Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order passed by ITO (International Taxation) Circle 1(2), Bangalore dated 27.9.2023 for the assessment year 2021-22. 2. Ground Nos.1, 2, 5 & 8 of the assessee’s appeal are general in nature, which do not require any adjudication.
IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 2 of 12 3. Ground No.3 is with regard to addition of receipts from sale of software & support services of Rs.14,27,24,656/- as Royalty income.
3.1 Facts of the case are that during the year under consideration the assessee company has offered NIL income and has claimed the entire TDS deducted of Rs.1,53,75,999/- as refund in its ITR. Synamedia limited (earlier known as NDS Limited) is registered in Surrey , UK. The company is one of the global providers of video solutions for Pay TV operators. It provides advanced and secure video solutions for cloud services, middleware platforms, IPTV, DTH, cable and OTT Pay TV providers. The company offers subscribers video experience on any device. The Company also serves global satellite DTH, cable, telco and over-the top pay TV providers. During the year, the assessee has received the following income: SI. No. Nature of income Amount (Rs.) Remarks A 14,27,24,656 Income shown as exempt in supply of software ROI. (schedule EI of lTR) license and hardware and Provision of support service Total 14,27,24,656 3.2 As per submissions dated 17.11.2022, the assesee has contended its income from India as exempt since it only transfers a right to use to the third party customers and doesn't transfer the right to use the copyright embodied/supply of software license and hardware by the Company. The assesee has relied on the ruling of Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Besides, the assessee has also stated the support services income earned by the company is exempt in India as the support services provided are not ancillary and subsidiary to the application or enjoyment of some right, property or information for which a royalty payment is made. Support services do not fulfil the condition of make available any technical knowledge, skill, experience, know how or consist of the development and IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 3 of 12 transfer of a technical plan <jr technical design to the third-party customers in India.
3.3 The detailed breakup of income earned by the assessee company is as under: Name o the customer Revenue Earned in Rs. GTPL Hathway Limited 48,66,517 Atria Convergence Technologies Limited 23,94,880 Den Networks Limited 3,11,35,803 Dish TV India Limited 1,49,65,000 Hathway Digital Limited 2,89,29,092 Star India Private Limited 63,86,620 Culver Max Entertainment Private 49,86,404 Limited Tata Play Limited 4,90,60,340 Total 14,27,24,656 3.4 As per submissions of assessee before the AO dated 25.11.2022, during AY 2021-22, there is no sale of software and only customization services were provided based on client’s requirements. The ld. A.R. has stated before the ld. AO that these payments do not constitute FTS.
3.5 The ld. AO treated it as royalty payment in respect of software & support services. Against this assessee is in appeal before us.
We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in assessee’s own case for the assessment year 2006-07 in dated 12.11.2021, wherein held as under: “23. In respect of agreement between the assessee and DEN, the relevant terms of the licence is as follows: LICENSE License Grant. In consideration of payment by DEN of all license fees due in accordance with Schedule 1, and subject at all times to IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 4 of 12 DEN complying with the terms and conditions of this Agreement, NDS hereby grants to DEN the non-transferable object code only right and license in the Territory. (a) To use the NDS Software, NDS Hardware, Third Party Hardware and Third Party Software in accordance with Schedule 2 but only as is strictly required to provide the services to Subscribers using STBs incorporating the Components; (b) From Acceptance, to make, store and use two back-up copies of the NDS Software and Third Party Software on back-up server(s) but only as required as part of a disaster recovery programme or expressly permitted under applicable law; (c) From Acceptance, to use the Components as integrated in the STBs but only as is strictly required to provide the services to the Subscribers; To use the documentation in connection with the operation of the NDS (d) Systems; From Acceptance, to distribute the Viewing Cards to Subscribers in the (e) Territory so that such Subscribers may, in conjunction with the STBs receive the Services in the Territory; and From Acceptance, to grant Subscribers a sublicense to use the NDS Software incorporated into the Viewing Cards but only as is strictly required to receive the Services from DEN and on terms consistent with those set out in Clause 7.2 and 7.4 which relate to the NDS Software contained on the Viewing Cards.
The terms of the other licence agreement between the various parties have not been set out in the order of assessment though the copies of the same are available in the Paper Book. The terms of the agreement are clearly similar to the terms of the agreement which the Hon’ble Supreme Court analyzed in the case of Engineering Analysis. We shall anlyse the terms of the Agreement between the Assessee and Bharati Telemedia as a sample. Techinical and commercial proposal given by the Assessee alongwith the STB provides technical specifications for the engineering of the relevant systems. That by itself cannot be the basis to conclude that there has been use of any copyright 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 inferences drawn by the AO based on the FAO given
IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 5 of 12 along with the STB. Even if software is licensed and not sold, it is akin to sale based on real nature of transaction. Bharti is just a distributor of Assessee’s products (ie, integrated system). Distributor is buying products for onward sale – para 45 of SC judgment. Use of hardware and software to run are key characteristics of an integrated system. Even if it is licensed, the real nature is that of a sale as per para 51 of SC judgment (one has to look at the real nature of the transaction upon reading the agreement as a whole as laid down by the Hon’ble Supreme Court and para 52 of SC judgment (licensing is akin to sale – reference to SC judgment in TCS case). With reference to paras 4.1 to 4.8 of FAO, it is clear from para 73 of SC judgment that granting of license has to be granting license over copyright rights as per section 14(b) read with 14(a) of Copyright Act. In para 97 the Hon’ble Supreme Court has observed that under software license agreement, customer is licensed to only use the software as such and not the copyrights in the software, therefore granting of license in such cases does not amount to royalty (Assessee’s case is similar – see Article 3.01 and 3.02 of the Agreement). In para 109 of SC judgment, it has been specifically laid down that it is wholly incorrect to say that license in software EULA is license to use copyrights. In para 117 for overall conclusions of SC in the context of distinction between license over copyright and license to use copyrighted product – specifically para 117(v), the Hon’ble Supreme Court has held that even if fee schedule refers to royalty payment, this is consideration for purchase of an integrated system. One has to look at the overall agreement and the real nature of the transaction (para 51 of SC judgment). On the AO’s reference in para 4.4 of FAO as license being for use of IPR over viewing cards and software is incorrect since as per Article 3.01 and 3.02 (page 58-59 of paper book), license is for simplicitor use of the software, with several restrictions. Also, as per clause 3.04 (No license to accessed materials) and clause 3.05 (Ownership), no license whatsoever is granted over using the IPR in the software. License is to only use software to enable using the accompanying hardware, as part of an integrated system. Aspect of training referred to in para 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 Assessment Year 2013-14 (After FA, 2012 was enacted) and cannot be upheld as clarificatory so as to apply retrospectively for previous assessment years (para 73 - 74, 78 and 79). Therefore, the payments made under the customer contracts are not be treated as “royalty” under section 9(1)(vi) of the Act itself for the subject AY 2010-11, even without reference to the DTAA. Under IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 6 of 12 the DTAA, clearly these are not “royalty” payments under Article 12 of the India – UK DTAA as held by the SC (UK DTAA has also been examined by the SC para 40.
As already observed in the earlier paragraph, the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon’ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts: 1. The seven acts enumerated in sub-clause (a); and 2. The eighth act of selling or giving of commercial rental or offering for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any medium electronically; 2. To issue copies of the work to the public, provided they are not copies already in circulation; 3. To perform the work in public, or communicate it to the public; 4. To make any cinematographic film or sound recording in respect of the work; 5. To make any translation of the work; 6. To make any adaptation of the work; and 7. To do, in relation to a translation or 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 under which software in question was sold by the IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 7 of 12 Assessee to its distributions and the terms of the EULA. The same are identical to the case decided by the Hon’ble Supreme Court and hence the ratio laid down therein would squarely apply to the present case also.
On the question whether the provisions of the Act can override the provisions of the DTAA, the Hon’ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the "transfer of all or any rights" in respect of any right, property, or information included and had always included the "transfer of all or any right for use or right to use a computer software". The court ruled that Explanation 4 to section 9(1)(vi) expanded the scope of royalty under Explanation 2 to section 9(1)(vi). Prior to the aforesaid amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or other similar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of ‘royalties’ will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term ‘copyright’ has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for "the use of, or the right to use, any copyright "of a literary work includes a computer program or software. It was held that the regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner 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.”
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.
Ground No.4 is with regard to recharacterizing the maintenance & support services income as fee for technical services.
IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 8 of 12 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, property or information for which a royalty payment is made. The assessee performs regular routine maintenance checks on headend components and systems, for example, monitoring the size of database files, etc. The assessee's support engineers carry out the health check of the headend/system that has been installed at customer site, to ensure that the system continues to operate at maximum efficiency.
5.3 He submitted that the learned Assessing Officer has failed to understand that while rendering services by the assessee, no technical knowledge, skill, knowhow or process is made available to the service recipients. As an end result of the provision of services, the customer is not equipped with any specialized technical knowledge or skill which he may independently use after the end of the contract between such customer and the assessee. Hence there is no transfer of make available of knowledge.
5.4 He further submitted that the learned Assessing Officer has erred in facts and laws by not considering the provisions of Double Taxation Avoidance Agreement to conclude whether the payments received are taxable income or not. The assessee is a tax resident of United Kingdom. The assessee is eligible to be taxed as per the provisions of the tax treaty to the extent they are more beneficial than the provisions of the Income Tax Act.
5.5 He submitted that the learned Assessing Officer has erred in facts and laws by not considering the definition of fees for technical services as IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 9 of 12 mentioned in Article 13 of the tax treaty between India and United Kingdom. As per Article 13 of the tax treaty, the term "fees for technical services" means: "payments of any kind of any person in consideration for rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a)of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) f this Article is received; of (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. " Accordingly, he submitted that if either 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 IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 10 of 12 subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment is made, such services are" considered FTS if they fall into the third category of technical or consulting services - those which make available technical knowledge, experience, skill, know how, or processes, or consist of the development and transfer of a technical plan or technical design.
5.7 The ld. A.R. submitted that the learned Assessing Officer has failed to appreciate the fact that the support services rendered by the Assessee do not fulfil the conditions of 'making available of knowledge' or any technical knowledge, experience, skill know how or processes, or consist of the development and transfer of a technical plan or technical design to the third-party customers in India. As per the article 13 - Royalties and Fees for Technical Services of DTAA between India and United Kingdom, the services provided by a non-resident to a resident is not taxable in India, if there is no make available of knowledge. Hence the receipts form maintenance and support services received by the Assessee is not taxable in India. The Assessee has also furnished Tax Residency Certificate which is a mandatory requirement to avail the benefits of DTAA.
The ld. D.R. relied on the order of lower authorities.
We have heard the rival submissions and perused the materials available on record. As discussed earlier, similar issue came for consideration before this Tribunal in assessee’s own case in assessment year 2006-07 in dated 12.11.2021 wherein held as under: “18. On question whether the receipts can be taxed as FTS in so far as it relates to receipts from Tata Sky and DEN, it was submitted as follows:
a. Mere issue of plastic/fiber cards along with physical set-up box does not constitutes FTS, instead of sale of hardware. b. Supply of products carrying the IP to the customer does not amounts to “FTS”.
IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 11 of 12 c. The AO and the DRP have erred in holding that provisions of DTAA are very similar to provision of the Act without understanding the legal position. d. The lower authorities have failed to appreciate that the “make available clause” required under the India-UK DTAA are not satisfied in the instant case e. The AO and the DRP have erred in not considering the settled position of law on make available clauses including the decision of the Jurisdictional High Court in the case of De Beers India Minerals Private Limited (Page 1172-1223 of case-law compilation).
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), then the receipts from subsequent AMC and other services will also not be covered under clause (vi) to Explanation 2 of section 9(1)(vi). Even under the DTAA, these will not be covered by Article 12(4)(a) or 12(4)(b), since these services fees will be seen as towards services for postsale of goods and not ancillary to royalty transactions.
……………………………………………………………………………………… ……………………………………………………………………………………….
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 cannot be brought to tax as FTS.”
7.1 Further, similar view was taken for the assessment years 2010-11, 2012-13 & 2013-14 by the Tribunal. In view of the above, we allow this ground on similar lines. This ground of assessee is allowed.
IT(IT)A No.940/Bang/2023 Synamedia Limited, United Kingdom Page 12 of 12 8. Ground Nos.6 & 7 are with regard to charging of interest u/s 234A & 234B of the Act, which is mandatory in nature, which do not require any adjudication.
Ground No.8, 9, 10 & 11 which are very general in nature, which do not require any adjudication.
In the result, appeal of the assessee is allowed.
Since we have allowed the appeal of the assessee, stay petition filed by the assessee in SP No.41/Bang/2023 has become infructuous and dismissed accordingly.
In result, appeal of the assessee is allowed and the stay petition filed by assessee is dismissed. Order pronounced in the open court on 13th Dec, 2023