TIBCO SOFTWARE B.V.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX, (IT), CIRCLE - 2,, PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S.SYAL, VICE PRESIDENT AND SONJOY SARMA,JM ITA No.2979/PUN/2017 Assessment Year : 2014-15 TIBCO Software B.V. ...... Appellant C/o TIBCO Software India P.Ltd. 3 Floor, Binnarius,Deepak Complex, National games road, Shastri Nagar, Yerwada, Pune – 411 006. PAN : AAECT3252G V/s. DCIT(IT),Circle-2, Pune ……Respondent

Assessee by : Shri Somil Agarwal Revenue by : Shri Rajiv Kumar Date of Hearing : 24.03.2022 Date of Pronouncement : 29.03.2022 ORDER PER SHRI SONJOY SARMA, JM: This is an appeal filed by the Assessee directed against the final Assessment Order dated 06.10.2017 passed u/s. 144C(13) r.w.s. 143(3) of the Income Tax Act 1961 (Act) for the assessment year 2014-15.

Ground No.2: On the facts and circumstances of the case, and in taw, the Hon„ble DRP erred in directing the Ld. AO to tax the receipt of Rs. 8,74,84,583 towards software maintenance fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement.

2 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.3 : On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to ax the receipt of Rs. 1,27,56,877 towards consulting service fees as Fees for Technical Services within the meaning of Article 12(5)(a) India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.4: On the facts and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld.AO to tax the receipt of Rs.1,48,45,943 towards training fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon'ble DRP be deleted. Ground No.5: On the fade and circumstances of the case, and in law, the Hon'ble DRP erred in directing the Ld. AO to tax the receipt of Rs.1,72,800 towards other service fees as Fees for Technical Services within the meaning of Article 12(5)(a) of the India-Netherlands Double Taxation Avoidance Agreement. It is prayed that the addition made by the Ld. AO on the directions of Hon‟ble DRP be deleted. Ground No.6: On the facts and circumstances of the case and in law, the Ld. AO erred in granting short credit of Tax Deducted at Source („TDS‟) amounting to INR 2,47,666. Ground No.7: On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings against the Appellant under Section 274 r.w.s 271(1)(c) of the Income-tax Act, 1961.”

3 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 Against the said return of income the Assessment was completed by the Assessing Officer. During the previous year relevant to the assessment year under consideration, it is stated that the appellant company had received a sum of Rs.2,07,330,076 towards software license, software maintenance and customer support, consultancy services and training services. The break up of which is as follows :- NATURE OF RECEIPTS AMOUNT (RS) Software License Fees 9,45,38,285 Software Maintenance Fees 8,74,84,583 Consulting Service Fees 1,27,56,877 Training Fees 1,48,45,943 Other Services 1,72,800 TOTAL 20,97,98,488

4 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15

5 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 in India placing reliance on the judgment of Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. 16 Taxman.com. 14 (Kar). Further, DRP also treated the software Maintenance fees, consultancy service fees, training fees and other service fees chargeable to tax in India as “Fees for technical services” as per 5(a) of Article 12 of Indian Netherland Treaty. On the receipt of the DRP direction, the A.O has passed the final assessment order vide order dated 6-12-2017 by bringing into tax the above items in conformity with the direction of DRP as Rs. 9,45,38,285/- as Royalty income and software maintenance fees Rs. 8,74,84,583/-, consulting Service fees Rs. 1,27,56,877/-, Training fees Rs. 1,48,45,943/-, other service fees Rs. 1,72,800/- as “fees of Technical Services”. Being aggrieved, the appellant is in appeal before us in the present appeal.

6 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 license fee on non-exclusive non-transferable basis during the license term. While deciding the issue in favour of the assessee the Tribunal found that the subject software is standard software not customized software. The title, the ownership and all rights in patents, copyrights and trade secrets and other software contained does not get transferred to the customer. The Courts as well as OECD commentary on Article 12 of the DTAA recognized the distinction between “copyrighted article” and “copyright right” in the programme and software which incorporates a copy of the copyrighted programme. Any payment made for acquisition of copy of the software is held not to be Royalty. Even the Hon’ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. 39 taxmann.com 88 held to the same effect. Whereas the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd.345 ITR 494 and CIT Vs. Synopsis International Old Ltd. 212 taxmann 454 held to the contrary. The reasoning given by the Hon’ble Karnataka High Court has been disapproved by the Hon’ble Supreme Court in the case of Engineering Analysis Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). The operative paras of the judgment are reproduced below :

“105. The reasoning of the High Court of Karnataka in Synopsis International Old Ltd. (supra) does not commend itself to us. First and foremost, as held in Swastik Tobacco Factory (supra), the expression "in respect of", when used in a taxation statute, is only synonymous with the words "on" or "attributable to". Such meaning accords with the meaning to be given to the expression "in respect of" contained in Explanation 2(v) to section 9(1)(vi) of the Income-tax Act, and would not in any manner make the expression otiose, as has wrongly been held by the High Court of Karnataka.

7 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 be relevant to determine taxability under the DTAA, as it is more beneficial to the assessee as compared to section 9(1)(vi) of the Income-tax Act, as construed by the High Court. Here again, section 90(2) of the Income-tax Act, read with explanation 4 thereof, has not been properly appreciated.

"Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:-

"In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property

8 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes."

In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held:

"Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good", but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good.

That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods."

A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. \

(pages 499-500)

"Be that as it may, in order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copyright of a literary, artistic or scientific work. Section 2(o) of the Copyright Act makes it clear that a computer programme is to be regarded as a 'literary work'. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under section 14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article".

Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9(1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case.

9 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty."(pages 501-502)

"He, thus submitted that the question of "copyrighted article" or actual copyright does not arise in the context of software both in the DTAA and in the Income-tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. v. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighted article" as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no. 1 & 2 in favour of the assessee and against the Revenue."(page 281)

The High Court then followed its own judgment in Ericsson A.B. (supra), deciding the case in favour of the assessee.

"65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of Motorola Inc v. Deputy Cit And Deputy Cit V. Nokia (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under:

10 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue.

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"(h) Copyright is distinct from the material object, copyrighted:

It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public" (underline is ours)."

The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objection cannot be accepted." (pages 365-366)

"87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty.

12 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto." (pages 385-386)

"96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.

"The misconception that the revenue harbors stems from its flawed appreciation of a copyright license. True, "copyright" is not defined; yet what works are capable of copyright protection is spelt out in the Copyright Act. Sections 13 and 14 of the Copyright Act flesh out the essential ingredients that make copyright a property right." (page 93)

"Thus, Section 14 categorically provides that copyright "means the exclusive right to do or authorizing the doing of any of the acts mentioned in section 14 (a) to (e) or any "substantial part thereof". The content of copyright in respect

13 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 of computer programmes is spelt out in section 14 (b). A joint reading of the controlling provisions of the earlier part of section 14 with clause (b) implies that in the case of computer programs, copyright would mean the doing or authorizing the doing-in respect of work (i.e. the programme) or any substantial part thereof —

(b) In the case of a computer programme,-

(i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme

Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.

The reference to clause (a) and (b) means that all the rights which are in literary works i.e."(i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) 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 (i) to (vi)" inhere in the owner of copyright of a computer programme. Therefore, the copyright owner's rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods-significantly enough, Section 14(1) talks of sale or rental of a "copy". The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign it, divesting itself of the title implying that it has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as "copyright".

In the present case, the facts are closely similar to Ericsson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separate invoicing was done for purchase and other transactions did not imply that it was royalty payment. In such cases, the nomenclature (of license or some other fee) is indeterminate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee's customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities; moreover, even in Ericsson (supra), a similar provision existed in the DTAA between India and Sweden." (pages 95-96)

(i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts.

14 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 (ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner.

(iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act.

(iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the "licensed" computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customized to its specifications or otherwise.

(v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.

(vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in State Bank of India (supra) (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so.

15 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed.

16 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 2 [2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.]

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this Article is received; or

b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property;

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals, making the payment; or

e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (Independent Personal Services) of this Convention.]

17 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 fixed base, then such royalties or fees for Technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

18 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15 19. As a result, the appeal is partly allowed for statistical purposes.

Order pronounced in the open Court on this 29th day of March, 2022.

Sd/- sd/- (R.S.SYAL) (SONJOY SARMA) VICE PRESIDENT JUDICIAL MEMBER Pune; Dated : 29th March, 2022. Ankam

Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The DRP-3,Mumbai. 4. The Pr. CIT(IT & TP), Pune. 5. DR, ITAT, “C” Bench, Pune. 6. Guard File. BY ORDER,

Senior Private Secretary ITAT, Pune. /// true copy ///

19 ITA No.2979/PUN/2017 Tibco Software B.V. A.Y. 2014-15

Date 1 Draft dictated on 28-03-2022 Sr.PS/PS 2 Draft placed before author 28-03-2022 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member

4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr. Sr.PS/PS PS/PS 6 Kept for pronouncement on 29-03-2022 Sr.PS/PS 7 Date of uploading of order 29-03-2022 Sr.PS/PS 8 File sent to Bench Clerk 29-03-2022 Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order