9911796707
TMI Blog2019 (12) TMI 1029X X X X Extracts X X X X X X X X Extracts X X X X ..... ax, Circle 1(1), New Delhi (AO) erred in 2. law and on facts in holding that the amount of Rs. 2,01,51,292/- received by the assessee company from its customers is in the nature of ROYALTY u/s 9(l)(vi) of the IT A, 1961 and also as per Article 12(3) of the Indo-USA DTAA. The AO ought to have appreciated that the said amount is normal Business Income of the appellant arising on account of sale of copyrighted products (licenses) and not taxable in India in the absence of Permanent Establishment (PE) in India. 3. The Honorable DRP has erred in law and on facts in rejecting the objections of the appellant to the additions proposed by the learned AO in treating the amount of Rs. 2,01,51,292/- received by the assessee company as ROYALTY u/s 9(l)vi) of the ITA, 1961 and as per Article 12(3) of the Indo-USA DTAA; instead of treating the same as consideration for sale of software licenses. 4. The assessee company craves leave to add / modify / delete / amend all / any of the Grounds of Objection. ITA No. 2415/Del/2013 ( A. Y. 2009-10) 1. The learned Asstt. Director of Income-tax, Circle 1(1), International Taxation, New Delhi (AO) erred in law and on facts in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll / any of the Grounds of Objection. ITA No.987/Del/2015 ( A. Y. 2011-12) 1. The Hon'ble DRP-IV Delhi has erred in law and on facts, in upholding learned AO's order treating the amount of Rs. 1,40,48,530/- being received by the assessee company for sales of licenses as a taxable ROYALTY u/s 9(l)(vi) of the ITA, 1961 and as per Article 12 the India - USA DTAA; instead of treating the same as consideration for sale of copyrighted software licenses. 2. The DRP / AO ought to have appreciated that the said amount, received from assessee's Indian customers, is normal Business Income of the appellant arising on account of sale of copyrighted licensed software products and not taxable in India in the absence of Permanent Establishment (PE) in India. 3. The learned AO has also erred in law and on facts in granting short TDS credit of Rs. 10,03,459/- (Rs. 14,90,981 - Rs. 4,87,522) which was deducted by the various Indian customers of the assessee by taking extreme conservative position of the law. 4. Alternatively and without prejudice to the ground no 1 to 3 above, learned Assessing officer has erred in law and on facts in applying taxation rate of 15% as per DTAA between In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the company does not have any PE in India, the company claimed the TDS refund of Rs. 25,35,599/- by filing return of income for A.Y.2007-08 on 29.03.2008. Similarly, the return for A.Y.2009-10 was filed on 16.03.2011 claiming refund of Rs. 339583/-. The returns were subjected to scrutiny proceedings for both the assessment year and draft assessment order was passed by the AO on 31.12.2009 for A.Y. 2007-08 and on 23.12.2011 for A.Y.2009-10. The objection of the assessee was rejected by the DRP and the AO passed the final order on 31.12.2009 for A.Y.2007-08 and on 26.10.2012 for A.Y.2009-10. The assessee company filed appeal before the Tribunal against the order of the AO for A.Y.2007-08 which was set aside by the Tribunal vide order dated 09.02.2011 to the file of the DRP for passing a fresh order for A.Y.2007-08. The DRP vide order dated 23.12.2011 passed the order dismissing the objections of the assessee company and consequently the final order was passed by the AO on 27.12.2011 which was received by the US company on 27.01.2012 for A.Y.2007-08. Similarly, the order for A.Y.2009-10 passed by the AO on 26.10.2012 was received by the US office on 04.12.2012. He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 167 ITR 471 has held that when substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right injustice being done because of a non-deliberate delay. There is no presumption that delay is occasioned deliberately or on account of culpable negligence or on account of malafides. The litigant does not stand to benefit by resorting to delay, in fact he runs a serious risk. 8. The Hon'ble Supreme Court in the case of Vedabai Alias Vaijayanta Bai Baburao Patil Vs. Shantaram Baburao Patil reported in 122 taxmann 114 has held that the Court should adopt pragmatic approach. The distinction must be made between a case where there is inordinate delay and a case where the delay is of a few days. In the former case, the consideration of prejudice to the other party will be a relevant factor so the case calls for more cautious approach but in the later case no such consideration may arise and such a case deserves a liberal approach, no hard and fast rule can be laid down in this regard. The court has to exercise the discretion of the facts of each case keeping in mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application are fanciful, the courts should be vigilant not to expose the other side unnecessarily to face such litigation. (xi) It is to be borne in mind that no one gets away with fraud, misrepresentation or interpolation by taking recourse to the technicalities of law of limitation. (xii) The entire gamut of facts are to be carefully scrutinized and the approach should be based on the paradigm of judicial discretion which is founded on objective reasoning and not on individual perception. (xiii) The State or a public body or an entity representing a collective cause should be given some acceptable latitude." 10. Respectfully following the ratio laid by the Hon'ble Apex Court in the decisions cited (supra) we condone the delay in filing of the appeal for assessee's A. Y. 2007-08 and 2009-10 and these appeals are admitted for adjudication. 11. Now, we take up the ITA No. 4918/Del/2010 for A.Y. 2007- 08 as the lead case. 11.1 Facts of the case, in brief, are that the assessee filed its return of income on 01.04.2008 declaring total income "Nil". Regarding background and business of the assessee company, the assessee had submitted the following :- "The company is enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and facilitation of any customer. As the softwares are Standard forms, the customization is necessary considering the diverse situations. Also, a regular backup of trouble shooting is necessary if there are any unintended bugs / problems. The assessee company aims at trouble shooting from the USA establishment. For this purpose, it has a ready support services on a 24 X 7 basis. The problems of the clients are aimed at being sorted out on an offline basis. However, in case of necessity, the executives are required to visit the clients establishments and fix the problems. For all these jobs, separate service charges are levied. 13. Some of the details regarding the software and solutions provided by the assessee were obtained by the AO from the website. He noted that the software is delivered at the site of the end customer. There is a specific roll out plan and installation and implementation programme. During the same the employees of the customer are given training on how to use the same. The services including updates, maintenance, support etc. are part & parcel of the contract. The same is also verifiable from the nature of receipts of the assessee: Infosys HCL TOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is recognized that the training is needed to support the basic sales, implementation and support of software. h) Not only license but license, documentation, services, training, updates are provided. The configuration is also to be done. i) The software license provided by the assessee are upgradable and as claimed 'future ready'. Unlike sale, the software is not stand alone and the assessee keeps in continuous touch with its customer. j) The software are heavily priced vis-a-vis a normal computer / system. The software are feature rich and are capable of carrying out various activities-. These can carry out the activities which many person together will not be able to do. Moreover the speed of carrying out the processes is real time i.e. the process is carried out as and when the activity happens. k) The customer gives its own IP Products to the assessee so that the software developed by the assessee is compliant to them. That is why there is a clause of Infosys IP. I) The assessee is required to protect those IP. A long list containing those IP of Infosys are provided in the agreement itself. The list runs into number of pages and is highly technical. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e file of the DRP to consider the same once again. Subsequently the DRP vide order dated 23.12.2011 passed certain directions wherein they upheld the action of the AO in holding that the payment made by M/s. Infosys and HCL to the assessee is covered within the definition of royalty u/s. 9 (1) (vi) of the IT Act and/ or Article 12 of the Indo US DTAA. While holding so they relied on the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Company Limited and the decision of AAR in the case of Millennium IT Software Limited. 18. The AO thereafter passed the order u/s. 143 (3)/ 144 C on 27.12.2011 treating the software consideration of Rs. 2,01,51,292/-as royalty which is taxable at the rate of 15%. He further held that the services in connection are taxable as FTS as per Article 13 (4) (a) of the Indo US DTAA. 19. Aggrieved with such order of the DRP/ AO the assessee is in appeal before the Tribunal. 20. The Ld. Counsel for the assessee while strongly challenging the order of the AO/ DRP filed the following written synopsis :- "Part-Si- Regarding merits of the appeals 2.1 - Key issue involved In all the four (4) appeals, the key issue involved i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Copyright Act. 1957 Section 14 of the Indian Copyright Act, 1957 defines the term "Copyright". The same is defined as the exclusive right to do or authorise doing the following acts in respect of a work-following acts in respect of a work- Right Section 14(a) Section 14(b) Section 14(c) Section 14(d) Section 14(e) Literary, dramatic or musical work Computer programme Artistic work Cinematograph film Sound recording To reproduce y y y X X To issue copies y y y y X To perform work in public/ To communicate to public y y y y y To make film y y y X X To translate y y X X X To make adaption y y y X X To sell or commercially rent X y X y y To sound record X X X X y Copy of the Indian Copyright Act, 1957 is given from page no. 455 to 503. Various categories (..families..) of such artistic expressions are aptly categorised into various sub-sections of section 14 of the Copyright Act. From a close reading of section- 14 of the said Act, it transpires that; likely losses arising from duplication / copying / illegal exploitation, etc. are protected for various limbs of artistic expressions; depending upon, the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (^required to update fix the bugs, etc. Totally irrelevant contention since, issue involved is, what is the fate of a copyrighted product (i.e. a licence having restrictions of copying / duplicating, etc.) Issue of update / fixing bugs, etc. are typical warranties which come with every product. Moreover, the same is besides the present issue. Page-6 (Para-3) Concept of copyrighted product does not find mention in the ITA / DTAA / Copyright Act Copyrighted article is the result of the Copyright Act itself. Moment negative rights are introduced as regards copying / duplicating, a copyright becomes a copyrighted product. Many such copyrighted products are present in daily life such as - Recent book called ORIGIN written by author DAN BROWN, restricting users from copying the book, etc. Music CD of (say) singer, Gulam Ali, wherein, restrictions are applicable for copying, as written on the CD cover .... and so on Page-6(Para-4) Special Bench decision is not applicable since, facts herein were not considered in the said SB case of Motorola, This is rather a complex proposition. Any precedent has to be followed if facts are similar Page-6 (Para-5 and 6) SB decision in Motorol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y not any equipment. The DRP-I has also focused on the issue of copyright V. copyrighted article and left the other analogies of the learned AO at that. Appellant submits, at the same time, the PMS software license cannot be a copyright + patent + process + equipment. Analogy of the learned AO is incorrect. 2.9 - Summary on point of covered issue As per the data available, it transpires, there are three decisions of the Honourable Delhi High Court, wherein, ratio of Infrasoft (supra) has been followed. As such, it is submitted, the said Infrasoft ratio is deep rooted. Similar views is also expressed by the Honourable Madras High Court in the case of CIT V. Vinzas Solutions India P. Ltd. - 392 ITR 155. The said issue of software royalty taxation matter is posted for hearing before the Honourable Supreme Court in January 2019. The copy of the said order is given at page no. 639. Considering THe"3B decision, considering the jurisdictional High Court decisions, considering various Honourable Delhi and other ITAT decisions; the order of the learned AO and learned DRP-I may please be reversed and appeals be allowed." 21. The Ld. Counsel for the assessee also relied upon the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal to that of Infrasoft. Moreover, the Hon'ble Delhi High Court in the case of Infrasoft had also observed - "69. The Tribunal has held and rightly so that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred." Accordingly, in the following paragraphs, the facts of the present case are examined in the light of the decision of Hon'ble High Court in the case of Infrasoft Ltd. i. Nature of Contract - It may be noted that the clients of the assessee like Infosys, Tech Mahindra, Virtusa, 3i Infotech etc are engaged in the business of developing software themselves. As explained in the following paragraphs, the agreement between the assessee and its clients are more in the nature of "Software Development Agreements" than "pure sale of softwares as goods". The contract/agreement between the assessee and Infosys [Paper Book-3] and more specifically, the 'Statement of Work' [p.295 to 298] and 'Exhibit-C' [p.293] when analysed, clearly brings out the fallacy in the assessee's contention tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ograms, whether in source code or object code, as literary works under the Berne Convention, to which India has also acceded. It is in this context that the importance of the provisions of the agreement making available the source & object codes to the licensee must be examined. These are the codes which can be used to adapt, customize and integrate the systems of the client with that of the assessee so as to enable the client to create/prepare/develop derivative softwares/programs or new products which can be used by the 'end users' or can be commercially exploited. Cl.2.1 (ii) r.w. cl. 3.1(b) of the agreement clearly provides that Infosys can "modify and prepare derivative works based on the Software [supplied by the assessee], including, without limitation, incorporating the Software in whole or in part, into Infosys's own products and developing new products based on the Software." This is a very powerful provision which gives the right to the client not only to create derivative works, but also to incorporate the software supplied by the assessee in the existing 'products' and 'new products' to be developed by the client. It is in the context of these 'products' that the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that Infosys will own all worldwide right, title and interest in and to all such integration code and the assessee will assign to Infosys all of its right, title and interest in and to all such integration code, including all worldwide Intellectual Property Rights therein. Moreover, there are no restrictions to the number of copies/users to the software [including Infosys softwares where the software has been embedded]. All these provisions clearly establish the commercial exploitation of the software by Infosys. In fact, cl.13.4 [p.283] provides that Infosys and the assessee "shall make all commercially reasonable efforts to enter into a product marketing/distribution agreement under which the software (including software derivatives/software core derivatives) will be offered to other entities in the market for licensing." Towards this end, Cl. 10 [p.281] provides for the non-solicitation of the employees of each other. In the light of above, it may be seen that the nature of the transaction between the assessee and Infosys is materially different from the facts of Infrasoft. Coming back to legal principles enunciated by the Hon'ble High Court in the case of Infrasoft, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Special Bench of this Tribunal in the case of Motorola Inc. [2005-TII-10-ITAT-DEL-SB-INTL1, the appellant has transferred "something more" than merely a 'copyrighted article'. ■ Adaptation & Derivatives - As has been stated earlier, the Hon'ble High Court in para- 67 of its order quoted US regulations as per which "If a transfer of a computer programme results in the transferee acquiring any one or more of the listed rights, it is a transfer of a copyright right. " in the case of the assessee there is no dispute or doubt that "the right to prepare derivative computer programmes based upon the copyrighted computer programme" is one of such rights assigned to the clients by the assessee. Accordingly, the transaction between the assessee and Infosys and other clients involves transfer of 'copyright' rather than 'copyrighted material'. In this regard, revenue places reliance on the decision of Hon'ble ITAT, Delhi in the case of Elektrobit Automotive GmbH[2018-TII-166-ITAT-DEL-INTL1 wherein, on identical situation, it was held that the receipts by the assessee are in the nature of royalty on account of transfer of 'copyright' through derivative and embedded software program ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, can be viewed or treated as a restricted use of the product for internal business purpose of the licensee. Thus, application of various tests as regards of rights to ownership, copying, commercial exploitation etc. as has been discussed above clearly establishes what Hon'ble AAR held in the case of Dassault Systems [2010-TII-02-ARA-INTL] that the grantee/licensee practically step into the shoes of the owner/grantor/licensor and he enjoys the copyright to the extent of its grant to the exclusion of others. In addition to the decisions in the case of Infasoft Ltd. [supra] and Elektrobit Automotive GmbH [supra] revenue relies upon the following decisions - i. Airport Authority of India (AAR No.819 of 2009) ii. CIT vs. Synapsis International Old Ltd. (212 Taxman 454)(HC, Karnataka) iii. Citrix Systems Asia Pacific PTY (343 ITR 1 AAR)(AAR No. 822 of 2009) iv. Skillsoft Ireland Ltd. (AAR No. 985 of 2010) v. CIT vs Samsung Electronics Co. Ltd & others (345 ITR 499) (Kar) vi. Verizon Communications Singapore PTE Ltd vs ITO (361 ITR 575)(Mad) 23. The ld. DR drew the attention of the bench to the following observation at para 3.1 of the order of the AO :- "3.1 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by both the sides, perused the orders of the AO and DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is engaged in sale of licenses of its software product called as Project Management Software (PMS). The PMS is considered as a BI Tool i.e. Business Intelligence Tool. It assists the users in regulating and effectively utilizing programmer's time on a collective basis with efficiency. We find the amount received by the assessee from its customers for sale of software products / licenses were treated by the AO as royalty and he taxed the same at applicable rate of tax. According to the AO and Ld. DR the software is delivered at the site of the end customer. There is a specific role out plan and installation and implementation programme. During the same the employees of the customer are given training on how to use the same. The services including updates, maintenance support etc are part and parcel of the contract. Once the license is granted the assessee is responsible to maintain it as it is their proprietary product. After granting of license, the assessee keeps on b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) payments 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, trade mark, design or model, plan, secret formula 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 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 27. We find the issue as to whether software with restriction of copying etc is a copy right or a copy righted product has been considered and decided by various courts and different benches of the Tribunal. We find the Hon'ble Delhi High Court in the case of Director of Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer 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 Income-tax Act or under the DTAA. 92. 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 shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd {supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer 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 license 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esale of software and the payments made by it to THPL and others were on account of purchases made by the Assessee. The ITAT concurred with the aforesaid finding. It is also not disputed that in the preceding years, the AO had accepted the transactions in question to be that of purchase of software. The limited issue to be addressed is whether in view of these findings the amount paid by the Assessee could be taxed as royalty. 12. In the cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht purchase and sale of a product. According to the corpus juris secundum, the word 'royalty' means a share of the product or profit reserved by the owner for permitting another to use the property, the share of the product or profit paid by the owner; a share of the product or proceeds therefrom reserved to the owner for permitting the another to use the property; the share of the produce reserved to the owner for permitting another to exploit and use the property; a share of the profit, reserved by the owner for permitting another to use the property; the amount reserved or the rental to be paid the original owner of the whole estate. [Para 4] ■ The Madras High Court in CITv. Neyveli Lignite Corpn. Ltd. [2000] 243ITR 459/109 Taxman 369 has explained the concept of royalty as the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is a tailor-made to meet th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and maintenance services are inextricably and essentially linked to supply of software; where supply of software is itself not taxable as 'royalty', these services are also not royalty. 34. Respectfully following the decisions cited (supra) we hold that the payment received by the assessee from its customers from sale of software products/ licenses is not in the nature of the royalty u/s. 9(1)(vi) of the IT Act, 1961 and also as per article 12 (3) (a) and article 12(3) (b) of the Indo US DTAA. In our opinion the said amount received by the assessee is normal business income of the assessee on account of sale of copy righted products (licenses) and not taxable in India in the absence of permanent establishment. The various decisions relied on by the Ld. DR are not applicable to the facts of the case and are distinguishable. The grounds raised by the assessee are accordingly allowed. 35. Identical grounds have been raised by the assessee in the remaining appeals. Since we have already decided the issue in favour of the assessee by treating the amount received by the assessee company from sale of software products/ licenses as not taxable as royalty u/s.9 (1) (vi) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
