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TMI Blog2021 (12) TMI 571X X X X Extracts X X X X X X X X Extracts X X X X ..... GSL (UK) from third-party vendors. The consideration paid for the use of the same therefore, cannot be termed as royalty as held by the Supreme Court in Engineering Analysis Centre [ 2021 (3) TMI 138 - SUPREME COURT] In determining the same, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is the Agreement between the EYGSL (UK) and the EYGBS (India). As the same does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term royalty as held by the Supreme Court in Engineering Analysis Centre The submission of the learned counsel for the Revenue that the judgment of the Supreme Court in Engineering Analysis Centre (supra) cannot be applied because it confines itself only to the four categories mentioned in paragraph 4, also cannot be accepted. Though the Supreme Court was on facts considering the four categories of cases that arose in the appeals before it, it has laid down the law for general application. The law, as laid down by the Supreme Court, when applied to facts of the present case, squarely covers the same in favour of the petitioners. The sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the EY Global Services Ltd. (EYGSL) UK [hereinafter referred to as the EYGSL (UK) ] is a limited liability company engaged in providing technology and other support services and software licences to member firms of the EY network in various countries all over the world. All member firms, including EYGSL (UK), use the brand Ernst Young (EY). The Petitioner EYGSL (UK) has entered into contracts with various third-party vendors for the procurement of various software. It has also entered into a contract with EY member firms to provide support services and/or deliverables. 5. The EYGBS (India) Private Limited [hereinafter referred to as the EYGBS (India) ] is an Indian company engaged in providing back-office support and data processing services. It has entered into an agreement with the EYGSL (UK) whereby it receives Right to benefit from the Deliverables and/or Services from EYGSL (UK). The Impugned Ruling notes the specific services mentioned in the Services Schedule annexed to the Memorandum of Understanding (hereinafter referred to as the MOU ), which are rendered by EYGSL (UK) under the Service Agreement and the MOU executed between itself and the EYGBS (India). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s will facilitate (a) efforts to put in place master services agreements; and (b) contract negotiations, where appropriate. Finally, Global Procurement Services will develop strategies and drive transition plans to standardize tools to support category operations (for example, online booking tools, travel management operations / companies, source to pay solutions). 6. Global Shared Services Centres 6.1 Procuring for the Member Firms access to the Global Shared Services Centres. 7. Other Services Providing such other services to the Member Firms as agreed from time to time with the Members Firms. 6. EYGSL (UK) and EYGBS (India) filed an application before the learned AAR seeking a ruling on the following questions: 3. The applicant has raised the following questions:- 1) Whether amounts received /receivable by EYGSL UK in accordance with the agreement entered into with EYGBS India Private Limited inter alia on account of services and / or Deliverables as defined in the Agreement is chargeable to tax in India as fee for technical services under Article 13 of the Agreement for avoidance of Double Taxation between India and UK ( the India-UK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT Act. 8. The Impugned Ruling also answered the question as to whether the consideration received in respect of the computer software (deliverables) by EYGSL (UK) is royalty . As submissions have been made by the learned counsels for the parties on this specific question, the finding of the learned AAR is quoted hereinbelow, in detail: 32. There is no doubt that treaty provisions override the provisions of the Act. Therefore, we may first examine whether consideration received for allowing use of computer software can be treated as royalty within the meaning of Article 13(3) of DTAA. In order to decide whether procurement of computer software by the applicant from various third party vendors and providing the same to EYGBS India against consideration is royalty under Article 13(3) of DTAA the following issues emerge for our consideration: I. Whether computer software is a literary work within the meaning of Article 13(3)(a) of DTAA. II. Whether acquisition of computer software by the applicant from a third party vendor and providing the same to other member firms can be treated as commercial exploitation and, therefore, would be in the nature of royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iterary works as literary work includes computer programmes, tables and compilations including computer literary data base . This discussion clearly establishes that computer software is literary work protected by copyright laws around the world and, therefore, is covered under the definition of royalty under Article 13(3) of DTAA. 34. Whether consideration received for the use, or the right to use computer software is royalty or business profits will depend on the facts and circumstances of the transaction. If the consideration is for the right to commercially exploit the intellectual property in the software, its nature is royalty. The OECD Revised Software commentary also favours a characterization based on the rights acquired by the transferee under the particular arrangement regarding the use and exploitation of a software. As regards the issue relating to exploitation of computer software, the matter relating to acquisition of software by the applicant and onward distribution of the same to member firms it is seen that the applicant obtains licence from third party vendors for all its entities under common control and creates a standard facility to be accessed and use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Revenue submits that the judgment of the Supreme Court in Engineering Analysis Centre (supra) has no application to the facts of the present case. He submits that the said judgment is confined only to the four categories of cases as mentioned in the judgment itself in paragraph 4 thereof. The EYGSL (UK) and the EYGBS (India) do not fall in any of the said four categories. He submits that in the present case, the EYGSL (UK) procures the computer software from different vendors and provides the same to its member firms. The purpose is to obtain a licence from the third-party vendors for all its entities under common control and create a standard facility to be accessed and used by all entities and in lieu of that, it receives consideration based on certain parameters. This is nothing but commercial exploitation of standard facilities created. He submits that the licence fee paid by the EYGSL (UK) for the software is with respect to the number of users. The computer programme is a literary work under the terms of Article 13(3) of the India-UK DTAA and payments for the use or right to use such copyright of the literary work would constitute royalty . Through the licence, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary work, which includes a computer programme or software. xxxxx 45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a nonexclusive, non-transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erritory mentioned by the licence. xxxxx 72. The transfer of all or any rights (including the granting of a licence) in respect of any copyright , in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has been held hereinabove, the expression in respect of is equivalent to in or attributable to . Thus, explanation 2(v) to section 9 (1)(vi) of the Income Tax Act, when it speaks of all of any rights in respect of copyright is certainly more expansive than the DTAA provision, which speaks of the use of, or the right to use any copyright. This has been recognised by the High Court of Delhi in CIT v. DCM Limited, ITA Nos. 87-89/1992 in its judgment dated 10.03.2011, as follows: xxxxx 73. However, when it comes to the expression use of, or the right to use , the same position would obtain under explanation 2(v) of section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14 (b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in Engineering Analysis Centre (supra). 15. We may also note that the learned AAR in its Impugned Order has relied upon its earlier view in Citrix Systems Asia Pacific Pty Ltd., In Re., (2012) 343 ITR 1 (AAR), which has been expressly stated to be bad law in Engineering Analysis Centre (supra). 16. The submission of the learned counsel for the Revenue that the judgment of the Supreme Court in Engineering Analysis Centre (supra) cannot be applied because it confines itself only to the four categories mentioned in paragraph 4, also cannot be accepted. Though the Supreme Court was on facts considering the four categories of cases that arose in the appeals before it, it has laid down the law for general application. The law, as laid down by the Supreme Court, when applied to facts of the present case, squarely covers the same in favour of the petitioners. 17. The submission made by the learned counsel for the revenue relying upon the amendment to Section 9(1)(vi) of the Income Tax Act, 1961 has also been specifically considered and rejected by the Supreme Court. 18. In view of the above, the Impugned Rulings dated 10.08.2016 passed by the learned AAR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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