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TMI Blog2022 (4) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon ble Supreme Court [ 2021 (3) TMI 138 - SUPREME COURT] and respectfully following the decision of the Tribunal [ 2022 (1) TMI 281 - ITAT PUNE] for the immediately preceding assessment year, we hold that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of consideration for grant of software license is not Royalty under the provisions of Income Tax Act, 1961, the question of considering under the provisions as per DTAA between India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed. Direction of the DRP directing the A.O to bring to tax software maintenance, consulting service fees, Training fees, other services within the meaning of Article 12(5)(a) of the India and Netherland Treaty - D.R.P held that the receipts of the assessee from software maintenance fees, consulting services, training fees and other services are chargeable to tax as fee for Technical Services as per Article 12(5)(a) of India and Netherland treaty - Assessee submitted that the question of treating the above consideration as fees for technical services does not arise as the considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deleted. Ground No.4: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld.AO to tax the receipt of ₹ 1,48,45,943 towards training fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.5: On the fade and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to tax the receipt of ₹ 1,72,800 towards other service fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon ble DRP be deleted. Ground No.6: On the facts and circumstances of the case and in law, the Ld. AO erred in granting short credit of Tax Deducted at Source ( TDS ) amounting to INR 2,47,666. Ground No.7: On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or merge or separate any component. All rights with respect to this remain with TIBCO BV. - The customer cannot reverse compile, dissemble or otherwise reverse engineer the software. If the customer requires modification to the software to make it further useful to him, the same would have to be made by TIBCO BV. 1.1 The Company has been asked to show cause why the receipts on account of software license fees amounting to INR 94,538,285 (as referred in Sr.No.1 of the above table) should not be taxed in India as Royalty as per the provisions the Act and Article 12 of the India- Netherlands tax treaty. 6. In response to the show cause notice the assessee Company filed its detailed replies, but the Assessing Officer was of the opinion that consideration received towards use of software license fees is taxable as Royalty u/s 9(1)(vi) of the Act as well as under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Netherland placing reliance on the following decisions. a) CIT Vs. Samsung Electronics Co.Ltd.(ITA No.2808 of 2005) dt.15-10-2011. b) CIT Vs. Synopsis International Old Ltd.(ITA No.11 to15/2008 17/2008) dt.03-08-2010. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is in appeal before us in the present appeal. 9. It is submitted before us that the ground of appeal No. 1 challenging the action of lower authorities in bringing to tax the software licence fees at ₹ 9,45,38,285/- as Royalty within the meaning of article 12 of the India and Netherland DTAA. It is submitted before us that in the immediate preceding assessment year 2013-14 the co-ordinate Bench of this Tribunal had decided this issue in favour of the appellant and finally submitted that the reasoning of the lower authorities in treating the software licence fee as royalty was not approved by the Hon ble Supreme Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). 10. The ld. CIT learned Departmental Representative for the Revenue placing reliance on the order of the lower authorities justified the action of bringing to tax the software licence fee ₹ 9,45,38,285/- as Royalty. 11. We heard the rival submissions and perused the material on record. The Tribunal while dealing with the identical issue in the case of the assessee for the A.Y. 2013-14 has observed that the appellant company granted the software lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the storage of a computer programme per se would constitute infringement of copyright. This, again, would directly be contrary to the terms of section 52(1)(aa) of the Copyright Act. 108. Fourthly, the High Court is not correct in referring to section 9(1)(vi) of the Income-tax Act after considering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income And Capital Gains,40 [ IndiaIreland DTAA ]. Article 12 of the aforesaid treaty defining royalties would alone be relevant to determine taxability under the DTAA, as it is more beneficial to the assessee as compared to section 9(1)(vi) of the Income-tax Act, as construed by the High Court. Here again, section 90(2) of the Income-tax Act, read with explanation 4 thereof, has not been properly appreciated. 109. Fifthly, the finding that when a copyrighted article is sold, the enduser gets the right to use the intellectual property rights embodied in the copyright which would therefore amount to tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as a 'literary work'. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under section 14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9(1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no. 1 2 in favour of the assessee and against the Revenue. (page 281) The High Court then followed its own judgment in Ericsson A.B. (supra), deciding the case in favour of the assessee. 112. In DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88/[2014] 220 Taxman 273 (Delhi) [ Infrasoft ],43 a Division Bench of the High Court of Delhi, by an exhaustive analysis of the provisions contained the India USA DTAA, the Income-tax Act and the Copyright Act, dealt with a situation in which the assessee who was primarily into the business of developing and manufacturing civil engineering software, licensed the said software to persons engaged in civil engineering work in India. The High Court referred to a decision of the Special Bench of the ITAT (New Delhi) in Motorola Inc. v. Dy. CIT [2005] 147 Taxman 39 (Mag.)/95 ITD 269 [ Motorola (ITAT) ] as follows: 65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title License , says that JTM is granted a non-exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation. 158. Secondly, under the definition of copyright in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public (underline is ours). The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objection cannot be accepted. (pages 365-366) 114. Referring to the High Court's earlier judgments in Ericsson A.B. (supra) and Nokia Networks OY (supra) and the determinations of the AAR in Dassault Systems K.K. (supra) and Geoquest Systems B.V. (supra), the High Court concluded: 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a copyrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely 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 conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. (pages 385-386) 115. The High Court of Delhi also expressed its disagreement with the impugned judgment of the High Court of Karnataka dated 15-10-2011, in Samsung Electronics Co. Ltd. (supra) as follows: 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght would mean the doing or authorizing the doing-in respect of work (i.e. the programme) or any substantial part thereof - (b) In the case of a computer programme,- (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. The reference to clause (a) and (b) means that all the rights which are in literary works i.e. (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 sub clauses (i) to (vi) inhere in the owner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. (iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright 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 lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. 13. Grounds No. 2, 3, 4 and 5 challenge the direction of the DRP directing the A.O to bring to tax software maintenances ₹ 8,74,84,583/- consulting service fees ₹ 1,27,56,877/-., Training fees ₹ 1,48,45,943/-, other services ₹ 1,72,800/- within the meaning of Article 12(5)(a) of the India and Netherland Treaty. The D.R.P held that the receipts of the assessee from software maintenance fees, consulting services, training fees and other services are chargeable to tax as fee for Technical Services as per Article 12(5)(a) of India and Netherland treaty. 14. On the other hand, the ld. A.R submits that the consideration received towards software maintenance fees, consulting services fees, training fees and other services cannot be considered as fees for technical services under Article 12(5) of the Treaty. He also submitted that the question of treating the above consideration as fees for technical services does not arise as the consideration received towards software licence fees cannot be considered as Royalty as per para4 of Article 12 of DTAA placing reliance on the following decision: Datamine International Ltd. Vs. ADIT (2016) 68 taxma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r technical design. 6. Notwithstanding paragraph 5, fees for technical services does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property; (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; (d) for services for the personal use of the individual or individuals, making the payment; or e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (Independent Personal Services) of this Convention.] 7. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of one of the States, carries on business in the other State, in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character as that of software license fee. In relation to ground of appeal No.1 in the preceding paragraphs, we have held that the consideration received towards software license fee cannot be termed as Royalty . Hence, what follows from this is that even the software maintenance, consulting charges and training fees which are incidental to software maintenance fee cannot come within the purview of FTS within clause 5 of Article 12 of the treaty. Our view is fortified by the judgment of Hon ble Delhi High Court in the case of Datamine International Ltd. Vs. ADIT (2016) 68 taxmann.com 97. We, therefore, we hold that software maintenance fees, consultancy services fees and training services fees cannot be held to be Fees for Technical services . Thus, grounds of appeal no. 2 to 4 stands allowed. 16. In the absence of any distinguishing facts and respectfully following the precedent, we hold that software maintenance fees, consulting service fees, and other services cannot be held to be Fees for technical services . Thus grounds of appeal No. 2, 3, 4 and 5 stands allowed. 17. Ground No. 6 challenges short credit of deduction of tax at source by ₹ 2,47,660/-. This groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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