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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 ..... .Y. 2006-07 wherein the assessee has raised the following grounds:- "1. The Ld. Commissioner of Income Tax (Appeals)-1. Dehradun has erred in law and in the facts and circumstances of the case in rejecting the appellant's contention that the receipts of the non-resident are exempt from tax in India. 2. Without prejudice to the preceding ground, the Ld. Commissioner of Income Tax (Appeals)-1. Dehra Dun has erred in law and in the facts and circumstances of the case in rejecting the appellant's contention that the receipts of the appellant are taxable u/s 44BB of the Act. 3. The Ld. Commissioner of Income Tax (Appeals)-l, Dehradun has erred in law and in the facts and circumstances of the case in not deciding the ground of chargeability of surcharge and education cess himself and in directing to the AO to look into the appellants contention in accordance with law. 4. The Ld. Commissioner of Income Tax (Appeals)-l, has erred in law and in the facts and circumstances of the case in not directing the AO to delete the interest levied u/s 234B. 4. The facts of the case, in brief, are that the assessee is a non-resident company which received licence fees in terms of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer was right in holding that such a payment was to be assessed u/s 115AA. (ii) The scientific knowledge vested in the software which has been permitted to be used by ONGC on payment of licence fee through which right to access and administer the system devised by the assessee has been obtained and, therefore, it does not partake the use of a finished product by customer on payment of tagged price. (iii) The software has been devised to transfer scientific knowledge and the ONGC has been privileged to access such information through granting of licence which means that payment of license fees has been as a consideration for scientific work. 7. The alternative plea of the assessee that the receipt of the assessee should be covered u/s 44BB was also rejected on the ground that the said payment is covered u/s 115A. Regarding surcharge and education cess, he has given direction to the Assessing Officer to examine the matter in accordance with the law and interest levied under various sections has been held to be consequential. 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-transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled proposition by various courts including that of the Delhi High Court that the said amendment to section 9(1)(vi) cannot be read into the definition of 'Royalty' as contained under the DTAA. In support, he relied upon DIT vs. New Skies Satellite B.V. & ors. (2016) 382 ITR 114. 10. In so far as the levy of surcharge, the ld. Sr. Counsel submitted that the rate prescribed under DTAA cannot be increased by any surcharge levied under that. However, regarding education cess, he agreed that the same would be covered within para 2 of DTAA. As regards levy of interest u/s 234B, he strongly relied upon the judgment of the Hon'ble Delhi High Court in the case of DIT vs. GE Packaged Power Inc. (2015) 373 ITR 65 (Del) and also the assessee's own case for assessment year and also the judgment of Uttarakhand High Court in the case of DIT vs. Maersk Company Ltd. (2011) 334 ITR 79 (UK). 11. On the other hand, the ld. DR strongly relied upon the order of the CIT (A) and pointed out that the judgements referred and relied upon by the ld. 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. Samsun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch it is given. A termination notice given by CMG for breach of contract shall be effective when received by the Member, if not remedied within 30 days. (2) The Membership pursuant to this Membership Agreement can be terminated, but this Membership Agreement (contract) shall survive membership termination. (3) The Member's license to use any CMG technology, including Source Code, received by it prior to the effective date of such termination notice shall continue perpetually subject otherwise to the terms of this Membership Agreement. The other relevant clauses for fees and payment, terms of membership and assignment, etc. are as under:- "(5) Each member of CMG has the right to reasonable enjoyment of Membership and each member shall respect such right of other members. (6) Membership is subject to the provisions of CMG's incorporating documents and bylaws. CMG is a member organization and the members establish member rights, privileges and obligations of general application 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 establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al purpose. Since the assessee is a tax resident of Canada, therefore, benefit of India-Canada DTAA in terms of section 90 of the Act has to be given. Para 3 of the Article 12 of Indo-Canada DTAA reads as under:- "3. The term "royalties" as used in this Article means: (a) Payment 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 film 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 process, or for information concerning industrial, commercial or scientific experience, including gains derived from 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loitation of the product is not given, then it cannot be reckoned that 'use or right to use in a copyright' has been given by the recipient to the payer. A limited right to use a copyright product with a non exclusive license to the end user being some kind of license program through the computer to the end user does not tantamount to the use of copyright or right to use the same. A distinction has to be drawn between the passing of a right to use and facilitating the use of a product for which the owner has the copyright. It is a sine qua non that some kind of enjoyment or all the rights which the copy right owner has, is necessary to trigger the concept of "royalty" as defined in the treaty. The non exclusive and non transferable license enabling the use of a copyrighted product cannot be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast the work (broadcasting right); 6) include it in a cable-programme service (cable right); 7) make an adaptation of the work, or do any of the above acts in relation to an adaptation (right of adaptation); 8) the right to authorize others to carry out any of these activities. 18. Further section 51 of the Copyright Act enlists copyright in a work which shall be deemed to be infringed; and section 52 specifies the acts which do not construe infringement of copyright. For the sake of ready reference relevant portion of section 51 and 52 are reproduced hereunder:- "51. When copyright infringed- Copyright in a work shall be deemed to be infringed (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enjoy any of those exclusive rights, reproduction, adaptation or the like, which ownership of the copyright preserves exclusively for the copyright owner. Purchaser may buy the copyrighted article and can use the article as he deems fit, but it does not enable him to use the article in a way which infringes the vendors' right. 20. Here in the present case, from the reading of the relevant clauses of the argument, it is quite ostensible that no use or right to use of a copyright in the software has been ever divested either to the distributors or to the end users. Even for the sake of argument, it is accepted that copyright has been transferred, then requirement of law is that, assignments of the copyrights 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is any kind of assignment of copyright." 16. The Tribunal has also taken note of the commentary given in OECD Model Tax Convention on Royalty and also the judgment of the Hon'ble Delhi High Court in the case of Nokia Networks, DIT vs. Infrasoft Ltd. and CIT vs. Alcatel Lucent Canada (supra). Thus, if one goes by the definition as enshrined in the Treaty read with relevant provisions of Indian Copyright Act, 1957 and also the relevant Agreement amongst the parties, it is seen that the payment for CMG's membership by the ONGC is purely for non-exclusive, non-transferable licence to use the technology only for the internal purpose. 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 rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of a privilege, quite independent of any material substance, such as a manuscript. * Just because one has the copyrighted article, it does not follow that one has also the copyright w 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 license 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Act or under the DTAA. * The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted 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 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of article 12(3) of the DTAA between India and USA 18. The aforesaid observation and the ratio have been further reiterated in the judgment of Alcatel Lucent Canada (supra). Thus, in view of the binding judicial precedents and discussion made above, we hold that nature of payment as received by the assessee through ONGC in terms of the aforesaid agreement cannot be characterized as 'royalty' and, 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. 19. 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. 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 trans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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