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TMI Blog2024 (5) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... rom supply of software as 'royalty' under section 9(1)(vi) of the Income-tax Act, 1961. 3. That the Ld. CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from 'maintenance services' as 'royalty/ fee for technical services' under Article 13 of DTAA between India and United Kingdom. 4. That the Ld.CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from 'maintenance services' as 'royalty/ fee for technical services' under section 9(1)(vi)/(vii) of the Income-tax Act, 1961. 5. That the Ld. CIT(A) has grossly erred, both on facts and in law in dismissing the entire appeal of the Appellant without adjudicating on the following grounds: a) The Ld. AO has grossly erred both on facts and in law in levying interest under section 234B of the Income-tax Act, 1961. b) The Ld. AO has grossly erred both on facts and in law in levying the interest under section 234D of the Income-tax Act, 1961. 6. Without prejudice to ground 5 above, the Ld. CIT (A) has failed to appreciate that the Appellant was not liable to pay adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware. The sublicensee in such a case is also the ultimate user of the software. The 'sub-licensee' is identified in the license agreement between the Appellant and its customers and the customers cannot sub-license such software product to any other sub-licensee. * License agreements (like with Bharti) that provide the license to the Appellant's customers to use the software product in its own business without any further sub-licensing rights to any third party. The customers in such a case are the ultimate user of the software. It is submitted that the license does not grant the Appellant's Customers/sub licensee any right in the copyright (which remains with the Appellant), but merely a copy of computer program. Accordingly, the transaction qualifies as "sale" of "copyrighted article" and not grants of any "copyright right". Accordingly, same is classifiable as "Business Profits" and since the Appellant does not have Permanent Establishment (PE) in India, such business profits are not taxable in India. In light of these facts, income from licensing of software has not been offered to tax in the return of income for subject year. 5. However, the Assessing Officer following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tabular form: Name of employee Designation Duration the stay Purpose Place of work (ix) The details of information and documents kept and maintained as per Section 92D of the IT Act in respect of all the international transactions. The copy of transfer pricing study report, if any, be also submitted. (x) The details of all the deliverables to the customers. The AR has filed its reply vide letter dated 12.11.2007, wherein it has also explained the reasons for not offering the income from software licensing and maintenance fee to tax. The contentions of the assessee are the same, as were raised during the assessment proceedings for A.Y. 2003-04 The payments during the year under consideration are received from the customers on account of licensing of software and rendering of services, the facts and circumstances of the case remains the same and the arguments of the assessee are also same, therefore, for the detailed reasons discussed in the order for A.Y. 2003-04, it is held that the amounts received by the assessee during this year on account of licensing of software and rendering of maintenance services are taxable under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engineers and dealers in computer systems. For AY 2003-04, the Appellant filed its return of income on March 22, 2005 wherein revenue classified as fees for technical services amounting to Rs. 741,538,511 was offered to tax. 5. The Appellant has contracts with Indian customers such as Bharti, Ericsson and Motorola for licensing of software products and is rendering specified services in relation to its billing software. It is submitted that the Appellant has entered into the following two types of agreements with its customers: 6. License agreements with Ericsson and Motorola provide a limited right i.e. a non-exclusive, personal and nontransferable right to the said customers to use the software product solely for the purpose of meeting the latter's obligations to their own customer i.e. BSNL ('sub-licensee'); and a one- time right to sub-license the software product to the 'sub-licensee' is given with further restrictions on the extent and manner of the use of software. The sub-license in such a case is also the ultimate user of the software. The 'sublicensee' is identified in the license agreement between the Appellant and its customers and the customers cannot sublicense su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, it was argued that no title in the material is transferred to the customer and there are restricted number of production and non-production copies which are granted to the customer under the license agreement, the use of which is subject to the same restrictions. It was comprehensively argued that the right transferred is a right merely to use a copy of the computer programme which is a copyrighted article. The ld. AR relied on a number of case laws: * DCIT vs. Metapath Software International Ltd (9 SOT 305) (Delhi ITAT) * Halliburton Export Inc. vs. ADIT(international Taxation) (152 ITD 803) (Delhi ITAT) * Alcaltel USA International Marketing Inc. (2009-TIOL-733- ITAT-MUM) (Mumbai ITAT) * Sonata Information Technology Ltd. vs. Addl. CIT (103 ITD 324) (Bangalore ITAT) 11. Relying on the judgment of Hon'ble jurisdictional High Court ruling in the case of Ericsson AB (246 CTR 422), it was argued that there is a distinction between the acquisition of a "copyright right" and a "copyrighted article" and the assessee supplies the software, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Sub-licensee" shall mean i. VSNL, TTML, TISL, IDEA, Aircel, Dishnet etc. ii. A telecommunication company or utilities company in which Tata Group has equity and operational control. (The Licensee can sublicense to the above group of persons without CSG consent.) iii. Other Indian entities (The Licensee can sub-licensee upon written consent of CSG. However, such consent shall not be unreasonably withheld.) E. Copying and Reproduction Cl-8 "All instances (i. e. Convergent Instance, ISL Instance & Mobile Instance) shall be converted to a Convergent Instance of- Kenan/BP 10. 1 and CSG Kenan/OM 1. 3x On a HP hardware platform and Oracle database and licensed to customer (Licensee) who shall sublicense one production copy to sub-licensees. In addition to this, as per sublicense terms, each new sub-licensee may make 5 non-production copies, (p. 305, PB-II, 2004-05) Product - Convergent Instance ISL Instance Mobile Instance Prodn Non -Prodn Prodn Non-Prodn Prodn Non-Prodn Licensee 1 2 1 2 1 2 Sub -Licensee 1 5 1 5 1 5 (It must be remembered there is no cap on the number of sublicensees. Hence, indirectly, there is no cap on total num ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrasoft Distinguished 13. The ld. DR further submitted her arguments which are as under: "During the course of hearings, the appellant had relied upon the decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02.03.2021. 2. The appellant submitted that the transaction of providing an object copy of machine readable computer program to its customers qualifies as sale and not grant of any copyright right hence not taxable as Royalty but only as business and mainly relied on following contentions: a. The appellant has not granted any right in the copyright, it is only a sale of copyrighted material, b. Source code has not been provided, c. Appellant has granted a limited 'right to use' with restrictions, d. One time right to sub-license only to BSNL with same restrictions, e. The transactions relates to sale of software products, f. Reliance is placed upon Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02. 03. 2021. 3. In this regard, it is to submit that to constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software should be shrink-wrap/off the shelf software (ii) That the case of the assessee should fall under the four categories as cited in the SC order (iii) That that there should be no sub-licencing 5. Whether the software is Shrink wrap software or customized software? However the factual position of the instant case as culled out from the terms of the agreement are different and are stated as under: a) The assessee licenses billing and customer care software products and renders maintenance and professional services in relation to these softwares. License payment being received by the appellant is for billing and customer care software from various telecom operators, namely, Erricson India Pvt. Ltd., Motorola India Pvt. Ltd., and Bharti Cellular Ltd. b) A Billing & Customer Care software provided to various telecom operators is claimed by the assessee to be in the nature of 'off the shelf'/shrink wrap software, rather than customized software. There are various erudite sites on google which explain the difference between customized and shrink wrap software. It is imperative to discuss the same to understand how the software of the assessee falls in the category of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding and implementation needs, and no other organization could access the application. Custom software development pros: Custom software's most significant benefit is providing features that off-the-shelf software doesn't. After the custom-designed solution is implemented, the problems it solves can be well worth the costs. For example, if you commission an application designed to increase productivity, the resulting rise in efficiency can offset the cost of building the solution. If your custom software addresses unique time and attendance or payroll challenges, you can save money and maximize your employees' time. If your organization has a need that's specific enough to warrant custom software, designing a solution is an excellent idea. Custom software development cons: If implementing a custom software solution was inexpensive and easy, everyone would do it. Unfortunately, costs and risks make designing a custom software solution challenging. Costs: The cost of off-the-shelf software applications ranges from a few do l lars to a few thousand dol lars. Many standard business applications have relatively low monthly subscript ion costs or one-time fees. However, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter and above arguments clearly states that the CSG products are customized according to the requirement of customer. (v) A very important aspect of shrink wrap software is that it is a very inexpensive/cheap product, however the customized software is an expensive software. This fact is ubiquitous and known to one and all. Had the concerned software been an off the shelf software, the assessee would not have charged such heavy sums running into crores of rupees/Dollars. In view of above discussion it is abundantly clear that the software catered to by the assessee is a customized software and not a shrink wrap one as it is exclusively developed for the organization to suit its business requirement and that it is very expensive which is a logical corollary to the customized software. So this fact also excludes the case of the assessee from the applicability of the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02. 03.2021. 8. In which category out of the four categories does the assessee's case falls? In para 4 of the decision in case of Engineering Analysis, the Hon'ble Court gives the four categories of cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement to BSNL Thirdly and very importantly, the agreement of the assessee with Erricson India Pvt. Ltd. has a sub- license clause, vide which Erricson sub licensed the billing and customer care software to BSNL. It is pertinent to invite attention of the Hon'ble Bench on the findings of Ld. CIT(A) on pg 11, para 7.1 of the order and pg. 15, para 7.1.3 and para 7.15 at pg 23 of the order where in it has been brought out by Ld. CIT(A) while citing the clauses of the software licensing agreement that rights of granting license were transferred to customers which also included Right to sub-license software consideration under agreement with EIL and MIL and these rights were transferred for heavy amounts of consideration which was in respect of use of or right to use the software(property) It never meant absolute transfer of property. 10. The four model agreements as per the decision of Hon'ble Supreme Court allow only for single use of software on one computer. They do not permit the licensee to copy, modify, reverse engineer, decompile, disassemble or otherwise attempt to discover the source code or algorithm of the software. They only allow taking back up copy which is necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the software licensing agreement, M/s Ericsson has the right to sublicense this software to a third party Le. M/s Bharat Sanchar Nigam Limited. The fact that the third party has been identified In the contract Itself or that only one copy can be sublicensed does not help the assessee's case. The right to sublicense may be exercised only once but it does not alter the fact that the recipient of the software has the right to commercially exploit it. Hence, one can safely Infer that M/s CSG International, UK has authorized M/s Ericsson India Pvt. Ltd. to give on commercial rental the software licensed to It by the former." 12. Thus as per the judgment of the SC and factual position as assessed by AO, if the owner of the software parts with any of the rights that are listed in section 14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof, it would be a case of parting with right in copyright and would then amount to royalty. 13. In view of the detailed discussion at above, it can be subsumed that assessee is engaged in providing customized software products not a Shrink Wrap one and as his case falls under section 14(b) of Copyright Act and not covered by any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter programme is trans ferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end- user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, there fore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all. 46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. 47. In all these cases, the "licence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the context of nonexclusive EULAs, not being so. At this juncture, we have examined the written submission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user right only. The buyer has no right to re-sale the product and it still remained a copyrighted article which the buyer cannot alter modified, reproduced i.e. own will unless authorized. And such authorization has been given to re-supply to BSNL for their use, at the same time, keeping the all other rights with the assessee. 20. Holding thus, the Hon'ble Supreme Court decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for royalty for the use of copyright in the computer software considering the definition of royalty under the DTAAs. Hence, keeping in view the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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