9911796707
TMI Blog2017 (11) TMI 1870X X X X Extracts X X X X X X X X Extracts X X X X ..... and Logica for providing network access to use copyright software in the nature of royalty even though the same is governed by Double Taxation Avoidance Agreement ('DTAA') of India-Netherlands. For this assessee has raised following grounds: - "Payments received from key application services ('KAS') for network access etc held to be royalty. 2. erred in construing the payments received from KAS providers i.e. IBM, WIPRO and Logica for providing network access to use copyrighted software to be in nature of royalty, on the alleged ground that payment received by the appellant is consideration for grant right to use various softwares to KAS. 3. Failed to appreciate that the payment received by the appellant company for software access fee is payment for use of copyrighted software and not for any copyright over such software and hence does not constitute royalty under the India - Netherlands Double Taxation Avoidance Agreement ('DTAAA') and the Act." 3. At the outset the learned Counsel for the assessee stated that this issue is squarely covered by Tribunals decision in assessee's own case for AY 2006-07 in ITA No. 5051/Mum/2009, wherein, the Tribunal has considered the exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed to provide certain Services (as defined below). Article 1. Definitions: "GI Services "shall mean the services as specified in Exhibit A. section I "Intellectual Property Rights" of a Party means patents, copyrights, designs, trade or service marks (whether or not registered), rights in inventions and confidential information, semiconductor topography rights, database rights or other similar rights in any country and any applications for registration of any of the foregoing, to the extent the Party in question is entitled to grant licenses there under. ... "MSA "shall mean the Master Service Arrangement (as may be amended from to time) for the provision of offshore IT services as entered into between srn and IBM Netherland B. V., with contract number LDMO4/00005. ... "MSA Services" shall mean the IT services provided under MSA by the IT Service Provider either directly or as a sub-contractor of affiliate of IT Service Provider, as further described in a Statement of Work entered into by the IT Service Provider (or an IT Service Provider Affiliate,) and a Shell Company. "MSA Service Area" shall mean the physical separated and secured area as described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions of access and/or use as may be set out in Exhibit A, section III (as may be amended from time to time), if any. Optional Software. In addition to access to and/or use of the GI software, the IT Service Provider may, in order to provide the MS'A Services agreed in certain Statements of Work, need to access and/or use certain Optional Software. In such case the IT Service Provider 01 Focal Point shall request SI11 the right to access and/or use the Optional Software in question in accordance with the Optional Software Ordering Procedures. SITI in its sole discretion may (but is under no circumstances obligated to) grant the IT Service Provider the right to access and/or use the Optional Software in question. The IT Service Provider GI Focal Point shall only request SITI for access to and/or use of Optional Software, if the IT Service Provider requires such access and/or use in order to provide the MSA Services agreed in certain Statements of Work. The IT Service Provider shall ensure that the IT Service Provider GI Focal Point shall be duly authorized to financially commit the IT Service Provider for the order placed by the IT Service Provider GI Focal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soon as reasonably possible return to SITI such Optional Software together with any associated documentation, including (but not limited to) manuals relating to the Optional Software in question as well as license certificates etcetera which may be in the IT Service Provider's' and/or Service Personnel's possession. Upon request by SITI, the IT Service Provider shall inform SITI of the numbers and identities of the Service Personnel accessing and/or using the GI software and/or Optional Software. Subject to applicable Law, SITI shall have the right to log into and monitor the IT Service Provider's and Service Personnel's access to and use of any of the GI software and Optional Software at any time without notice. The IT Service Provider shall permit SITI or its authorized representative's at all reasonable times, to audit the IT Service Provider's and Service Personnel's access to and use of the GI software and Optional Software. The IT Service Provider shall cooperate with S111 in carrying out such audit. ARTICLE 5. INDEMNITY. 5.2.1. By SITI. SITI will defend, indemnify and hold harmless the IT Service Provider against any losses, damages, clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibit in which case the IT Service Provider shall ensure that all Service Personnel immediately stop using and/or accessing such GI software and/or Optional Software and upon request of SITI the IT Service Provider shall, unless the GI software or Optional Software in question has already been remotely removed by SITI, as soon as reasonably possible return to SITI such GI software together with any associated documentation, including (but not limited to) manuals relating to the GI software, license certificates etcetera which are in the IT Service Provider's and/or Service Personnel's possession. The foregoing slates SITI's entire liability to the IT Service Provider in respect of the infringement of the Intellectual Property Rights of any Third Party. ARTICLE 6. OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS. The Intellectual Property Rights in the GI software and Optional Software are owned by SITI and/or SITI's Third Party licensors and remain vested in SITI or its Third Party licensors (as applicable). SITI is not expected to make, create or generate any Work Products in the performance at the Services under this Agreement, however in the event that SITI does ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /or Optional software on certain equipment (such as, but not limited to PC's), and such equipment is no longer used by the IT Service Provider in order to provide MSA Services, the IT Service Provider shall, unless expressly otherwise agreed in writing by SITI, ensure that all the GI software and/or Optional Software on such equipment is removed as soon as such equipment is no longer used for provision of the MSA Services. ARTICLE 17. NETWORK ACCESS In order for SITI to provide the Services and for the IT Service Provider and Service Personnel 10 make use of the Services, the Service Personnel shall be allowed to access certain parts of the IT network of Shell Companies. IT Service Personnel shall ensure that the Service Personnel only access and use the IT network of Shell Companies in so, far as required in order to provide the MSA Services and shall comply with all further instructions as may be provided from time to time by SITI with respect to the IT Service Providers access and use of the IT network of Shell Companies. Exhibit A: Services Section I GI Services The, following services are components of the GI Services and shall be provided by SITI under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide MS services shall use and/or access the GI software and/or Optional software; and 2) Such Service personnel shall only access and/or use the GI software and optional software in a normal operational manner and only in so far as strictly necessary to provide MSA Services; and 3) Unless otherwise agreed with SITI, the GI Software and operational software shall only be accessed from and used in the MSA Service Area. He pointed out Article 17 stipulates that in order to provide services to Shell Entities, WIPRO/IBM shall be allowed to access certain parts of the IT network of the Shell Companies. Such right is not unfettered but again is limited to use for the own business purpose and not otherwise. Similarly, Article 6 outlines the ownership of the IPRs and clearly states that GI/operational software shall at all times remain vested with the assessee. Similarly, termination agreement under Article 8.2 provides the immediate stop of access of using GI/operation software and the party shall return the software along with many other things. 10. The learned counsel further submitted that all these terms and conditions as enshrined in MSA will only go to show that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amendment brought in the section 9(1)(vi) by insertion of Explanation 4 to Finance Act 2012 with retrospective effect, covers such kind of payments for use or right to use of a computer software under the ambit of royalty. Such an amendment has to be read into the Treaty, because the scope of definition and meaning of 'royalty' under the Act and DTAA are by and large same. In support, he strongly relied upon the decision of CIT vs. Siemens Aktiongesellschaft, 310 ITR 320; and Vaicom 18 Media Private Ltd. vs. ADIT (2014) 162 TTJ 336. He gave a small writeup on this aspect, which for the sake of ready reference is reproduced below: 1. On the issue whether the Amendments/Explanations inserted in the IncomeTax Act can be read into the DTAA or not, in my most respectful submissions, the Bombay high court decision in the case of CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom HC)rendered in the facts peculiar factscase has notbeen appreciatedin the proper perspective in various decisions of the Delhi high Court and Mumbai Tribunal relied upon by the assessee. While appreciating the Siemens AG, supra, the following facts may kindly be kept in mind: i) The exact q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mens AG, supra, nowhere it is mentioned that amendments in the I.T. Act cannot be read into DTAA. ii) The nature of services rendered in the said case was found to be not Royalty under the DTAA though found to be Royalty under the Act (post 01-06-1976). Those services were found to fall under the expression "commercial or industrial profits" as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. Thus, the provisions of DTAA being more beneficial to the assessee were preferred over the provisions of the I.T. Act. iii) In paras 13, 22 and 28 of its order, the Hon'ble HC has approved the insertion of Explanation below S.9(2) inserted by the Finance Act 2007, thereby implying that the Clarificatory Explanations could be read into modern DTAAs. iv) Mumbai Tribunal, in the case of Viacom 18 Media (P.) Ltd.(2014) 162 TTJ 336 (Mum) has explained the import of Bombay HC decision in right perspective in paras 16 and 17 of its order while rejecting the assessee's argument that the HC has held that amendments in the Act cannot be read into DTAAs. v) The Bombay HC has approved ambulatory approach (para 22) to interpretation of treaties against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting 'royalty' in Para4 is for a consideration for the 'use of' or the 'right to use' any copyright.......... The key phrases are "for the use" or "the right to use any copyright of"; "any patent......., "or process", "or for information.........,"; "or scientific experience", etc., are important parameter for treating a transaction in the nature of "royalty". If the payment doesn't fit within these parameters then it doesn't fall within terms of "royalty" under Article 12(4).The computer software does not fall under most of the term used in the Article barring "use of process" or "use of or right to use of copyrights" Here first of all, the limited use of software cannot be held to be covered under the word "use of process", because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) In the case of sound recording, - (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation 13. Thus, the definition of 'copyright 'in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the material object, copyrighted. Copyright is an intangible incorporeal right 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 in 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. 88. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 copy righted 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 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. 93. The licensee has been prohibited from copying, decompiling, deassembling, or reverse engineering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software". The ratio of the above decision clearly clinches the issue which is applicable in the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services Vs. State of Andhra Pradesh (2004) 271 ITR 401 (SC), wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted: - "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The aforesaid decision also takes care of all the arguments relied upon by the ld. CIT DR including that of the Verizon Communications Singapore Pte. Ltd. The Hon'ble High Court has specifically clarified as to why the said judgment of Madras High Court cannot be applied in such cases after observing as under:- "31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I, [2014] 361 ITR 575 (Mad), the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies Hindustan Ltd. & Wipro Ltd., It is held that payment received by the appellant is consideration for grant of right to use various software's to IBM Wipro under licence and therefore, it is taxable as "royalty". Hence, the first ground of appeal is dismissed". In conclusion, considering the above factual and legal matrix, we are of the opinion that the action of the AO in treating the above receipt as royalty does not require any interference. 5. In view of the above, the learned Counsel for the assessee stated that the Tribunal in assessee's own case has taken the view that the payments received by the assessee from WIPRO, IBM and Logica in pursuance to the MSA cannot be treated as royalty under Article 12(4) of the Indian-Netherlands DTAA. 6. Exactly on identical facts, this was confronted to the learned CIT DR, he fairly agreed that the issue is covered by the Tribunal's decision. After hearing both the sides and gone through the facts of the case, we find that exactly on identical facts the issue is covered by Tribunal's decision for AY 2006-07 and 2007-08 in ITA No. 551/Mum/2009 and 3818/Mum/2011 respectively, vide order dated 15-03-2017. Respectfully following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or knowhow in future on his own". Here, information technology relating to design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system is provided to the Indian entity whichis applied in running the business of the Applicant and the employees of the Applicant would get equipped to carry on these systems on their own without reference to the French Company, when the IT Agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the agreement on its expiry. We are of the view that the services provided under the IT agreement are in the nature of Fees for Technical Services and taxable under the DTAA as well as under the Act. Though the ruling is technically not binding in the present case, the ratio and logic followed by the Hon'ble Authority have very high deg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -services provided by SITI BV to she IT Services Provider wider this Agreement, which Sub-services include the (if Services, the STO Services and she provision by SITI BV to the IT Service Provider and Service Personnel of access to and/or use of GI software and/or Optional Software ...... 11. Further, SITI BV is company incorporated in The Netherlands. SITI BV is a tax resident of The Netherlands eligible to claim the benefits conferred by the Double Taxation Avoidance Agreement entered into between India and The Netherlands (Treaty'). Section 90 of the Act read with the Circulars and several judicial precedents issued thereunder provide that a non-resident taxpayer is eligible to be assessed as per the provisions of the Act or as per the provisions of the relevant double taxation avoidance agreement, whichever is more beneficial. SITI BV is a non-resident for Indian tax purposes. Accordingly, SITI BV could be assessed as per the provisions of the Actor as per the Treaty, whichever is more beneficial to SITI BV. IN view of the same, the non-taxability of the services rendered by SITI BV has been examined under the provisions of the Treaty. Article 12(4) of the Treaty defines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RTICLE 13- 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 law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) In the case of royalties within paragraph 3 (a) of this Articles, and fees for technical services within paragraphs 4 (a) and (c) of this Article,- (i) during the first five years for which this Convention has effect; (aa) 15% of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first mentioned Contracting State or a political sub-division of that State, and (bb) 20% of the gross amount of such royalties or fees for technical services in all other cases; and (ii) during subsequent years, 15% of the gross amount of such royalti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal plan or technical design. According to the Tribunal this "make available" condition has not been satisfied inasmuch as no technical knowledge, experience, skill, know-how, processes, have been made available by the assessee to the insurance companies operating in India. It also does not consist of the development and transfer of any technical plan or technical design. 10. The Tribunal examined the evidence available on record in order to return a finding on the issue as to whether the payments received by the assessee from the insurance companies operating in India would fall within the expression 'fees for technical services' as appearing in article 13(4)(c) of the DTAA read with section 9(1)(vii) of the said Act. While doing so the Tribunal, inter alia, found that the assessee company was an international reinsurance intermediary (broker) and was a tax resident of United Kingdom. Further, that it was a recognized broker by the financial services authority of United Kingdom. It was also an admitted position that the assessee did not maintain any office in India and that it had a referral relationship with J.B. Boda reinsurance (Broker) Pvt. Ltd of Mumbai and that J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal reinsurer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for competitive proposals. Based on the various offers or proposals given by the international reinsurance brokers, like the assessee, to J.B. Boda, the latter would present various options to the originating insurer in India, which would take a final decision in the matter. Based on the decision of the originating insurer in India, the policy terms would then be agreed upon and the risk would be placed with the international reinsurer. It was also pointed out that as per the normal industry practice, the reinsurance premium net of brokerage of 10% as per the policy contract is remitted to the assessee, i.e., reinsurance brokers, for onward transmission to international reinsurers. The intermediation fee which is another word for brokerage is paid separately by the originating insurance in India to J.B. Boda, the international reinsurance brokers like the assessee and other intermediaries, based on a mutually agreed ratio which accounts for their relative contribution in the reinsurance process. 12. Based on this manner of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Advance Rulings was correct in not looking into the Indo-Portugese DTAA, but insofar as the Indo-USA DTAA is concerned, a provision similar to that DTAA has been incorporated in the Indo-Netherlands DTAC by virtue of paragraph 5 of Article 12 of the same, whereby the very same make available clause, which is to be found in the DTAA between India and USA read with the memorandum of understanding connected therewith, has been incorporated into Indo-Netherlands convention by way of amendment on 30.08.1999, by notification No. S.O. 693 (E) [reported in (1999) 239 ITR (Stat) 56]. It is evident that the Authority for Advance Rulings had not considered the said amendment."
14. In view of the above, we are of the view that the concept of 'make available' of technical services that such receipts would not amount to fee for technical services so as to the "concept of make available clause' contained in Article 13(4)(c) of the treaty has not been satisfied. Accordingly, we delete the addition and allow this issue of assessee's appeal.
15. In the result, both the appeals of assessee are allowed.
Order pronounced in the open court on 16-11-2017. X X X X Extracts X X X X X X X X Extracts X X X X
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