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TMI Blog2024 (5) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has only granted a right to use its Software to Jio in connection with its telecommunication business. The consideration received towards licensing of software is for use of a copyrighted article and therefore not taxable as royalty income under the provisions of Article 12 of the India-USA DTAA. In our considered view, the case of the assessee is squarely covered by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. ( 2021 (3) TMI 138 - SUPREME COURT] ) which has already been upheld by the DRP and the Hon ble Delhi High Court in light of the factual matrix of the present case. We, therefore have no reason to interfere with the findings of the Ld. DRP on the impugned issue. Consequently, consideration received by the assessee from supply of software licence is not taxable in India in terms of Article 7 of the India-USA DTAA. Accordingly, ground Nos. 1 to 4 is allowed with a direction to the Ld. AO to give effect to the Ld. DRP s findings in its directions/ order. Remaining receipts on account of support and maintenance services rendered by the assessee - Nothing has been brought on record by the Revenue to establish t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of consideration for a copyrighted article and not copyright. 3. That the Ld. AO has erred in law, in disregarding various judicial precedents (including the judgement of Hon'ble Apex Court) wherein it has been settled that consideration for supply of copyrighted article does not tantamount to Royalty under the provisions of the Double Taxation Avoidance Agreement (DTAA'). 4. That the Ld. AO has erred on facts and in law, in alleging software licensing fee as 'Royalty though he could not factually demonstrate that the licensee namely M/s Reliance Jio Infocomm Limited (RJIL ) had any rights to make copies of the software or to commercially exploit the rights in such software as envisaged in the Copyright Act, 1957. 5. That the Hon'ble DRP has erred in law and on facts, in not appreciating that the support and maintenance services being ancillary and subsidiary as well as inextricably and essentially linked to software license does not amount to Fees for included Services as per Article 12(5)(a) of the India- USA DTAA. 6. That the Ld. AO has erred on facts and in law, in making an addition of INR 4,94,29,858 by treating the transactions of both supply of sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not taxable in India as the underlying services do not fall within the purview of Royalty/ Fees for technical services/Fees for Included Services ( FTS/ FIS ) under Article 12 of India-USA DTAA and therefore shall qualify as business income of the assessee which is not chargeable to tax in the absence of PE of the assessee in India. 3.1 During the assessment proceedings, the Ld. Assessing Officer ( AO ) after analysing the Software License Agreement and disregarding the submissions/reply filed by the assessee arrived at a conclusion that the impugned receipts pertaining to supply of software (including AMC services) are taxable as FTS. Accordingly, he proposed an addition of Rs. 4,94,29,858/- as FTS income of the assessee for the following reasons recorded by him in the draft assessment order: (a) As per the relevant Software License Agreement, software means the proprietary Openwave Mobility software, including configurable components, to be provided by the Licensor to the Licensee. b) Under sl.no. 6 of the Agreement, the nature of software license is seen to be non- exclusive, non-transferable (though right to transfer the license to licensee's affiliates through assignme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de and underlying algorithm of the software are the assessee's proprietary trade secrets. d) In order to enable the client to effectively use and operate the software, the assessee will provide free annual maintenance contract services for a period of one year and thereafter such AMC services shall be optional. e) The assessee shall implement optimisation solution into production network of the client with the technical specifications in the Software License Agreement. The services provided under this Agreement include installation/implementation of the software (including testing, production cut over and transition to operations) and onsite support services either directly or through sub-contracting for troubleshooting, resolving production/lap platform issues, implement and maintain proactive monitoring procedures, maintain a list of key risks etc. f) The presence of staff for such on-site support services do not create any permanent establishment in India since they are not employees of the assessee, the assessee has no distributors in India; the local staff has no authority to obligate or contract on behalf of the assessee or act as an agent or secure any order or sign any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -USA DTAA. 3.4 The Ld. DRP by placing reliance on the decision of the Hon ble Supreme Court in the case of Centre of Excellence Pvt. Ltd. vs. CIT (2022) 3 SCC 321 and considering the terms of the Software Licence Agreement concluded in para 2.5 of its directions/ order that software licence fee will not constitute royalty income but business income under Article 7 of India- USA DTAA which is not taxable in India in the absence of PE of the assessee. 3.5 As regards the AMC charges, the Ld. DRP held the same to constitute FTS/FIS within the meaning and scope of Article 12(4)(b) of India-USA DTAA recording its observation and findings in para 2.6 to 2.10 of its directions/ order which are reproduced hereunder: 2.6 As regards the annual maintenance charges, the AO held that as the rate of taxation of both software as well as FTS is the same, the categorisation as per FTS or Royalty does not have any material impact. The AO held that even otherwise the services provided are offered in close coordination with the employees of clients and included training component as well. Consequently the AO held that the services fall under FTS clause as per India-US DTAA. As stated earlier in Para 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for various support services and processes in relation to incident management, problem management, change management process/service requests, service operation, release management, configuration management, investigation, diagnosis, resolution and recovery, incident closure etc. 2.8 The technical support services in relation to the assessee s products clearly require technical expertise which is rendered by the assessee. These services involving human intervention and skill entail application of the technology contained therein to enable the user to independently use the products. The training provided by the assessee (as stated at page-16 of the assessee's Form 35A objections filed in DRP proceedings) allows the user to acquire / develops the capability to independently use the products such that the AMC support is optional at the discretion of the user after the initial free AMC period. Considering the significant technical expertise involved in such services in respect of specialized products, these services duly make available the technical knowledge, experience and know-how available to the user. The support services are therefore neither standard nor routine, but are re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uman element. In other words, when services have no human element involved, such services cannot be treated as technical services' for the purposes of Section 9(1)(vii). 21. In Siemens case (supra), however, the coordinate bench went much beyond what was held by the Hon'ble Courts above. The coordinate bench has concluded that, Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that (the assessee) is rendering any kind of technical services to assessee. These observations are not only based on erroneous analysis of the legal position but directly contrary to the law laid down by Hon'ble Supreme Court wherein it is held that even in a case of completely automated process like interconnect and port access facility, which is facility to use the gateway and the network of other cellular operator, the Assessing Officer is still required to examine whether at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the decision rendered by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). The Ld. AR relied on the observations of the Ld. DRP contained in para 2.5 of its order. 5.1 As regards AMC charges, the Ld. AR submitted that the AMC services provided by the assessee are ancillary and subsidiary to the licensing of software. Since such services are simply an extension of the original transaction (being supply of the software) their characterisation shall be the same as that of the predominant transaction. In support thereof, he relied on the decision of the Delhi Bench of the Tribunal in the case of Aspect Software Inc. vs. ADIT (2015) 61 taxmann.com 36 (Delhi ITAT) and Infrasoft Ltd. vs. ADIT (2009) 28 SOT 179 (Delhi ITAT) which has been affirmed by the Hon ble Delhi High Court in (2013) 39 taxmann.com 88 (Delhi HC). He drew our attention to para 8.5 of the assessment order and submitted that the Ld. AO has himself admitted that support and maintenance services are inextricably linked to the license granted by the assessee to its licensee and no separate contract is entered by the assessee for the same. 5.2 Without prejudice to the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MC charges of Rs. 58,90,308/- aggregating to Rs. 4,94,29,858/-. So far as the issue relating to the taxability of Software Licensing Fee of Rs. 4,35,39,550/- is concerned, we observe that the Ld. DRP has examined this issue in detail and recorded its observation finding in para 2.5 of its order reproduced below:- 2.5 As regards the first set of transactions namely supply and license of software, the licensor grants the licenses to use and operate the software in india as follows - Non-exclusive, non-transferable and sub licensable to licensee's affiliates; unlimited; perpetual; unlimited use and irrevocable etc. As per clause 3 (License Restrictions) of the Agreement, though licensee will not (a) sell, rent, lease, distribute or sub-license the software or documentation; (b) host the software for third party services; (c) modify, alter, reverse engineer, decompile, translate or disassemble any source code of the software; (d) disclose, make available or allow any third party to use the software without licensor's prior written consent; or (e) develop any programs using licensor's source code. As per the said clause, the source code and underlying algorithm of the softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission, the petitioner relies upon the order dated 17.05.2022 passed by the Dispute Resolution Panel-2 [ DRP ] with regard to Financial Year (FY) 2018-2019 [AY 2019-2020]. 13. In particular, our attention has been drawn to the following observations made by the DRP: - 2.4 The submissions have been examined along with the materials on record. It is seen that the Software License Agreement dated 20.02.2017 captures two distinct transactions namely (a) supply and license of certain software and (b) providing of AMC services to the Licensee. Given the same, the assessee's contention that both the transactions are inextricably and integrated with each other under Article 12 of the DTAA is rejected. 2.5 As regards the first set of transactions namely supply and license of software, the licensor grants the licenses to use and operate the software in India as follows Non-exclusive, non-transferable and sub licensable to licensee's affiliates; unlimited; perpetual; unlimited use and irrevocable etc. As per clause 3 (License Restrictions) of the Agreement, though licensee will not (a) sell, rent, lease, distribute or sub-license the software or documentation; (b) host the software fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 16.01.2023, at 11:00 AM. 17.3 The concerned authority will be at liberty to hear the AR of the petitioner via video-conferencing. 18. While disposing of the application, the concerned authority will bear in mind, the order dated 17.05.2022 passed by the DRP, and the ratio of the judgment rendered by the Supreme Court in Engineering Analysis. 9. In this view of the matter, we are inclined to agree with the findings of the Ld. DRP. What the assessee has supplied in the form of a Software to Reliance/ Jio is a copyrighted article not a copyright in the Software. Fact on record demonstrates that the Software is supplied by the assessee on a non-transferable, non-exclusive basis to various customers all over India. The assessee has only granted a right to use its Software to Jio in connection with its telecommunication business. The consideration received towards licensing of software is for use of a copyrighted article and therefore not taxable as royalty income under the provisions of Article 12 of the India-USA DTAA. In our considered view, the case of the assessee is squarely covered by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... renew AMC for an additional annual period. If Licensee notifies its intent to renew AMC for an additional annual period then Licensee will issue a PO/WO for such renewal of additional annual AMC period within ninety (90) days from such notification. In the event that Licensee fails to issue the PO/WO, then Licensee will be deemed to have discontinued the AMC, and if Licensee thereafter request to resume AMC, then Licensee shall pay reinstatement charges equal to what Licensee would have paid if the AMC has not been discontinued. 11) Licensor warrants that even after the expiry of the Term, Licensee shall have option to avail Licensor's support for the Software as long as Licensee continues to pay AMC charges. 10.1 It is evident from the above that the Service Level Agreement which envisages rendition of support and maintenance services (AMC) forms part of the Software License Agreement by way of Annexure F to the said agreement (Page 85 to 87 of the Paper Book refers). Services provided by the assessee to Reliance are thus ancillary and subsidiary to the licensing of software and would therefore be characterised in the same manner as that of the predominant/ original transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meaning of the expression make available has been derived from umpteen numbers of judicial precedents as well as Protocol to the India-USA DTAA. If we consider the terms of the AMC under the Software Licence Agreement (read with Service Level Agreement) set out above, we find that none of the conditions to qualify the test of make available has been satisfied in the present case as - (i) the service recipient is not able to apply any expertise/ technology contained therein or use knowledge on its own without recourse to the service provider; (ii) the service recipient is not at the liberty to use the technical knowledge, skill, know-how and process of the assessee in its own right; and (iii) the service recipient is unable to perform the services on its own and have to necessarily seek services of the assessee time and again. Support may be drawn from the decision of the Hon ble Karnataka High Court in CIT vs. De Beers India Minerals (Private) Ltd. (2012) 21 taxmann.com 214 (Kar.) wherein it has been held that- to fit into the terminology making available the technical knowledge, skill, etc. must remain with the person receiving the services even after the particular contract co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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