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TMI Blog2017 (11) TMI 1870X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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. See GUY CARPENTER CO. LTD. [ 2012 (5) TMI 31 - DELHI HIGH COURT] Accordingly, we delete the addition and allow this issue of assessee s appeal. - ITA No. 2204/Mum/2014, ITA No. 1203/Mum/2015 - - - Dated:- 16-11-2017 - SRI MAHAVIR SINGH, JM AND SRI G. MANJUNATHA, AM For the Appellant : Niraj Sheth, AR For the Respondent : Samuel Darse, DR ORDER PER MAHAVIR SINGH, JM: These two appeals by the Assessee are arising out of the orders of Dispute Resolution Panel-II, Mumbai, [in short DRP ] in Objection No. 163 97 dated 27-12-2013 30-10-2014 respectively. The Assessments were framed by the Deputy Director of Income Tax (IT)-2(1) Deputy Commissioner of Income Tax (IT)-4(1)(2), Mumbai (in short DDIT DCIT ) for the assessment years 2009-10, 2010-11 vide order dated 3001-2014 29-12-2014 under section 143(3) of the Income Tax Act, 1961(hereinafter the Act ). 2. The first issue in ITA No. 2204/Mum/2014 for AY 2009-10 is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so perused the relevant finding given in the impugned orders as well as the material referred before us at the time of hearing. As stated earlier, the assessee had entered into service agreement (MSA) with WIPRO/IBM to provide IT services to various Shell Entities. Under this agreement, the assessee provides restricted software / network access and related IT support services to WIPRO/IBM. Before us, the learned counsel submitted that the relevant articles and clauses given in the Master service agreements are very relevant to understand the nature and concept of software services provided as well as to examine, whether there is any payment received, which can be reckoned as royalty within the terms of Article 12(4) of India Netherland DTAA, because the assessee has sought benefit under the treaty in terms of section 90 of the IT Act. The relevant terms of service agreement, copy of which are appearing in pages 35 to 40 of the paper-book are reproduced here under: Preamble WHEREAS A. SITI and IT Service Provider have entered into a MSA ('as defined' below) under which IT Service Provider, either directly or as a subcontractor of an affiliate of IT Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t practical to Include a list to this Agreement of all the mandatory GI client software that may be provided by SITI as part of the GI Services, because the list of mandatory GI client software is subject to regular change, however the mandatory GI client software provided to the IT Service Provider shall be the same as the mandatory GI client software provided by SITI to other Shell Companies that use the same equipment as used by the IT Service Provider in order to provide the MSA Services. STO Services shall mean the services as specified in Exhibit A, section II ARTICLE 3. PROVISION OF SERVICES. SITI shall provide the IT Service Provider with the Services. SITI shall at its sole discretion be entitled to subcontract any part of the Services to a Third Party orThird Parties, but S117 shall remain solely responsible for the provision the Services. The IT Service Provider shall not subcontract nor delegate any of its rights and/or responsibilities under this Agreement to a Third Party without SITPs prior written consent. In the event of delegation or subcontracting by the IT Service Provider the IT Service Provider shall remain solely responsible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally add or remove certain software from the GI software and to stop the IT Service Provider from accessing and/or using certain Optional Software or request the Service Provider to stop accessing and/or using certain Optional Software. SI71 also reserves the right to unilaterally amend the specific terms and conditions for access and/or use of the GI software and/or Optional Software, as may be set out in Exhibit A, section III. In the event that SUL at its sole discretion, stops the IT Service Provider from accessing and/or using certain Optional Software, or requests the IT Service Provider to slop accessing and/or using certain Optional Software, and the IT Service Provider does require such Optional Software in order to be able to provide MSA Services, SITI shall use reasonable endeavours to provide the IT Service Provider with sufficient prior notice in order to enable IT Service Provider to acquire a license or any other permission from the applicable Third Party licensor to access and use such Optional Software or a substantial equivalent, so that the IT Service Provider shall continue to be able to provide MSA Services. In the event that SITI requests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice Provider's and/or the Service Personnel's misuse or modification of the GI software or Optional Software; (b) the IT Service Provider's and/or the Service Personnel s .failure to use corrections or enhancements made available directly or indirectly by SITI; or (c) the IT Service Provider's and/or the Service Personnel s use of the GI software or Optional Software otherwise than in accordance with this Agreement. Provided the exceptions of the foregoing paragraph do not apply, if the IT Service Provider's and/or the Service Personnel's access or use of the GI software or Optional Software in SITI's reasonable opinion are likely to be held to be infringing, SITI shall at its option and expense take one or more of the following actions in order to procure the right for the IT Service Provider and the Service Personnel to continue to use and/or access the GI software or Optional Software in question; I. replace the GI software or Optional Software in question with a no infringing equivalent. i.e. having substantially equivalent functionalities and features, provided however that such non-infringing equivalent w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, for whatever reason, the IT Service Provider shall ensure that all Service Personnel immediately slop using and/or accessing all GI software and Optional Software and the IT Service Provider shall return to SITI as soon as reasonably possible all the GI software and all Optional Software together with the associated documentation, including ('but not limited to) manuals relating to the GI software and Optional Software, license certificates etcetera, which are in the IT Service Provider's possession. 8.3. Termination, of Provision of a Sub Service. In the event that the IT Service Provide,' no longer requires a certain Subservice provided under this Agreement in order to provide MSA Services, the IT Service Provider shall inform SITI there and the provision of such Sub-service will be terminated and the IT Service Provider shall n longer be charged to Fees applicable to the Sub-service iii quest/u/i. If provision by SIT! to the IT Service Provider of access to and/or use a/UI software and Optional software is terminated, the IT Service Provider shall, unless the UI software and all Optional Software has already been remotely removed by SITI, return to SITI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exhibits of this Agreement the terms and conditions and Exhibits of this Agreement shall prevail. The provision of the Services shall be governed by the terms and conditions in this Agreement; the IT Service Provider acknowledges that the SITI delivery terms. shall not apply to provision of the Services by SITI to the IT Service Provider. In the event that Service Personnel encounter problems while using the Services the Service Personnel shall follow the problem management procedures/instructions as provided by SITI. Section II STO Services STO services are the end-to-end connectivity services provided by SITI, by means of which the IT Service Provider shall be provided with a connection to (certain parts of) the IT network of Shell Companies. Section III In addition to the terms and conditions stated in this Agreement the following specific terms and conditions of access and/or use apply: Al the date of signature of this Agreement, other than the provisions already set out in this Agreement, no specific terms and conditions of access and/or use the GI software and Optional Software provided by SITI there unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the learned AO, because the assessee has not allowed WIPRO/IBM to use the process by using the software as they do not have any access to the source code. What is allowable for their use is their software product as such and not a process embedded in it. In any case, he submitted that by making use of or having access to the computer programs embedded in the software, it cannot be said that WIPRO/IBM are using the process the process that has gone into the software or that they have acquired any rights in relation to the process as such. Lastly, he contended that access to software/network is not the use of copyright but the use of copyrighted article and, further referring to the relevant definition in section 13 14 of the Copyright Act, he submitted that there is no use or right to use of any copy right and does not fall within the ambit of royalty as covered under DTAA. In support he relied upon the following decisions before us:- DIT v. Infrasoft Ltd [2013] 39 taxmann.com 88 (Del- HC) ADIT v Baan Global B V [2016] (ITA 7048/Mum/2010 CIT v. Halliburnton Export Inc. [2016] ITA 363/2016 (Del-HC) DIT v. Nokia Network OY [2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation 2 to S.9(1)(vi), inserted by the Finance Act 1976 w.e.f 01-061976. iv) The agreements under consideration in the case of Siemens AG, supra which gave rise to the impugned income were entered into before 01-06-1976 when there was no definition of Royalty both under the I.T. Act and under the DTAA. The A.Y. under consideration in Siemens AG supra was A.Y.1979-80. v) Section 9(1) (vi) upto and including Explanation 2 are substantive provisions as inserted by Finance Act 1976 and thereafter, Explanation 3 to 6 and explanation below S.9(2) are only clarificatory provisions inserted subsequently. vi) For the purpose of the present appeal, the definition of royalty as applicable has been defined both under the DTAA as well as I.T. Act and the issue is regarding the application of Explanations (clarificatory provisions) inserted in the Act into the DTAA by virtue of article 3(2) of the DTAA. vii) The said decision in the case of Siemens AG, supra was rendered in 2008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act 2007 doing away with the requirement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat:- Firstly, any kind of right granted to WIPRO/IBM cannot be passed on or transferred to any other person and only WIPRO/IBM is legally permissible to exercise this right. Secondly, the right to access/use of software is again subject to various terms and conditions, which has been highlighted under Article 4 The right which has been given to WIPRO/IBM is not unfettered but has a very limited use for the own business purpose and not otherwise. Thus, only limited right to access/use the software has been provided to the UT service provider for its own business purpose and they do not get any right in the said software. The access to software is not for use of any copyright albeit for a copyrighted articles during the course of providing service. The agreement clearly envisages that WIPRO/IBM shall use the software only for providing services to Shell entities and cannot alter or modify the software. Since the assessee is a resident of Netherland therefore, such a payment has to be seen in terms of Article 12(4) of DTAA, which reads as under:- The term royalties as used in this Article means payments of any kind recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into account for understanding the concept. Section 14of the said Act defines the copyrights to mean as under: 14. Meaning of copyright For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise 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 make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; ( vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in subclauses (i) to (vi); (b) in the case of a computer programme,- (i) to do an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no copyright in the computer programme or software. Here in this case, none of the conditions mentioned in section 14 of the Copyright Act is applicable as held by the learned CIT(A); and is also is evident from the terms of MSA, because no such rights has been given by the assessee to the IT Service providers. 14. Further by making use or having access to the computer programs embedded in the software, it cannot be held that either WIPRO/IBM are using the process that has gone into the software or that they have acquired any rights in relation to the process as such. The software continues to be owned by the assessee and what WIPRO/IBM is getting mere access to the software. The source code embedded in the software has not been imparted to them. Hence, there is no use or right to use of any process as held by the learned AO. Hence, the finding of the learned CIT(A) that the payment in question cannot be reckoned as royalty is factually and legally correct and the same is upheld. 15. Apart from that now there are various decisions of Hon ble High Court including that of Hon ble Delhi High Court in case of DIT vs. Infrasoft Ltd., reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. 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 nonexclusive 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. Xxx xxxx xxxxx xxxxx xxxxxx xxxxx xxx xxxxxx 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the assessee also. This ratio and principle has been followed and reiterated again in the case of Principal CIT vs M.Tech India Pvt Ltd (supra) and again in the decisions of Alacatel Lucent, Canada, reported [2015] 372 ITR 476 , wherein Hon ble Delhi High Court relying upon its earlier two decisions in the case of DIT vs Ericson , [2012] 343 ITR 470 and DIT vs M/s Nokia Networks, reported in 358 ITR 259 (Del) concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. The relevant observation of the High Court in Alcatel Lucent (supra) in this regard reads as under: We have noticed, at the outset, that the ITAT had relied upon the ruling of this Court in Director of Income Tax V. Ericsson A.B. (2012) 343 ITR 470 wherein identical argument with respect to whether consideration paid towards supply of software along with hardware rather software embedded in the hardware amounted to royalty. After noticing several contentions of the revenue, this Court held in Ericsson A.B. (supra) as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become goods . We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. TAXPUNDIT.ORG Sale is not just of the media which by itself has very little value. The software and the media and case laws in favour of the assessee including that of the Delhi High Court on several occasions, we are inclined to follow the decision and proposition laid down by the Hon ble Delhi High Court. Thus, in view of the finding given above, we uphold the order of the CIT(A) that the payment received by the assessee for sums amounting to ₹ 3,75,25,291/- does not amount to royalty within the meaning of Article 12(4) of IndoNetherland DTAA and accordingly, the same is not taxable in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today, supra note 22 recognizes that the question will have to be decided and the submission argued, Verizon, supra note 23 cites no reason for the extension of the amendments to the DTAA. As regards the decision of Hon ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra), referred to by d. CIT DR, the Hon ble Delhi High Court has also dealt with this point and made distinction that the issue and situation before the Hon ble Bombay High Court was materially different and also the term royalty was not defined in the German DTAA. 17. Thus, we hold that for all the years the payments received by the assessee from WIPRO/IBM in pursuance to the MSA cannot be treated as royalty under Article 12(4) of the India-Netherland DTAA. Thus, the matter is decided in favour of the assessee and against the revenue. 4. The learned Counsel then took us through the findings of the DRP, who is relied on the CIT(A) s decision for AY 2008-09 and DRP has also gone thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 the same, we allow this issue of the assessee s appeal. 7. The next issue common issue in both the appeals of assessee is as regards to taxability of payment received by assessee from IT support services which constitutes Fees for Technical Services ( FTS ) and royalty under the India-Netherlands Treaty DTAA. For this Assessee has raised following ground:- Payments towards IT Suport fees held to be Fees for Technical Services ( FTS ) and royalty. 4. Erred in holding that payments received by the Appellant for IT support services constitutes FTs and royalty under the India-Netherlands DTAA. 5. Failed to appreciate that IT support services do not make available any technical knowledge, skill, experience etc.to the services recipient under Article 12 of the IndiaNetherlands DTAA and hence not subject to tax in India. 6. Erred in alternatively holding that the receipt from IT support services qualify as Royalty under the India-Netherlands DTAA. 8. The facts and circumstances are exactly ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 degree of persuasive value. In any case, this technical know-how is of an enduring nature and has a direct nexus with the assessee s business. 5.3.2 considering the above factual and legal matrix, we are of the opinion that the action of the AO in treating the above receipt as fee for technical services does not require any interference. The alternate arguments on taxability of the receipt as royalty do not require any direction from the penal as we have already upheld the taxability of the services as fees for included service. 10. The learned Counsel for the assessee explained the facts that the SITI BV is a company registered in the Netherlands. SITI BV is in the business of providing information technology ( IT ) support services. During the financial year ended 31.03.2006 SITI BV provided IT (mobile office) support services, IT helpdesk and network infrastructure related services to Indian customers. SITI BV is a tax resident of The Nether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the term 'royally' as follows: Payments of any kind received as a consideration for the use, or the right to use, any copyright of literacy, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 12. From the above, it is clear that SITI BV is engaged in providing IT services to Indian entities but does not provide any right to use any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Even under the agreements entered into with WIPRO and IBM, SITI BV only provides them access to the software i.e. computer Programme. SITI BV does not provide them the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 royalties or fees for technical services; and (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10% of the gross amount of such royalties and fees for technical services. (3)** ** ** (4) For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsidiary to the application of enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or (b) are ancillary and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, 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.B. Boda was duly licenced by the Insurance Regulatory Development Authority to transact reinsurance business in India. 11. The Tribunal also observed as under: - 27. In the illustrative transaction, New India Insurance Co. Ltd. in India has entered into an agreement to reinsure on an Excess Loss basis the catastrophe risk arising from its primary insurance cover in conjunction with J.B. Boda and Alsford Page and gems Ltd. (the reinsurance brokers). The terms of the agreement specifies that the assessee in conjunction with J.B. Boda are recognized as intermediary, through whom all communications relating to this agreement shall pass. The terms of the agreement further provides that the assessee will provide all the details of agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted 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 transacting, the Tribunal came to a conclusion that the payment received by the assessee could not be regarded as 'fees for technical services'. Further, more, the Tribunal also held that such receipts would not amount to fees for technical services as the make available clause contained in article 13(4)(c) had not been satisfied in the facts and circumstances of the present case. 13. In our view, the Tribunal has arrived at these conclusions purely on assessing the factual matrix of the case at hand. The findings are in the nature of factual findings and, therefore, according to us, no substantial question of law arises for our consideration, particularly, because the learned counsel for the Revenue was unab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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