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TMI Blog2020 (3) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... support services does not constitute ' income' 2. Erred in holding that the payments received by the Appellant constitutes ' income ' without appreciating that the appellant work only on cost- only arrangement and the receipts were reimbursement being in the nature of cost allocation without markup and hence does not constitute income under section 2(24) of the Act. Receipt towards access to use software held as royalty' under the India-Netherland DTAA 3. Erred in constituting the payments of Rs. 67,53,80,709/- received by the Appellant from Key Application Service provider and Shell group entities for access to use copyrighted software as royalty taxable under Article 12 of India-Netherlands Double Taxation Avoid Agreement ('India - Netherlands DTAA) 4. Failed to appreciate that the payments received were only for the 'use of copyrighted article as compared to ' use of process' use of property similar to patents, design, trademark and invention, which does not constitute 'royalty' under the India-Netherlands DTAA; Receipts towards IT support services held as 'Fees for Technical Services (FTS) under the Act as well as India-Netherlands DTAA 5. Erred in holding that paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the coordinate Bench rendered in the assessee's appeals pertaining to the AYs 2012-13 , 2013-14, 2014-15. The findings of the coordinate Bench read as under:- "5. We have heard the rival submissions and perused the orders of the authorities below and the orders of the Tribunal for various assessment years. The Tribunal decided this issue in favour of assessee initially for the A.Y. 2006-07 to 2008-09 in ITA. No. 5051/MUM/2009, 3818/Mum/2011 and ITA. No. 728/Mum/2012 dated 15.03.2017 wherein the Tribunal held that 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- Netherlands DTAA observing as under: - "12. After considering the aforesaid submissions and the relevant terms of 'Master Service Agreement' (as reproduced above) between the assessee and the IT Services providers, i.e., WIPRO/IBM, it is quite ostensible that:- 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 conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of copyrights" Here first of all, the limited use of software cannot be held to be covered under the word "use of process", because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the various Courts have consistently opined that the definition of "copyright "as given in the 'Copyright Act, 1957' has to be taken into account for understanding the concept. Section 14 of 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 resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be a copy already in circulation". 13. Thus, the definition of 'copyright 'in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. 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 nontransferable 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 DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the 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 transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software". The ratio of the above decision clearly clinches the issue which is applicable 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 rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I, [2014] 361 ITR 575 (Mad), the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead 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 payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be set aside. 8. The Ld. DR fairly admitted that these grounds are covered in favour of the assessee by the orders of the Tribunal rendered in the assessee's appeals pertaining to the earlier years. However, the Ld. DR supported the impugned order. 9. We have perused the material on record including the decisions of the coordinate Benches of the Tribunal relied upon by the Ld. counsel. As pointed out by the Ld. counsel, the coordinate Benches have decided the identical issue in favour of the assessee in the assessee's appeals pertaining to the AYs 2011-12 to 2014-15. We further notice that Ground No. 5 and 6 of the present appeal are identical to the assessee's appeal for the AY 2015-16 and the coordinate Bench has decided the said issue in favour of the assessee by following the decision of the Tribunal in assessee's own appeals pertaining to the earlier assessment years. The findings of the coordinate Bench are as under:- 7. Coming to Ground Nos. 5 and 6 of Grounds of appeal, Ld. Counsel for the assessee submitted that these grounds relates to receipts towards IT support services held as FTS under the Act as well as the India Netherlands DTAA, and it was decided in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are liable to be treated as Fees for Technical Services. We are also in agreement with the AO that the Ruling of Hon'ble Authority for Advance Rulings in the case of ARE VA T&D India Limited (A TD/L) is applicable in the case of assessee. In this case, the Aar held as below: "We have noted that under- the IT Agreement, the French company is to provide support services through a central team in the area of Information Technology to the Applicant and to its other subsidiaries in the world. The provision of support services by the French company would 'itself make available, the technical knowledge/ experience to the Applicant. In Porfetti Van Melle Holdings B.V1 this Authority held the view that the expression 'in available only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or knowhow in future on his own". Here, information technology relating to design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of tr'1nernv ion and distribution system is provided to the Indian entity Whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the global servers', and Facilitating teleconferencing and video conferencing services Further, in the event Shell requires IT services from external service providers like WIPRO and IBM SITI BV is engaged in providing the necessary network access and related services as well. For this purpose, reference can be made to the scope of services to be rendered by SITI BV to WIPRO under the Services Agreement (copy of which is enclosed in the paper book of the assessee) and from the same Article 3 is reproduced below: Article 3 - Provision of Services SITI BV shall provide the IT Service Provider with the service." Further, 'Service' has been defined in Article I - Definitions as 'the combined Sub-services provided by S/TI BV to she IT Services Provider wider this Agreement, which Sub-services include the (if Services, the STO Services and she provision by S/TI BV to the IT Service Provider and Service Personnel of access to and/or use -of GI software and/or Optional Software.... 11. Further, SIT! BV is company incorporated in The Netherlands. SITI BV is a tax resident of The Netherlands eligible to claim the benefits, conferred by the Double Taxation Avoidance Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA was under consideration of Hon'ble Delhi High Court and Hon'ble High Court after considering the Article 13 of the DTAA of India-UK and also the facts of the assessee finally held the concept of 'make available' of technical services that such receipts would not amount to fee for technical services so as to the "concept of make available clause' contained in Article l3(4)() of the treaty has not been satisfied In the given facts and circumstances of the case Hon'ble Delhi High Court vide Para 8 to 13 held as under: - "8. Before we go on to examine the findings of the Tribunal it would be pertinent to refer to article 13 of the DTAA to the extent it is relevant :- "ARTICLE 13- 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. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that Stale; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 15 (Independent personal services) of this Convention (6), (7), 8 and (9) ** ** 9. A plain reading of Article 13(4)(c) of the DTAA indicates that 'fees for technical services' would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which, inter alia, "makes available" technical knowledge, experience, skill, k7jcv-how or processes, or consist of the development and transfer of a technical plan or technical design. According to the Tribunal this make available condition has not been satisfied inasmuch as no technical knowledge, experience, skill, know-how, processes, have been made dye/lab/c by the assessee to the insurance companies operating in India. It also does not consist of the development and transfer of any technical plan or technical design. - 10. The Tribunal examined the evidence available on record in order to return a finding on the issue as to whether the payments received by the assessee from the insurance com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess cannot, by any stretch of imagination, be qualified as a consideration received for rendering any financial analysis related consultancy services rating agency advisory services, risk based capital analysis etc. as alleged by the A.O." The Tribunal also noted the process by which the transactions takes place It has been pointed out that the originating insurer in India would contact J. B. Boda/ M, B. Boda for placing identified risks/ class of risks with international reinsurers. J.B. Boda, in turn, would contact one or more international firm(s) of reinsurance broker(s) like the assessee for competitive proposals from the international reinsurer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for competitive proposals. Based on the various offers or proposals given by the- international reinsurance brokers, like the assessee, to J.B. Boda, the latter would present various options to the originating insurer in India, which would take a final-decision in the matter. Based on the decision of the originating insurer in India, the policy terms would then be agreed upon and the risk wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IndoNetherlands Double Taxation Avoidance Convention. The learned counsel for the petitioner had also raised the plea that the memorandum of understanding concerning fees for included services referred in Article 12(4) of the Indo USA DTAA concerning the expression? Available? was also not considered by the Authority for Advance Rulings; It-was submitted that the said Authority refused to look into the IndoPortugese DTAA or the Indo USA DTAA and memorandum of understanding between India and USA on the ground that only the Indo Netherlands DTAC needed to be looked into. 2. The learned counsel for the respondent states that the Authority for Advance Rulings was correct in not looking, into the Indo - Portugese DTAA, but insofar as the Indo-USA DTAA is concerned a provision similar to that DTAA has been incorporated in the Indo-Netherlands DTAC by virtue of paragraph 5 of Article 12 of the same, whereby the very same make available clause, which is to be found in the DTAA between India and USA read with the memorandum of understanding connected therewith, has been incorporated into Indo-Netherlands convention by way of amendment on 30.08.1999, notification No. S.O. 693 (E) [report ..... X X X X Extracts X X X X X X X X Extracts X X X X
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