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Income Tax Appellate Tribunal, “L” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& C.N. Prasad (JM)
O R D E R Per B.R. Baskaran (AM) :-
Both these appeals filed by the Revenue are directed against the orders passed by the learned CIT(A)-10, Mumbai and they relate to A.Y. 2008-09 & 2009-10.
The solitary issue agitated in both these appeals is whether the learned CIT(A) was justified in holding that payment made by the assessee for use of software owned by USA company is not “royalty” subject to deduction of tax at source.
Facts relating to the issue is narrated as under by the learned CIT(A) in the order passed for A.Y. 2008-09 :-
2 M/s. First Advantage Pvt. Ltd.
“1.1.2 Brief facts are that the appellant is a resident company, incorporated under the Companies Act, 1956. It is primarily engaged in providing employment background screening services to its clients, which consists of checks such as education screening, employment screening, address verification, criminal check/verification, reference check, database verification, hiring management services, assessment solution which the clients can choose from.
1.1.2. The appellant has entered into an agreement with First Advantage Corporation, United States of America ('FADV US') for use of the CSPi software which is owned by FADV US, a tax resident of USA. Under the said agreement the appellant has made payment for use of the CSPi software amounting to Rs 1,32,13,654/- for the financial year ended 31,March 2008. As per this agreement, if the appellant is required by law to make any withholding or deduction in respect of income tax as per the provisions of the Act from the consideration payable to FADV US, the appellant shall pay to FADV US such consideration in full, free and clear of any deduction and set-offs without deduction or withholding for or on any income tax as per the Act. The liability on account of withholding tax, if any, will be borne by the appellant. 1.2.0 1.1.3 The appellant filed an application under Section 195(2) of the Act wherein it was submitted that consideration payable towards use of CSPi Software is not taxable in the hands of FADV US under the Act as well as not under the India-USA DTAA. Hence, the payment is not subject to deduction of tax at source 1.1.4 The AO however did not accept the contention of the appellant and passed an order under Section 195(2) of the Act holding payments as Royalty under the Act and directing to withhold taxes at 10.56% on gross basis as per Section 115A of the Act”.
Before Ld CIT(A), the assessee contended as under:-
“1.2.0 The appellant referring to the definition of 'Royalty' as per Explanation 2 to section 9(1)(vi) of the Act, contended that that grant of license is in the context of transfer of all or any rights in respect of any copyright, literary, artistic or scientific work, patent invention, model, design etc. Under the present agreement there is no transfer of any copyright, literary, artistic, scientific work or any patent, invention, model, design etc. The AR submitted that FADV US merely provided the access to copyrighted software to the appellant. The appellant does not have the right to use the copyright embedded in the software. In other words, the appellant is not permitted to make copies and sell the software. Except for the limited right to access the copyrighted software for its own business purpose, the appellant does not acquire any right to 3 M/s. First Advantage Pvt. Ltd. exploit the copyright in the software. Whereas "use of copyright" encompasses exploitation of the right embedded in a copyright, a mere user right is a limited right and consideration paid for such user right cannot be regarded as consideration for use of right to use a copyright. Therefore it was contended that consideration payable to FADV US is for the use of copyrighted article and not for the use of the copyright. Payment for the use of copyrighted article cannot be considered as royalty.”
The Ld CIT(A), by placing reliance on various case laws, came to the conclusion that the sale of copyrighted article is not royalty. He also held that the payment for use of software cannot be considered as royalty under India-USA DTAA also. Accordingly he set aside the orders passed by Ld CIT(A) in both the years. Aggrieved by the orders passed by Ld CIT(A), the revenue has filed these appeals before us.
We have heard rival contentions and perused the record. The Ld D.R placed his reliance on various case laws including the decision rendered by Hon’ble Karnataka High Court in the case of Cit Vs. CGI Information Systems & Management Consultants (P) Ltd (2014)(275 CTR 72), Synopsis International Old Ltd (2013)(212 Taxman 0454) and CIT Vs. Samsung Electronics Co Ltd (2011)(245 CTR 0481) in order to support the order passed by the AO. On the contrary, the Ld A.R submitted that the assessee has obtained only license to use the software. He submitted that the assessee is entitled to use the software for its internal business operations only (Clause 1 of the agreement). He submitted that the clause 2(b) of the agreement curtails the rights of the assessee and reads as under:- “2(b) Licensee may not (i) (other than accessing the Software as contemplated by this Agreement) attempt to circumvent any security device or licensing restriction contained in the software; (ii) assign, loan, rent, lease, sublease, license, sublicense, encumber, mortgage, translate, modify, alter, adapt, decompile, or disassemble the software or create derivate works based on the software or otherwise reverse engineer the software; (iii) make copies of Licensor Documentation except for one internal archival copy for each Licensed User or (iv) remove alter, cover or obfuscate any copyright notice or other proprietary rights notice placed in or on or displayed by the Software and the Documentation, whether in machine language or human readable
4 M/s. First Advantage Pvt. Ltd. form…”
The Ld A.R submitted that the ownership, title and interest in the IPR of the software vested with the US company and the assessee has no right in respect of the same except the license to use the software as expressly granted under the agreement. The Ld A.R submitted that the assessee has obtained only copyrighted article from the US company and not the copyright in the software. Accordingly he submitted that the payment made by the assessee to a copyrighted article, which is akin to “off the shelf” software is not royalty. He submitted that the Hon’ble Delhi High Court, in the case of DIT Vs. Iftasoft Ltd (264 CTR 329) has taken its view in favour of the assessee in this matter and hence the decision rendered by Hon’ble Karnataka High Court, which was relied upon by the Ld D.R, need not be followed. He submitted that the identical issues have been decided by the co-ordinate benches of tribunal in various cases in favour of the assessee by following the decisions rendered by Hon’ble Delhi High Court. He submitted that the co-ordinate bench of Mumbai ITAT, in its recent decision dated 13- 06-2016 rendered in in the case of ADIT Vs. M/s Baan Global B V (now known as Information Global Solution (Barneveld) BV) has considered an identical issue under the provisions of Income tax Act as well as India-US DTAA and has decided the issue in favour of the assessee. He further submitted that the provisions of DTAA will prevail over retrospective amendment made in the Income tax Act.
We notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V (supra) has considered an identical issue and rendered its decision as under:-
10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of “royalty or business income. In case, if it is a ‘business’ income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not 5 M/s. First Advantage Pvt. Ltd. be taxable in India and if it is a “royalty”, then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within the terms of “royalty” under Article 12(4) of India-Netherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the treaty provisions. Briefly recapitulating the relevant facts for the purpose of our adjudication emanating from the impugned order is that, Assessee Company is engaged in the business of development and sale of computer software and also provides “other general services” in relation to the software. For both the activities, it has entered into a “distribution agreement” with its Indian subsidiary INFOR India which mainly functions as a distributor of computer software. So far as payments received from “other general services” of Rs.4,79,36,944/-, same has been offered to tax in India as ‘fee for technical services’ on which there is no dispute. The dispute is with regard to the payment of Rs.3,75,25,291/- received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold “off shelf” which is mainly used by the Indian customer in their business for financial accounting, inventory management, HR management etc. INFOR India carries out marketing and sale of the software in India and places order with the assessee. The software supplied is then distributed to the Indian customers through INFOR. The consideration charged by INFOR India is based on terms agreed between the assessee and INFOR India as per the ‘distribution agreement’. Under the terms of the agreement, as noted by the CIT(A), there is no transfer of any copyright in the software product. The payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT(A) in his order is reckoned as admitted facts.
Now, on these facts, we have to decide, whether the payment received by the assessee can be reckoned as “royalty” within the terms of article 12(4) of DTAA. Before that, the relevant paragraph of Article 12 dealing with the definition of “royalty” reads as under:-
6 M/s. First Advantage Pvt. Ltd.
“4. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience”.
From the plain reading of the article it can be inferred that, it refers to payments of any kind received as a consideration for the use of, or the right to use any ‘copyright’ of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as “royalty”, it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting ‘royalty’ in Para 4 are for a consideration for the ‘use of’ or the ‘right to use’ any copyright.......... The key phrases “for the use” or “the right to use any copyright of”; “any patent…….; “or process”, “or for information………,”; “or scientific experience”, etc., are important parameter for treating a transaction in the nature of “royalty”. If the payment doesn’t fit within these parameters then it doesn’t fall within terms of “royalty” under Article 12(4). The computer software does not fall under most of the term used in the Article barring “use of process” or “use of or right to use of copyrights” Here first of all, the sale of software cannot be held to be covered under the word “use of process”, because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the 7 M/s. First Advantage Pvt. Ltd. various Courts have consistently opined that the definition of “copyright” as given in the ‘Copyright Act, 1957’ has to be taken into account for understanding the concept. Section 14 of the said Act defines the ‘copyrights’ to mean as under:-
“14. Meaning of copyright –For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely:-
(a) in the case of a literary, dramatic or musical work, not being a computer programme, -
(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); (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.” (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) In the case of cinematograph film, -
8 M/s. First Advantage Pvt. Ltd.
(i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) In the case of sound recording, - (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation”.
Thus, the definition of ‘copyright’ in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. As noted by the CIT(A), under the terms of the agreement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling the software. The agreement also provides that the end user shall use the software only for the operation and shall not sublicense or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT(A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of “shrink wrapped software” off the shelf and hence, cannot be considered as a “royalty” within the meaning of Article 12(4) of the DTAA, as 9 M/s. First Advantage Pvt. Ltd. the same is consideration for sale of copyrighted product and not to use of any copyright.
One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of ‘royalty’ as given therein should be read into the DTAA. We are unable to appreciate this contention of the Ld. DR because the retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of ‘royalty’. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of “royalty” in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the ‘royalty’ has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty.”
Identical view has been expressed in the following cases also:- (a) M/s Quaolcomm India P Ltd Vs. ADIT (ITA Nos. 1664 to 1667/Hyd/2011) (b) Reliance Industries Ltd & Ors (47 CCH 94)(Mum-Trib) (c) Capgemini Business Services (India) Ltd (46 CCH 253)(Mum- Trib)
We notice that the above said decisions have been rendered in favour of the assessee by following the decision rendered by Hon’ble Delhi High Court in 10 M/s. First Advantage Pvt. Ltd.
the case of Infrasoft ltd (supra) and other decisions rendered by Hon’ble Delhi High Court. Accordingly, by following the decisions rendered by the co- ordinate benches of the Tribunal, we uphold the orders passed by Ld CIT(A) in both the years under consideration.
In the result, both the appeals filed by the revenue are dismissed.
Order has been pronounced in the Court on 11.1.2017.