9911796707
TMI Blog2022 (5) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of copy of the software is held not to be Royalty. Even the Hon ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd.[ 2013 (11) TMI 1382 - DELHI HIGH COURT] held to the same effect. Whereas the Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT] and CIT Vs. Synopsis International Old Ltd. [ 2013 (2) TMI 448 - KARNATAKA HIGH COURT] held to the contrary. The reasoning given by the Hon ble Karnataka High Court has been disapproved by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] Thus 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 held not to be Royalty under the provisions of Income Tax Act, 1961, the question of consideration of the issue 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. Software maintenance fees, consultancy services fees and training services fees held to be Fees for Technical services - HELD THA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Deepak Garg ORDER PER INTURI RAMA RAO, AM : These are appeals filed by the assessee directed against the separate final assessment orders dated 04.07.2019 for A.Y. 2011-12 and dated 18.07.2018 for A.Y. 2015-16 passed u/s.144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 ('the Act') respectively. 2. Since the identical facts and issues are involved in both the appeals, except the addition of amounts, we proceed to dispose of the same by this common order. 3. For the sake of convenience and clarity, the facts relevant to the appeal in ITA No.1348/PUN/2019 for the assessment year 2011-12 are stated herein. ITA No.1348/PUN/2019, A.Y. 2011-12 : 4. The appellant raised the following grounds of appeal :- "Ground No.1: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to tax receipt of INR 26,02,184 towards software license fees as 'Royalty' as per the provisions of the Income Tax Act, 1961 read with the provisions of the India-Netherlands Double Taxation Avoidance Agreement. It is thus prayed that the addition proposed by the Ld. AO and confirmed by the Hon'ble DRP be deleted. Ground No.2: On the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itiating penalty proceedings against the Company under section 274 r.w.s. 271F of the Income-tax Act, 1961. It is prayed that the revenue earned in India from the aforementioned income is not liable to tax in India during the year and therefore the Company was not under an obligation to file a return of income in this regard. Hence, the subject penalty proceedings be overturned. Ground No.9: On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings against the Appellant under section 274 r.w.s. 271(1)(c) of the Income-tax Act, 1961. It is prayed that the additions made by the Ld. AO merely represent a difference in opinion and the Company has not furnished any inaccurate particulars of income and thus, the subject penalty proceedings be overturned. The above grounds are without prejudice to each other." 5. Briefly, the facts of the case are as under : The appellant TIBCO Software B.V. is a non-resident company incorporated in Netherlands. The company is engaged in sale of Software licences and provision of Software maintenance, Consulting and Training services in India. The return of income for the assessment year 2011-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same would have to be made by TIBCO B.V. 7. The AO was of the opinion that the consideration received towards use of the software 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 to 15/2008 & 17/2008) dated 03-08-2010. c) Millennium IT Software Ltd. (AAR No.835 of 2009) dt. 28-09- 2011. d) Citrix Systems Asia Pacific Pty Ltd. (AAR No.822 of 2009) dt.06-02-2012. e) Acclerys K.L. Japan (AAR No.989 of 2010) dt. 27-02-2012 f) ING Vysya Bank Ltd. (ITA No.160/2010, dt. 05-08-2011 (A.Y.2008-09)- Bangalore-Tribunal g) Mac Corporation (ITA No.1331 to 1336/2008) (A.Y. 1999- 2000 to 2004-05)-Delhi Tribunal. Rejecting the contentions of the appellant that such payment cannot be characterized as Royalty as the payment is made for purchase of standard software, not for use of 'copyright itself'. The appellant placed reliance on the OECD commentary as well as the decisions of Hon'ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and perused the material on record. The appellant company granted the software license fee on non-exclusive non-transferable basis during the license term. The subject software is standard software not customised software. The title, the ownership and all rights in patents, copyrights and trade secrets and other software contained does not get transferred to the customer. The Courts as well as OECD commentary on Article 12 of the DTAA recognized the distinction between "copyrighted article" and "copyright right" in the programme and software which incorporates a copy of the copyrighted programme. Any payment made for acquisition of copy of the software is held not to be Royalty. Even the Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. 39 taxmann.com 88 held to the same effect. Whereas the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd.345 ITR 494 and CIT Vs. Synopsis International Old Ltd. 212 taxmann 454 held to the contrary. The reasoning given by the Hon'ble Karnataka High Court has been disapproved by the Hon'ble Supreme Court in the case of Engineering Analysis Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the intellectual property rights embodied in the copyright which would therefore amount to transfer of an exclusive right of the copyright owner in the work, is also wholly incorrect. For all these reasons, therefore, the judgment of the High Court of Karnataka in Synopsis International Old. Ltd. (supra) also does not state the law correctly. 110. A series of judgments by the High Court of Delhi have dealt with the same question that now lies before us. In DIT v. Ericsson A.B. [2011] 16 taxmann.com 371/[2012] 204 Taxman 192/343 ITR 470 (Delhi) ["Ericsson A.B."], which happens to be impugned in C.A. Nos. 6386- 6387/2016 before us, the assessee was a company incorporated in Sweden which entered into an agreement with Indian cellular operators, pursuant to which the assessee supplied various equipment (hardware) embedded with software to the said cellular operators. The High Court in this case, found: "Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty."(pages 501-502) 111. This judgment was followed in DIT v. Nokia Networks OY [2012] 25 taxmann.com 225/[2013] 212 Taxman 68/358 ITR 259 (Delhi) ["Nokia Networks OY"],41 with the High Court of Delhi, adverting, this time, to the further expanded definition of "royalty&qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 Tribunal in Delhi in the case of Motorola Inc v. Deputy Cit And Deputy Cit V. Nokia (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under: 155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the Assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue. 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 by the Assessee is expressly stated in clause 20.1 as a "non exclusive restricted license". This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the public domain is totally prohibited, which is evident from the use of the words in Article 20.1 of the agreement, "restricted" and "not otherwise". Thus JTM has a very limited right so far as the use of software is concerned. It needs no repetition to clarify that JTM has not been given any of the seven rights mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "copyright right" and a "copyrighted article". Copyright is distinct from 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 prog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ics 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 right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the [Karnataka] High 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of copyright of a computer programme. Therefore, the copyright owner's rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods-significantly enough, Section 14(1) talks of sale or rental of a "copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng services and training services cannot be considered as "Fees for Technical services" under Article 12(5)(a)of the treaty. He also submitted that the question of treating the above consideration as Fees for Technical service does not arise as the consideration received towards software license fees cannot be considered as "Royalty" as per para 4 of Article 12 of the DTAA, placing reliance on the following decisions : Datamine International Ltd. Vs. ADIT (2016) 68 taxmann.com 97 Technip Singapore Pte Ltd. V. ADIT 385 ITR 408 (Delhi) Aspect Software Inc. Vs. ADIT (2015) 61 taxmann.com 36 (Delhi) DDIT Vs. Scientific Atlanta Inv. (2009) 33 SOT 220 (Mumbai) Renaissance Services BV Vs. DDIT 94 taxmann.com 465 (Mumbai) 16. In order to decide the issue on hand, it is appropriate to extract Article 12 of the India and Netherland treaty which reads as under : "ARTICLE 12 - 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 [2. However, such royalties and fees for technical services may also be taxed in the Contracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 situated therein, and the royalties or fees for technical services are effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 8. Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, has in one of the States a permanent establishment or a fixed base in connection with which the contract under which the royalties or fees for technical services are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce by Rs.9,59,092/-. This ground of appeal no.6 is restored to the file of AO with a direction to allow tax as per the information contained in Form No.26AS and in accordance with provisions of section 199 of the Income Tax Act, 1961. Thus, ground of appeal no.6 is allowed for statistical purposes. 19. Ground of appeal No.7, 8 and 9 relates to initiation of penalty proceedings under the Income Tax Act, 1961 are consequential in nature and the same are dismissed. 20. In the result, the appeal filed by the assessee in ITA No.1348/PUN/2019 for A.Y. 2011-12 stands partly allowed for statistical purposes. ITA No.1554/PUN/2018, A.Y. 2015-16 : 21. Since the facts and issues involved in both the above captioned appeals are identical, therefore, our decision in ITA No.1348/PUN/2019 for A.Y. 2011-12 shall apply mutatis mutandis to the ground of appeal no.1 to 5 and 7 & 8 filed by assessee in ITA No.1554/PUN/2018 for A.Y. 2015-16. Accordingly, the ground of appeal no.1 to 5 are allowed and the ground of appeal no.7 & 8 are partly allowed for statistical purposes. 22. By the ground of appeal no.6, the appellant company challenges the action of the lower authorities in bringing to tax the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
