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Income Tax Appellate Tribunal, “G”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
आदेश / O R D E R PER R.C.SHARMA (A.M):
These are the appeals filed by the Revenue against the order of CIT(A)-6, Mumbai dated 28/10/2015 for A.Y.2012-13 in the matter of order passed u/s.143(3) of the IT Act.
Grievance of revenue in both the years pertains to CIT(A)’s action holding that no TDS was deducted on payment made to foreign parties.
We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that the assessee company is engaged in the business of software exporting. For the assessment year 2011-12, the assessee filed its return of income on ITA 248/Mum/2016 M/s. Western Outdoor Interactive Pvt. Ltd., 23/09/2011 by declaring total income of Rs.8,91,09,323/- under the normal provision of the Act. The AO, observed from the Profit & Loss A/c that an amount of Rs.63,56,339/- was paid as export commission to foreign parties. When the assessee was asked whether TDS was deducted or not, the assessee replied in negative. Relying on the provisions of section 9(1) of the Act, the assessee submitted that no tax was deductible as the commission in the hands of the non-resident did not arise directly or indirectly through or from any business connection or property or transfer of capital asset in India. The AO was of the opinion that the assessee should have taken a certificate from the AO as per section 195 of the Act, failing which the assessee is liable to deduct tax on the payment to foreign agents. Accordingly, the AO added an amount of Rs.63,56,339/- to the total income of the assessee. The AO also made a disallowance of Rs.17,61,904/- u/s 40(a)(i) of the Act in respect of content & software development expenses.
By the impugned order, CIT(A) has deleted the disallowance of export commission paid to foreign parties, after observing as under:- 4.2 I have carefully considered the facts of the case and the submissions of the appellant. I have also gone through the decisions relied on by the Id. AR. There is no dispute regarding the fact that the impugned commission was paid to three foreign parties for procuring export orders. The Hon'ble ITAT, Delhi in case of Welspring Universal (supra) has considered Circular Nos.23 of 1969, 786 of 2000 and 7 of 2009 and held that commission income for rendering services in procuring export orders outside India is not chargeable to tax in the hands of non- resident agent and hence no tax is deductible u/s 195 of the Act on such payment by the payer. Accordingly, no disallowance is called for u/s 40(a)(ia) of the Act. It also referred to the decision of Hon'ble Madras High Court in the case of Faizen Shoes (P) Ltd. (supra) where it was held that no disallowance can be made u/s ITA 248/Mum/2016 M/s. Western Outdoor Interactive Pvt. Ltd., 40(a)(ia) in respect of commission( paid to non-resident agent for providing services outside India. This decision has been accepted by the department and no SLP has been filed. The other decisions relied on by the Id.AR also support the case of the appellant. Since the facts of the present appeal are similar, respectfully following the above decisions, addition is deleted and the ground is allowed.
By the impugned order, CIT(A) deleted the disallowance made u/s.40(a)(ia) by observing as under:- “I have carefully considered the facts of the case and the submissions of the appellant. I have also gone through the provisions of section 9(l)(vi) , relevant sections of the Copyright Act and the decisions relied on by the Id. AR. I have also gone through the Content License Agreements entered into by the appellant with M/s Columbus Travel Media Ltd. and Zagat Survey LLC. The assessee is a private limited company engaged in the business of export of software application and games from its premises located at SEEPZ, Mumbai, India. M/s Columbus Travel Media Ltd, is a company registered in U.K. and it writes travel guides and the assessee company has partnered with WTG, also known as Columbus, to display WTG travel guides to the airlines. It is submitted that there are approximately 70 cities of WTG data that is used in assessee's application namely Cityscope/Travelport. It includes information for a traveler such as city overview, getting around, hotel and restaurant description, top attractions, culture, shopping, night life, performance and calendar etc. The other company namely Zagat Survey LLC is registered in USA. It publishes restaurant and other survey content in a variety of media including its web site www.zagat.com. The appellant has taken license from Zagat of certain contents in order to make them available for use on aircraft seatback monitors located in airplanes. 6.1 According to the AO, the licensor has given the right to the assessee of its copyright work for the development of assessee's software. Therefore, the payment would fall under the meaning of royalty u/s 9(l)(vi) of the Act on which tax was deductible. He stated that it would be immaterial whether the licensing right was exclusive or not. What is material is that the assessee makes use of the content in its software and makes payment to the licensor for the contents utilized by it. The AO has also stated that exclusive right could be provided by the foreign company to many companies including the assessee on receipt of certain payments by the foreign company. He also stated that it would not matter whether the payment was made from India or abroad. Accordingly, he treated the payments to these two companies as loyalty u/s 9(l)(vi) and disallowed the payment u/s 40(a)(i) of the Act.
ITA 248/Mum/2016 M/s. Western Outdoor Interactive Pvt. Ltd., 6.2 The Id.AR has stated that a number of international companies are engaged in the business of data collection/organization and creation of data bases and softwares. The Indian companies subscribe to such data base to know the international best practices, research reports etc. The question that needs to be answered is whether such payments could be characterized as royalty within the meaning of section 9(l)(vi) of the Act and would require withholding of tax on such payments. The Id.AR has referred to the definition of royalty under Explanation 2 to section 9(l)(vi), section 14 of the Copyright Act, 1957 and a host of High Court and ITAT decisions and contended that the appellant has only a non exclusive and non transferable licence and the transfer is of a copyrighted article and, therefore, the payment is not royalty. 6.3 In order to qualify as "royalty" payment, within the meaning of Explanation 2(v) to section 9(l)(vi), 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, as held in DIT v. Ericcson A B 343 ITR 470 (Del.) and followed in CIT v. Alcatel Lucent Canada 372 ITR 476 (Del.) Examination of the Content Agreements of the appellant with Columbus Travel Media Ltd. and Zagat Survey LLC reveal that the assessee has obtained non exclusive, non transferable licenses from both parties. The assessee cannot edit, modify, use copy, transmit, display or redistribute the Works in any way except as permitted by the licensor. It cannot remove or modify any copyright or trademark notice from the Works or any copies of the Works made under the license or retain copies of the Works after termination of the license. The assessee also does not have any right in the Intellectual Property Rights (IPR). It is thus clear that the assessee has no right as envisaged u/s 14 of the Copyright Act, 1957 to duplicate the software or to issue copies of the software in public or to give copies of software on rent or even to reverse engineer, decompile or modify the software. The conditions in the agreement makes it clear that no part of the copyright is given to the assessee. Accordingly, grant of the software to the assessee cannot be said to be the transfer of the copyright to the assessee either in part or in whole. The consideration paid by the appellant for acquiring the copy of software is not for the use of the copyright or transfer of copyright to use of copyright. Copyright is different from the work in respect of which the copyright exists. The appellant has got a copy of the software without any part of the copyright of the software. Thus, payment of the assessee for acquiring copy of the software does not amount to royalty within the definition of Article 13(3) of DTAA with U.K. or Article 12(3) of DTAA with USA. The amounts pair by the appellant to Columbus Travel Media Ltd. and Zagat Survey LLC was purchase of collection of data, i.e. handy information for a traveler such as city overview, hotel/restaurant description, top attractions, ITA 248/Mum/2016 M/s. Western Outdoor Interactive Pvt. Ltd., shopping, nightlife, performance, calendar etc. Hence, such payments would not constitute royalty under the Act or the Treaty. Further, the appellant has a non-exclusive and non-transferable license to use the Works into its software applications. In this regard, the decision of the Hon'ble Delhi High Court in the case of DIT v. Infrosoft Ltd. 220 Taxman 273 is relevant. The Hon'ble High Court held that non exclusive and non transferrable license to use customerise software was not taxable as royalty. 6.4 The Delhi High Court in case of DIT v. Ericsson A.B, (16 Taxman.com 371) held that in deciding the nature of payment for software the distinction between 'copyrighted articles' and 'copyright' is relevant. The Hon'ble ITAT, Delhi in the case of Aspect Software (supra) v. ADIT in 1125/Delhi/2014 following the decisions in the case of Ericsson A.B .(supra)and Infrosoft Ltd. (supra) held that consideration received by the assessee for supply of product alongwith license and software to end user is not royalty under Article 12 of the Tax Treaty. It held that there was no transfer of any right in respect of the copyright of the assessee and it was a case of mere transfer of a copyright article. 6.5 Where a non-resident without PE in India received payment against sale of copyrighted software from a resident in India, a question arose as to whether the payment was a copyrighted product. In Velankani Mauritius Ltd. v. DDIT (IT), 7 ITR (Trib.) 171 (Bang.), the Tribunal found that the purchase was off-the-shelf shrink wrapped software by the US company. The transaction was governed by DTAA between India and USA. It was held that the same could not be an instance of royalty. It, inter alia, relied upon the decision in Tata Consultancy Services v. State of AP 271 ITR 401(SC) for inference that it was a purchase of goods and followed the decision of the Special Bench in Motorola Inc. v. DCIT 95 ITD 269 (Del.) (SB). 6.6 The ITAT, Mumbai in cases of DDIT (IT) v. Reliance Infocom Ltd., 43 SOT 506(Mum) has dealt with the issue as to whether consideration paid to a US resident for licensing of computer software would be in nature of "royalty". After considering various clauses of agreement, Indian Copyright Act and other decisions including Special Bench decision in Motorola Inc. (supra) it held that payment was for a copyrighted article and not the copyright itself. It also stated that definition of royalty under DTAA is more restrictive than that in I.T.Act. It also held that it is incorrect to hold that computer software or a media is an Intellectual Property Right. Hence, the payment was held not to be "royalty". In case of Addl.DIT (IT) v. Til Team Telecom International Pvt. Ltd. 121 ITR (Trib.) 688 (Mum), the Tribunal spared liability on payment for supply of software.
ITA 248/Mum/2016 M/s. Western Outdoor Interactive Pvt. Ltd., 6.7 Where appellant opted to be governed by DTAA between India & Finland and language of DTAA differed from amended section 9, the amendment cannot be read into such DTAA, as on the wording of such DTAA, a copyrighted article does not fall within purview of "royalty". Such a view was taken in the case of DIT V. Nokia Networks OY 358 ITR 259 (Del.) which was followed in CIT v. Alcatel Lucent Canada 372 ITR 476 (Del.).Taking into consideration various aspects of law on the subject of software licensing/distribution, the ITAT, Mumbai in Novel Inc. v. DDIT (IT) [2012] 16 ITR (Trib.) 10 (Mumbai) decided the issue in favour of appellant with reference to its understanding of the definition of royalty under Indo US Agreement. 6.8 The decision of the Mumbai Tribunal in the case of DIT v. Telecom International Pvt. Ltd. (ITA No.3939/Mum/2010 dated 26/08/2011 is also directly on the issue. The Hon'ble Tribunal in this case after considering the decisions of the Special Bench in the case of Motorola INC (supra) held that copyright is one thing and copyright article is quite another thing. The payments for software cannot be treated as payment for use of copyright in the software. 6.9 In view of the above decisions and the facts narrated above, it is held that payment to M/s Columbus Travel Media Ltd. and Zagat Survey LLC cannot be treated as a royalty u/s 9(l)(vi) of the Act. Hence, the assessee was not required to deduct tax u/s 195 of the Act. Therefore, the disallowance made u/s 40(a)(i) is not proper and is accordingly deleted. 6.10 It may further be mentioned that the appellant has also relied on the decision in the case of Merlyin Shipping and Transport v. ACIT (136 ITD 23)(Special Bench) where it was stated that if the amount is not payable and had been actually paid than the disallowance u/s 40(a)(i) is not applicable. This decision has been approved by the Hon'ble High Court in the case of Vector Shipping Services (ITA No.122 of 2013) dated 9/7/2013. Further, relying on the decision in the case of Aktiengesellschaft Kuhnle Kopp (supra) the appellant argued that the payment could not be regarded as deemed to have accrued in India u/s 9(l)(vi)(b) since payment was made outside India out of export sales. Since the main ground has been allowed, the alternative submissions are not decided. 6.11 In the result, the ground is allowed.
It is clear from the order of the CIT(A) that after applying various judicial pronouncements, he reached to the conclusion that payment to M/s. Columbus Travel Media Ltd., and Zagat Survey LLC cannot be treated as ITA 248/Mum/2016 M/s. Western Outdoor Interactive Pvt. Ltd., royalty u/s.9(1)Ivi) of the Act. Hence, assessee was not required to deduct tax u/s.94 of the Act, accordingly, no disallowance can be made u/s.40 (a) (i) of the Act.
With regard to export commission paid to the foreign agents, the CIT(A) recorded a clear finding that commission has been paid for procuring export order and payment was made outside India. After relying on the CBDT Circular No.23 of 1969, 786 of 2000 and 7 of 2009, the CIT(A) held that no tax is deductible in respect of such export commission. The CIT(A) also relied on the decisions of ITAT Delhi in case of Welspring Universal, Madras High Court in case of Faizen Shoes (P) Ltd., which has been accepted by the Department and no SLP has been filed. Accordingly, we do not find any infirmity in the order of CIT(A) for deleting the disallowance made in respect of export commission paid to the foreign agents.
Nothing was brought on record by learned DR to persuade us to deviate from the findings and conclusion recorded by CIT(A). Accordingly, we do not find any reason to interfere in the order of CIT(A) for deleting the disallowance made by the AO.
All the facts and circumstances in the A.Y.2012-13 are parimateria, following reasoning given hereinabove, we do not find any infirmity in the order of CIT(A) for deleting the disallowance made on account of payment made to foreign parties without deduction of tax at source.