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TMI Blog2018 (5) TMI 1957X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical services/royalty taxable @ 10% as per article 12 of DTAA. 2.The assessee has raised the following effective grounds of appeal against the impugned order passed by the Assessing Officer:- "On the facts and circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP: General 1. Erred in assessing the total income at Rs. 58,69,42,743 as against returned income of Rs. 66,870 offered by the Appellant. Receipts being reimbursements does not constitute ' income' 2. Erred holding that the payments received by the Appellant during the year, constitutes 'income' without appreciating that the receipts were reimbursements being in the nature of cost allocation without markup and hence does not constitute 'income' under section 2(24) of the Act. Payments received for providing access to use copyrighted software held to be royalty 3. Erred in construing the payments of Rs. 25,21,84,024 received by the Appellant for providing network access to use copyrighted software as royalty taxable under section 9(1)(vi) of the Act as well as under Article 12 of India-Netherlands Double Taxation Avoidance Agreement (India Netherlands D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement to provide IT services to Shell Group entities including its entity in India. In order to provide such IT services by WIPRO and IBM, they were required to have access to network and software of the assessee company. During the financial year relevant to the assessment year under consideration, the assessee company received the following payments from the 'Key Application Service' providers i.e., IBM, WIPRO, Logica as well as Shell group entities for providing access to software: S. No. Name of Entity Total Invoice Amount (INR) 1. Accenture Services 64,513 2. IBM India Pvt. Ltd. 1,71,22,435 3. Logica CMG Pvt. Ltd. 6,39,949 4. Shell India Markets Private Limited 22,61,39,537 5. Shell Gas LPG 261 6. Shell MRPL Aviation Fuels & 1,29,601 7. WIPRO Technologies 80,87,728 Grant Total 25,21,84,024 4. The AO held that the payment received by the assessee for network access and related services for the right of access and use of software which would qualify as royalty under clause 4 of Article 12 of the DTAA between India and the Netherlands, therefore, the said amount would be taxed @ 10% as per Article 12 (2) of the DTAA with the Netherlands. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned in section 14 of the Copyright Act is ápp1icable 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 WJPRO/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 [20131 39 Taxmann.com 88, wherein host of other decisions have been referred and relied upon. In the A.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyrighted 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 piôd.t 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts 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 license authorization device to Infrasoft. Xx xxxx xxxxx xxw xxxxxx xxm w xxx. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 us 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: 54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above that 1,4eiftSsessee did not have any business connection. in India. have also held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the form of books or (In case of painting) or computer discs or cassettes, marketed would become "goods". We see no difference 4dveen 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 Rs. 3,75,25,2911- does not amount to "royalty" within the meaning of Article 12(4) of Indo-Netherland DTAA and accordingly, the same is not taxable in India. Since, admittedly, the assessee has no PE in India; therefore, same cannot be taxed as business income under Article 7. Accordingly, ground raised by the revenue stands dismissed." The aforesaid decision clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regard the decision of Hon'ble Bombay High Court in the case of CIT vs Siemens Aktiongesellschaft (supra), referred to by d CIT DR, the kmb1e 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." 10. Since, the coordinate Bench of the Tribunal has decided the identical issue in favour of the assessee in assessee's own case for the A.Ys. 2006-07, 2007-08 and 2008-09 discussed above, we respectfully following the decision of the co-ordinate Bench decide this issue in favour of the assessee. Accordingly, Ground No. 3 and 4 of the assessee's appeal is allowed. 11. The assessee durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that payments received by the Appellant for IT support 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 India- Netherlands 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 IndiaNetherlands DTAA." 8. The facts and circumstances are exactly identical in both the AYrs i.e. 2009-10 and 2010-11 and also the grounds raised are identically worded hence, we will take- the facts from 2009-10. 9. The learned Counsel for the assessee, first of all, took us through the findings of the DRP on the issue which is recorded in Para 53 as under: "5.3 Discussions and directions of DRP 5.3.1 We have considered the draft assessment order, submissions of assessee and material. We have seen that under the Master Services Agreement, the assessee SITI BV has furnished technical and advisory services to various clients based in India. The delineated services are significantly technical in nature and the resultant fees are liable to be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. SIT! BV is in the business of providing information technology (IT') support services. During the financial year ended 31.03.2006 SIT! 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 NetherIand and is eligible to claim benefits under the Double Taxation Avoidance Agreement entered into between India and The Netherlands. He explained that SITI BV is in the business of providing information technology support services SITI BV typically, provides helpdesk services-and network infrastructure services to Shell group companies comprising. Information Technology (II) support for solving any IT related problems faced by users i e any problem faced by users for accessing any application software c-mails, Computer repairs and maintenance etc. desktop laptop and workstation support, Services related to Wide area network ('WAN') arid Local area network ('LAN') for connection to the global servers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 use the copyright embedded in the software. In other words, WIPRO, IBM are not permitted to make copies and sell the software. Under the Services Agreements, WIPRO and IBM-have been granted the mere under the right in the copyrighted software and not the right of, use of-copyright'. Whereas use of copyright' encompasses exploitation of the rights embedded in a copyright but a mere user right is a limited right and consideration paid for Such user right cannot be regarded as consideration for use of or right to use a copyright. In view of the above, the learned Counsel for the assessee stated that the issue is fully covered by the decision of Hon'ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd (2012) 20 taxmann.com 807 (Del-HC), wherein India-UK DTAA was und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received, or Make available technical knowledge, experience. skill, knowhow or processes, or consist of the development and transfer of a technical plan or technical design. 5. The definition of fees for technical services in paragraph 4 of this Article shall not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricable and essentially linked, to the sale of property, other than property described in paragraph 3 (a) of this Article; (b) For services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) For teaching in or by educational institutions; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifies that the assessee in conjunction with J.B. Bode 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 endorsements to the reinsurers by e-mail or facsimile and shall submit the slip policy to XIS (Lloyd's processing market) for signing. The assessee will act as a claim administrator and Will submit claims advices to relevant market systems. For the services rendered, the assessee along with the other reinsurance brokers acting as an intermediary in the reinsurance process for New India Assurance Co. will be entitled to 10% brokerage. From the role played by the assessee in the reinsurance process as discussed above, it is evident- to us that the assessee was rendering only intermediary services while acting as an intermediary/facilitator in getting the reinsurance cover for New India Insurance Co. There exists no material or basis on the basis of which, it Would be said that the assessee was rendering any kind of technical/consultancy service within the meaning of Article 13 of Indo-UK treaty. The consideration received b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 unable to point out any perversity in the recording of such findings. As such no substantial question of law arises for our consideration. The appeal is dismissed. There shall be. no order as to costs." 13. Further, the learned Counsel for the asséssee stated that the reliance placed by DRP in Arevay T and D India Limited of Perfeti Van Melle Holdings B.V. In re [2011] 16 taxmann.com 207 (AAR - New Delhi) was reversed by Hon'ble Delhi High Court and reported in 2014 52 taxmann.com 161 (Delhi), wherein Hon'ble Delhi High Court has considered as under: - "1. This writ petition is directed against the ruling dated 09.12.2011 in AAR NO.86912010 given by the Authority for Advance Rulings. One of the pleas raised by the petitioner was that the said authority had not considered the Double Taxation Avoidance Agreement between India and Portugal which is an OECD country. The learned counsel for the petitioner submitted that any a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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