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TMI Blog2023 (12) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... r continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the licencee. It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty. Recharacterizing the maintenance support services income as fee for technical services - HELD THAT:- As discussed earlier, similar issue came for consideration before this Tribunal in assessee s own case in assessment year 2006-07[ 2021 (11) TMI 1023 - ITAT BANGALORE] on the question whether the sums in question can be taxed as FTS, we agree with the submissions made by the learned counsel for the Assessee set out in paragraph-18 19 of this order and hold that the sums in question c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge, skill, experience, know how or consist of the development and transfer of a technical plan X X X X Extracts X X X X X X X X Extracts X X X X ..... or that technical services have been provided. This is like providing a technical and user manual describing the system and does not imply granting of any copyright rights or transferring technical knowledge. The software is only licensed for use without granting any license over the copyrights [see Article 3 - 3.01 - clause (a) at Page 58]. There are further restrictions on such license like (a) no copies to be made (b) no reverse engineering decompiling or otherwise (c) no sub-license rights (see clause 3.02 at Page 59). The clauses are typical clauses in a Software End User License Agreement (EULA) as analysed by Honble Supreme Court in the Engineering Analysis case (see paras 45 - 47 of the SC judgment). The Viewing cards, Set Top Boxes and the software to run it are together an integrated system. This is similar to the fourth category examined by the Supreme Court. The Supreme Court approved the judgment of Delhi High Court (para 118 ) in the cases of Ericsson and Nokia which dealt with the sale of integrated telecom equipment with embedded software (para 110). The AO also acknowledges that STB, Viewing Card and embedded software is an integrated system. There were certain inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 4.5 of FAO does not advance AO's case since software and hardware are part of an integrated system akin to supply of goods. When training is provided to use it, it is similar to initial training provided by a vendor of any high end electronic or integrated equipment (for example, telecom equipment as examined by Delhi HC in Ericsson case). This doesn't amount to training in furtherance of license of copyright. With reference to para 4.6 on provision of operations and maintenance manual, this is akin to provision of a User Manual which describes the functioning of any equipment. For example, every sale of a TV comes with an operations and user manual. With refence to para 4.7, the providing of AMC services like repair, etc is akin to post-sale standard AMC services provided in the case of any sale of equipment. This AMC service does not in any way make the original transaction a royalty transaction. Since the AY is AY 2010-11 (ie, prior to the Finance Act, 2012 amendment by way of inserting Explanation 4 to Section 9(1)(vi) of the Act, as per the SC in its judgment, the Finance Act, 2012 amendment has to be read as expanding the scope of royalty with prospective effect from the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (1) to (6).
The court held that a licence from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a licence issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is 'licensed' by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon'ble Karnataka High Cour in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon'ble Supreme Court. We have already set out the terms of the Agreement u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opy right in favour of the licencee. It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty."
4.1 The same order has been followed by this Tribunal for the assessment years 2010-11, 2012-13 & 2013-14. Being so, we allow the ground taken by the assessee on similar lines.
5. Ground No.4 is with regard to recharacterizing the maintenance & support services income as fee for technical services.
5.1 The ld. A.R. submitted that the ld. AO has erred by stating in the order that notwithstanding the above, in case the appellate authorities take a contrary view with respect to treating the support services as "Royalty", it is stated that the services rendered by the assessee partakes the character of Fee for Technical Services.
5.2 He submitted that the learned Assessing Officer has failed to appreciate that the support services provided are not ancillary and subsidiary to the application or enjoyment of some right, propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither of the conditions are not satisfied then the services fees cannot be regarded as FTS. While the support services would be regarded as being 'technical' in nature, it needs to be additionally analyzed whether such services satisfies any of the conditions stated under (a) or (b) or (c) above and also whether such services falls within the ambit of the exclusionary clause (i.e., Clauses of Article 13 of the tax treaty).
5.6 The ld. A.R. submitted that the learned Assessing Officer has ought to know that in the definition of Fees for Technical Services in the tax treaty, the first category addresses payments for services that are connected with the production of royalties. Thus, this includes technical and consulting services that are ancillary and subsidiary to the application or enjoyment of an intangible from which a royalty is received under a license (or a contingent sale), as well as those services that are ancillary and subsidiary to the application or enjoyment of industrial, commercial or scientific equipment for which a royalty is received under a lease. To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of De Beers India Minerals Private Limited (Page 1172-1223 of case-law compilation).
19. Reference was made to decision of Hon'ble Madras High Court in the case of Skycell Communications Ltd [2001] 119 Taxman 496 (Madras) wherein it has been held that Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment, does not result in the provision of technical service to the customer for a fee. Reference was also made to the order of the DRP in assessee's own case for AY 2016-17 (page 1725 of case law compilation) wherein the DRP has categorically held that the technical support and rendered by the assessee for ensuring the deployment/maintenance of the hardware and software is a routine aftersales support service and does not make available any technical know-how to the Indian customers. The DRP held that the 'make available' clause as per Article 13 is not being satisfied in the case of the Assessee. It was further submitted that once the principal receipts are not held to be in nature of "royalty", but receipts towards simplicitor sale of goods (copyrighted product), th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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