not for purchase of any software and similar payment in assessment year 2005-06 has been held to be not royalty by the ld. CIT(A). From the perusal of the invoices raised, it is seen that the payment has been made for annual lease charges with maintenance and once in the earlier years it has been held not to be in the nature of royalty, then, same payment cannot be held to be royalty in this year. Otherwise also all the other elements in these years remai ..... 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