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TMI Blog2024 (2) TMI 1396X X X X Extracts X X X X X X X X Extracts X X X X ..... e deem it appropriate to additionally observe that the right of subscription to a cloud-based software cannot possibly be said to be equivalent to the use or right to use any industrial, commercial or scientific equipment. This more so since the respondents sought to place the consideration received under Article 12 (4)(b) and which is specifically excluded from sub-article (3)(b). The argument based upon Article 12(4)(a) also cannot sustain since the same pertains to payments received as consideration for managerial, technical or consultancy services and which are ancillary or subsidiary to enjoyment of the right, property or information referable to paragraph 3. This again would be founded upon the payment foundationally falling within the ambit of royalty as defined therein. Similar would be the position which would obtain bearing in mind the unambiguous language in which Article 12(4)(b) of the DTAA is couched. Article 12(4)(b) would have been applicable provided the appellants had been able to establish that the assessee had provided technical knowledge, experience, skill, knowhow or processes enabling the subscriber acquiring the services to apply the technology contained the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration received by the assessee from various customers on account of licensing of Customer Relationship Management CRM software is not royalty income within the meaning of Article 12(3) of the IndiaSingapore Double Taxation Avoidance Agreements DTAA ? b) Whether on the facts and in the circumstances of the case, the order of ITAT is erroneous as the Assessing Officer AO has held that receipt from CRM software as royalty income under Clause (iv-a) and clause (v) of Explanation 2 to Section 9(l)(vi) of the Income Tax Act, 1961 Act whereas the ITAT has dealt the issue under clause (iv) of the Explanation 2 to Section 9(1)(vi) of the Act? c) Whether on the facts and in the circumstances of the case, the ITAT has erred in holding that the consideration received by the assessee from various customer on account of licensing of CRM software is not royalty income without appreciating the fact that CRM platform provided by the assessee to its customers in India is a scientific equipment and income arising from use or right to use of such platform is royalty income both under clause (iv-a) to Explanation 2 of Section 9(l)(vi) of the Act as well as Article 12(3)(b) of the India- Singapor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion fee is liable to be placed in that particular Article and thus be treated as royalty under the DTAA. The appellant additionally asserts that if it not be royalty, it would clearly fall within the ambit of fee for technical services. 5. The business module of the assessee has been duly recorded by the AO in the following terms: - Transaction flow: 1. SFDC Singapore would enter into a Master Subscription Agreement with the Indian Customer for provision of CRM services. 2. Indian customer to make payment to SFDC Singapore for the subscription fee for CRM services which is directly remitted by the customer in India to SFDC Singapore‟s bank account outside India. 3. The customer shall input, store and retrieve his proprietary data on the Salesforce.com portal through the CRM application software of SFDC Singapore. 4. SFDC Singapore shall provide access for customer‟s own use to generate reports etc. in the desired format and thereby use such data for own business purpose. 5. The access is for a limited duration upto the period validity of the subscription paid by the customer and such is denied automatically after this period. The key features of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al case of the assessee that customers are not accorded the right to either copy or download the CRM application software or to use the same other than on the server of the assessee. 8. It becomes pertinent to note that while dealing with a similar issue of whether subscription fee to a software could be viewed as royalty under Article 12 of the Indo-US DTAA, this Court in The Commissioner of Income Tax-International Taxation-3 vs. Relx Inc. [ITA 630/2023] on 07 February 2024 had held as under:- "11. We find that similar would be the position which would obtain when subscription fee is examined on the anvil of Article 12 of the DTAA. If the Department were to describe subscription fee as "royalty", they would necessarily have to establish that the payments so received by the assessee was consideration for the use of or the right to use any copyright or a literary, artistic or scientific work as defined by Article 12(3) of the DTAA. Granting access to the database would clearly not amount to a transfer of a right to use a copyright. We must bear in mind the clear distinction that must be recognised to exist between the transfer of a copyright and the mere grant of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licencee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA. 92. The licencees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee Company, the licencee to whom the Assessee Company has sold/licenced the software were allowed to make only one copy of the software and associated support information for backup purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant DTAA depending upon whether there is a PE through which the assessee operates in India. This is one more circumstance to show that the Revenue has itself appreciated the difference between the payment of royalty and the supply/use of computer software in the form of goods, which is then treated as business income of the assessee taxable in India if it has a PE in India. Conclusion 180. Given the definition of "royalties" contained in Article 12 of the DTAAs mentioned in para 46 of this judgment, it is clear that there is no obligation on the persons mentioned in Section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act [Section 9(1)(vi), along with Explanations 2 and 4 thereof], which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 181. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer by way of a licence to only include a licence which transferred rights in respect of copyright, by referring to Explanation 2 to section 9(1)(vi) of the Income-tax Act. It then held: 'Considerable arguments are raised on the so-called distinction between a copyright and copyrighted articles. What is a copyrighted article ? It is nothing but an article which incorporates the copyright of the owner, the assignee, the exclusive licensee or the licencee. So, when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. That apart, the Copyright Act or the Income-tax Act or the DTAC does not use the expression "copyrighted article", which could have been used if the intention was as claimed by the applicant. In the circumstances, the distinction sought to be made appears to be illusory.' This ruling of the Authority for Advance Rulings flies in the face of certain principles. When, under a non-exclusive licence, an end-user gets the right to use computer software in the form of a CD, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed." 5. Further, this court on similar facts has allowed writ petitions filed by the similarly placed assessee in EY Global Services Ltd. v. Asst. CIT W. P. (C) No. 11957 of 2016 and EYGBS (India) Pvt. Ltd. v. Joint CIT W. P. (C) No. 12003 of 2016 [2022] 441 ITR 54 (Delhi). The relevant portion of the said judgment is reproduced hereinbelow (page 69 of 441 ITR) : "A reading of the above judgment would clearly show that for the payment received by EYGSL (UK) from EYGBS (India) to be taxed as 'royalty', it is essential to show a transfer of copyright in the software to do any of the acts mentioned in section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licensee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end-user to have access to and make use of the licenced software over which the licensee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as 'royalty'. In the present case, the EYGBS (Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no substantial question of law arises for consideration in the present appeals. It is also pertinent to mention that the appellant had admitted before the Income-tax Appellate Tribunal that the dispute in question had been decided in favour of the assessee by the Tribunal in the earlier years. Accordingly, the present appeals are dismissed." 9. Insofar as the question relating to the aspect of "make available" is concerned, we had in Relx observed as follows: - "15. Similarly, in order for that income to fall within the ambit of "fees for included services", it was imperative for the Department to establish that the assessee was rendering technical or consultancy services and which included making available technical knowledge, experience, skill, know-how or processes. As has been found by the Tribunal, the access to the database did not constitute the rendering of any technical or consultancy services and in any case did not amount to technical knowledge, experience, skill, knowhow or processes being made available. 16. We note that while explaining the meaning liable to be ascribed to the expression "make available", the Court in Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider." (emphasis is ours) 15. We tend to agree with the analysis and conclusion arrived at by the Tribunal." 10. The view taken by us in Relx thus clearly merits the questions proposed being answered in favour of the assessee. The submission addressed by Mr. Bhatia, learned counsel for the appellant, additionally on Section 9(1)(vi) of the Act must also meet a similar fate and for the following reasons. It becomes pertinent to observe that the provision under Section 9 of the Act would have been attracted, provided they were more beneficial to the assessee. Notwithstanding the above, we find that Section 9 and more particularly Explanation 2 thereof defines the word "royalty" as follows: - "9. Income deemed to accrue or arise in India.--(1) The following incomes shall be deemed to accrue or arise in India-- *** (vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.--For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for-- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns which were rendered by the Supreme Court in Engineering Analysis Centre for Excellence vs. CIT (2022) 3 SCC 321 and have been noticed in Relx and have been reproduced hereinabove. 12. We deem it appropriate to additionally observe that the right of subscription to a cloud-based software cannot possibly be said to be equivalent to the "use" or "right to use" any industrial, commercial or scientific equipment. This more so since the respondents sought to place the consideration received under Article 12 (4)(b) and which is specifically excluded from sub-article (3)(b). 13. The argument based upon Article 12(4)(a) also cannot sustain since the same pertains to payments received as consideration for managerial, technical or consultancy services and which are ancillary or subsidiary to enjoyment of the right, property or information referable to paragraph 3. This again would be founded upon the payment foundationally falling within the ambit of royalty as defined therein. 14. Similar would be the position which would obtain bearing in mind the unambiguous language in which Article 12(4)(b) of the DTAA is couched. Article 12(4)(b) would have been applicable prov ..... 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