HIKAL LIMITED,MUMBAI vs. DCIT 3 (1) (1), AAYAKAR BHAWAN

The assessee is mainly aggrieved by the action of the Assessing Officer in treating two payments made to non- residents as sums chargeable to tax in India and, consequently, holding the assessee to be an assessee in default for failure to deduct tax under section 195. The first payment of ₹22,94,510 was made to Aspen Technology Inc., USA towards licence of software, which has been treated by the Assessing Officer as royalty. The second payment of ₹6,44,347 was made to Dekom AG, Germany, which has been treated as fees for technical services. The assessee’s case, on the other hand, is that the first payment was merely for a limited right to use copyrighted software without acquisition of any right in the copyright, whereas the second payment was predominantly for purchase of video-conferencing equipment supplied and installed in Germany.

Insofar as the payment made to Aspen Technology Inc. is concerned, the Assessing Officer rejected the assessee’s contention that it represented consideration for use of a copyrighted product and proceeded on the premise that the software involved use of a process, know-how and information concerning industrial, commercial or scientific experience. On this reasoning, he held the payment to be royalty and consequently invoked sections 195, 201(1) and 201(1A). In the case of Dekom AG also, the Assessing Officer proceeded on the premise that the payment was for technical services

Before us, the learned counsel, in respect of the first issue, drew our attention to the relevant clauses of the licence agreement entered into with Aspen Technology Inc. and submitted that the nature and extent of rights granted thereunder leave no manner of doubt that the assessee was merely permitted to use the copyrighted software for its internal business purposes. The licence was expressly non- exclusive, non-transferable and non-sublicensable. The title, copyright and all proprietary rights in the software continued throughout to vest in Aspen Technology Inc. The assessee could neither commercially exploit nor transfer, sublicense, modify, adapt, reverse-engineer or create derivative works from the software. Thus, there was no grant of any right in a copyright so as to fall within Article 12(3) of the India-USA DTAA. Reliance was principally placed upon the judgment of

The provisions governing ownership and proprietary rights are even more explicit. Title, ownership and all rights in patents, copyrights, trade secrets and other intellectual- property rights in the software remain with Aspen Technology Inc. and/or its third-party vendors and licensors and do not pass to the assessee. The assessee is prohibited from modifying or enhancing the software, creating derivative works, merging or separating its components or commercially exploiting it. Except for a permissible archival or backup copy, copying is prohibited; and the assessee cannot recompile, disassemble or reverse-engineer the software. The

Article 12(3)(a) of the India-USA DTAA, insofar as relevant, contemplates consideration for the use of, or right to use, copyright of a literary, artistic or scientific work, patent, trademark, design or model, plan, secret formula or process or information concerning industrial, commercial or scientific experience. What is material, therefore, is not merely that the assessee has been permitted to use a software product, but whether the payment is consideration for use of, or right to use, the copyright or any other intellectual-property right enumerated in the Article. A copyrighted article and the copyright subsisting therein are not juridically interchangeable concepts. A person may acquire a limited facility to use the former without acquiring any of the rights constituting the latter.

Tested on the aforesaid touchstone, we are unable to subscribe to the reasoning of the authorities below that because the software is specialised or assists the assessee in its engineering or manufacturing processes, the consideration

We have examined the said contemporaneous document. The Order Confirmation No. 49931 dated 25.09.2018 issued by Dekom AG furnishes a clear description and breakup of the transaction. It records €4,725 towards AVAYA SCOPIA XT5000, €768 towards AVAYA SA Essential + UA PRT NBD SCOPIA XT5000, €890 towards installation, setup and training, and €25 towards shipping, packing and insurance, resulting in a net amount of €6,408, apart from VAT. The description relating to installation refers to installation at site, commissioning, training of the system administrator and users and deployment of configuration templates and recommendations.

Once this primary document is juxtaposed with the reasoning in the assessment order, the infirmity in the latter becomes apparent. The Assessing Officer has proceeded on the footing that the payment was connected with clinical research trials and has thereafter embarked upon a general discussion regarding the width of the expression “technical services”. The documentary evidence, however, shows that the transaction had nothing to do with clinical research trials. It was essentially a commercial transaction for procurement of

From the aforesaid contemporaneous document, it is evident that the predominant part of the transaction was towards purchase of the identified video-conferencing equipment and allied product. Therefore, the approach of the Assessing Officer in treating the entire payment of ₹6,44,347 as consideration for technical services, much less on the premise that it pertained to clinical research trials, is not borne out from the material on record. The order confirmation itself belies such an inference. At the same time, however, the order confirmation separately identifies an amount of €890 towards “installation, setup and training”, which, inter alia, comprised installation at site, commissioning, training of the system administrator and users and deployment of configuration templates and recommendations. Thus, unlike the consideration attributable to the equipment, this amount has been separately earmarked for rendition of certain services.

Before us, the learned counsel submitted that even the aforesaid installation and training were incidental to the supply of equipment and, therefore, should partake the same character as the principal transaction. However, when specifically confronted with the separately identified service component of €890, it was fairly stated that there is no further material on record delineating the precise nature and extent of the training and other services rendered by Dekom AG or demonstrating that the same were confined merely to routine installation and operational demonstration. In other words, while the material before us clearly establishes that the entire payment could not have been characterised as fees for technical services, the evidentiary record is not sufficient to conclusively determine that the separately stipulated consideration of €890 for installation, setup and training was wholly outside the ambit of technical services.

Ordinarily, such an aspect may have required further verification as to the exact nature and scope of the services comprised in the separately identified consideration. However, having regard to the smallness of the amount involved and the corresponding withholding-tax liability, the learned counsel fairly stated that the assessee does not wish to prolong the controversy or seek restoration of this limited issue and would accept deduction of tax on the aforesaid amount of €890 at the applicable rate under the India-

We make it explicit that the aforesaid conclusion in relation to €890 rests upon the peculiar facts of the present case, the absence of sufficient material before us demonstrating the precise nature and scope of the training and allied services, and the fair concession made by the learned counsel having regard to the smallness of the tax effect involved. This finding shall, therefore, not be construed as laying down any proposition or precedent that installation, commissioning or training services incidental to supply of equipment would, per se, constitute fees for technical services under Article 12 of the India-Germany DTAA. Such characterization would necessarily depend upon the terms of the particular arrangement and the nature of services established on record.

Thus, insofar as the payment of ₹6,44,347 made to Dekom AG is concerned, the action of the authorities below in treating the entire payment as fees for technical services

To sum up, the payment of ₹22,94,510 made to Aspen Technology Inc., USA is held not to constitute royalty within the meaning of Article 12(3) of the India-USA DTAA, since the assessee acquired merely a limited right to use the copyrighted software without acquiring any right in the copyright itself. Consequently, no liability under sections 195, 201(1) or 201(1A) survives in respect of the said payment. As regards Dekom AG, the treatment of the entire payment of ₹6,44,347 as fees for technical services is set aside and the withholding-tax liability shall stand restricted only to the separately identified consideration of €890 towards installation, setup and training, in terms indicated hereinabove.

In the result, the appeal of the assessee is partly allowed.