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TMI Blog2018 (5) TMI 1861X X X X Extracts X X X X X X X X Extracts X X X X ..... ultancy Services Ltd. (TCSL) (Rs.36.08 lacs) for the relevant year qualify as 'Royalty', as contended by the Revenue, or as 'business income', as claimed by the assessee. The assesseecompany, a foreign company, with no business presence/permanent establishment (PE) in India, its' business income is not taxable in India under the Indo-German Double Tax Avoidance Agreement (DTAA), while the 'royalty income' would attract tax at the rate of 10% under Article 12 thereof. 3.1 The background facts are that the appellant is a manufacturer of automotive software and offers flexible and innovative software solutions for connected car infrastructure, human machine interface (HMI) technologies, navigation, driver assistance, electronic control units (ECUs), and software engineering services. The Appellant for the relevant year licensed its software to two Indian customers, as afore-noted, which the Revenue contends to be royalty and, hence, taxable, refuted by the assessee. 3.2 The relevant provisions (in the relevant part) of the domestic law and DTAA, defining the term 'royalty', are as under: Domestic Law 'Income deemed to accrue or arise in India. 9. (1) The following incomes sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India.' Indo German (DTAA) As per article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Germany:- "ARTICLE 12 - Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement." 3.3 We may at this stage set out the respective cases of both the sides. The assessee's case, firstly, is that the computer software is not a copyright. Reference to the Copyright Act, 1957 by the Revenue is not valid as the term 'royalty', as defined in the Indo German Tax Treaty, does not include reference to use of the computer programme/software. The inclusion of 'computer software' (per Explanations 3 and 4 of section 9(1)(vi)) expands the scope of the term 'royalty', which cannot be taken into account as the narrower definition of 'royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensed products, by its customers. It is similar to preparing a 'word document' using the commonly used software 'Microsoft Word'; the word document belongs to the user, while the copyright in Microsoft Word vests in Microsoft Corporation. Likewise, the HMI model developed by RBI belongs to it, while the copyright in EB Guide Studio belongs to the assessee. The Revenue's case is that the development license is a full-blown agreement, allowing the user to internally develop, configure and adapt the software, so that the same can be used in the products manufactured which may be sold or licensed ('the licensed product') by it. Sub-licensing right allows the user to further sub-license the right to reproduce and distribute the licensed product to third parties. The restriction on the reverse engineering is subject to the rights granted under the license, viz. for copying, integration and compilation of the software into licensed products. The user is further obliged to furnish a monthly statement of all the licensed products supplied by the user to its' customers, and is to pay fee and royalty on the basis of the invoice raised by the assessee. 3.4 We may now advert to the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the royalty definition. Viewed from this angle, a non-exclusive and non-transferable 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 Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the, licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests hims ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (l)(vi) of the Act and i also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e software or a right to use the same (copyright). 3.6 The question that therefore arises next for considering and answering is whether the licensed product/s developed by using the assessee's software EB Guide Studio is a derivative program, or not. This is as the other rights afore-stated (at para 3.5) are clearly not applicable in the instant case, nor are claimed to be so by the Revenue. A derivative is something which has been developed or obtained from something else. The matter, it may be appreciated, thus, given the clear law laid down by the binding decision afore-referred, is essentially one of fact. The question to be asked in this regard is if the HMIs developed using the software EB Guide Studio could be so developed independent of the latter. The answer, surely, is in the negative; the same admittedly providing the platform for the development of a HMI model. The assessee regards its' said software only as a tool. Surely, any software, designed as it is to achieve a particular function or obtain a particular result, is a tool, as the MS Word, the example of which the assessee cites. Preparing a word document using the same does not in any manner gives the user any ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly means the changes, extension or adaptions to the EB products as carried out by EB (assessee) pursuant to requisition therefor by a customer, formalized through an agreement (cl. 2.4). Not surprisingly, the license agreement itself employs the word 'royalties' in conjunction with the license fee (cls. 6.1 & 6.2), even as the Revenue points out. Significantly, the supply of the licensed products by the assessee's customer (RBI) using EB Guide Studio, statement of which it is under the license terms obliged to furnish to EB on a monthly basis, is taken into account, raising the invoice on RBI on that basis (cl. 6.5). This itself establishes the license fee for the same to be a royalty. Further, if the supply of the licensed product so created/produced for consideration to its' customers by the user is not commercial exploitation by the assessee's customers (as RBI), what we wonder is? How could, further, it be regarded as use of software for internal purposes? We have not considered it necessary to reproduce the development license agreement, the principal terms of which were gone through and read in detail by both the sides during hearing, so as to avoid burdening this order furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to develop the HMI have been or are to be allowed. Why, for all we know, reverse engineering may not be required for the same. If anything, it gets clarified from the said clause that derivative works are in contemplation on the basis of the development license. It is in fact upon considering all these aspects that we have - in the preceding part of this order, found the licensed product/s (HMI/s) are developed only on the basis/ edifice of the software licensed, and is thus a derived program, on the supply of which therefore EB keeps tab. The sale/license (or sub-license) of the licensed product by the customer is only a commercial exploitation of the assessee's software. These rights do not obtain in the case of Infrasoft Ltd. (supra), in which case the Hon'ble Court found the rights granted to be limited to those necessary for operating the program. Why, as afore-noted, the parties have in the instant case themselves regarded the consideration (license fee) as royalty, implying a grant of right to use the Intellectual Property Rights (IPRs) embedded in the software inasmuch as it gets transmitted/embodied in the licensed products, with the user (RBI) being invoiced on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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