DASSAULT SYSTEMES SIMULIA CORPORATION,CHENNAI vs. DDIT, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

ITA No.1399/Mds/2014. :- 2 -:

Dassault Systems Private Limited (herein after referred to as ‘DSSPL’), towards sale of software products, by applying deeming provisions under section 9(1)(vi) of the Income Tax Act, 1961 (in short ‘the Act’).

Assessee has also raised an additional ground whereby it 2. questions the validity of assessment done on it without first issuing a draft assessment order as mandated u/s.144C of the Act.

Ld. Counsel for the assessee submitted that assessee had 3. received �13,21,57,925/- from ‘DSSPL’, for software products sold to ‘DSSPL’, for distribution in India. As per the ld.AR such software products were delivered directly to the end customers by the assessee, and they could load the software using the licence keys provided by the assessee. Further as per ld. Authorised Representative, DSSPL was only a distributor of the software product and never obtained a right to copy or commercially exploit the software. Submission of the ld. Authorised Representative was that ld. Assessing Officer considered the amount received by the assessee from DSSPL as royalty income, accruing or arising in India in terms article 9(1)(vi) of the Act, erroneously. As per ld. Authorised Representative, Assessing Officer had come to an erroneous conclusion that amount received from DSSPL fell within the definition of ‘Royalty’ under article 12 of the ITA No.1399/Mds/2014. :- 3 -:

Double Taxation Avoidance Agreement (herein after referred to as the ‘’DTAA’’) between India and USA. Further, as per ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) had confirmed this view disregarding the Tribunal order for earlier years in assessee’s own case, where it was held that the amounts were not in the nature of Royalty. Reliance was placed by the ld. Authorised Representative on decisions dated 09.01.2014 of Co-ordinate Bench in assessee’s own case in 1025, 1026 & 1027/Mds/2013 and ITA No.1177/Mds/2013. Ld. Authorised Representative also placed reliance on the decision of the Co-ordinate Bench in the case of Dassault Systems Simulia P. Ltd (2011-TII-143-ITAT-MAD-INTL) dated 16th September, 2011, which was relied on by the Co-ordinate Bench in ITA Nos.1024, 1025, 1026 & 1027/Mds/2013 (supra).

According to him, payments received from DSSPL during the previous year relevant to impugned assessment year was based on the very same regional support agreements entered by the assessee with M/s.

DSSPL which was considered by the co-ordinate Bench in the decisions for assessment years 2002-03 to 2006-2007.

Per contra, ld. Departmental Representative strongly 4.

supporting the orders of the lower authorities submitted that decisions cited by the ld. Authorised Representative had not considered

ITA No.1399/Mds/2014. :- 4 -:

Explanation 4 to Sec. 9(1)(vi) of the Act which was brought in by Finance Act, 2012 with retrospective effect 01.06.1976. According to the ld. Departmental Representative, through the Explanation, definition of Royalty was broadened to include transfer of copy righted software as well as copy right in software. As per ld. Departmental Representative, by virtue of the said Explanation, payments received by the assessee from DSSPL came within the ambit of Royalty. Thus, according to him, as per the mandate of Sec. 9(1)(vi) of the Act, royalty income had to be deemed as arising or accruing in India, and therefore liable to tax in the hands of the assessee.

Ad libitum reply of the ld. Authorised Representative was that 5. definition of the term ‘Royalty’ in the DTAA between India and USA alone would apply, since it was more advantageous to it. According to him article 12(3) of the DTAA defined the royalty and said definition was never amended to bring it in line with the meaning of the term Royalty as broadened by Explanation 4 to Sec. 9(1)(vi) of the Act.

According to him, assessee could take advantage of the definition of Royalty as per DTAA and a fall back on the definition as per Act was possible only were a definition was not available in the DTAA. Relying on the judgment of Hon’ble Delhi High Court in the case of DIT vs. Infrasoft Ltd 264 CTR 329, ld. Authorised Representative submitted

ITA No.1399/Mds/2014. :- 5 -: that amendment made to Sec.9(1)(vi) of the Act, and whether sums received for use of software could be Royalty in terms of the Act, were irrelevant since assessee was covered under DTAA which was more beneficial to him.

‘’15. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, we find that no specific error in the order of the ld. CIT(A) could be pointed out by the ld. D.R. We find that the ld. CIT(A) has followed the decision of the Delhi Special Bench of the Tribunal in the case of Motorala Inc. Vs. DCIT 95 ITD 269. We find that following the above decision of the Mumbai ‘E’ Bench of the Tribunal in the case of ADIT Vs. TII Team Telecom

ITA No.1399/Mds/2014. :- 6 -:

International order dated 26.8.2011 has held as under:

“17. It is not even revenue's case that any of these rights have been transferred by the assessee, on the facts of this case, and, for this reason, the payment for software cannot be treated as payment for use of copyright in the software. As we hold so, we may mention that in the case of Gracemac (supra), a contrary view has been taken but that conclusion is arrived at in the light of the provisions of clause (v) in Explanation 2 to Section 9(1)(vi) which also covers consideration for "transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work" - a provision which is clearly larger in scope than the provision of Article 12(3) of the Indo Israel tax treaty. The word "of' between 'copyright' and 'literary, artistic or scientific work" is also missing in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statutory provision, and, by the virtue of Section 90(2) of the Act, the provisions of India Israel tax treaty clearly override this statutory provision. In Gracemac decision (supra), the coordinate bench was of the view that the provisions of the applicable tax treaty and the Income Tax Act are "identical" - a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac decision (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for "process" as a computer program is a nothing but a set of instruction lying in the passive state and this execution of instructions is' a process' or' a series of processes'. No doubt, in terms of the provisions of Section 2 (ffc) of the Indian Copyright Act, 1957, a computer program, i.e. software, has been defined as "a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result", but the moot question is as to what is that a customer pays for when he buys, or to put it in technical terms 'obtains licence to use the software for the process of executing the instructions in the software, or for the results achieved on account of use of the software. To draw an analogy, it is akin to a situation in which a person hires a vehicle, and the question could be as to what does he pay for - for the use of the technical knowhow on the basis of which vehicle operates, or for the use of a product which carries passengers or goods

ITA No.1399/Mds/2014. :- 7 -: from one place to another. The answer is obvious. When you pay for use of vehicle, you actually pay for a product which carries the passengers or goods from one place to another and not the technical knowhow on the basis of which such a product operates. Same is the case with the software, when someone pays for the software, he actually pays for a product which gives certain results, and not the process of execution of instructions embedded therein. As a matter of fact, under standard terms and conditions for sale of software, the buyer of software is not even allowed to tinker with the process on the basis of which such software runs or to even work around the technical limitations of the software. In Asia Satellite Telecommunications Ltd Vs DCIT (78 TTJ 489), a coordinate bench of this Tribunal did take the view that when an assessee pays for transponder hire, he actually pays for the a process inasmuch as transponder amplifies and shifts the frequency of each signal, and, therefore, payment for use of transponder is infact a payment for process liable to be treated as 'royalty' within meanings of that expression under Explanation 2 to Section 9 (l)(vi) of the Income Tax Act. However, when this decision came up for scrutiny of Hon'ble Delhi High Court, in the case reported as Asia Satellite Telecommunications Co Ltd Vs DIT (332 ITR 340), Their Lordships, after a very erudite and detailed discussion, concluded that "we are unable to subscribe to the view taken by the Tribunal in the impugned judgment on the interpretation of Section 9(1)(vi) of the Act". It cannot, therefore, be open to us to approve the stand of the revenue to the effect that the payment for software is de facto a payment for process. That is a hyper technical approach totally divorced from the ground business realities. It is also important to bear in mind the fact that the expression 'process' appears immediately after, and in the company of, expressions "any patent, trade mark, design or model, plan, secret formula or process". We find that these expressions are used together in the treaty and as it is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Hon'ble Shri

ITA No.1399/Mds/2014. :- 8 -:

M.K. Chaturvedi, had, in an article 'Interpretation of Taxing Statutes' (AIFTP Journal: Vol. 4 No.7, July, 2002, at p. 7), put it in his inimitable words as follows: "Law is not a brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on commonsense approach. Suppose a man tells his wife to go out and buy bread, milk or anything else-she needs, he will not normally be understood to include in the terms "anything else she needs" a new car or an item of jewellery. The dictum of ejusdem generis refers to similar situation. It means of the same kind, class or nature. The rule is that when general words follow particular and specific words of the same nature, the general words must be confined to the things of same kind as specified. Noscitur a sociis is a broader version of the maxim ejusdem generis. A man may be known by the company he keeps and a word may be interpreted with reference to the accompanying words. Words derive colour from the surrounding words."

In a later decision dated 09.01.2014 in to 1027/Mds/2013 and 1177/Mds/2013 (supra), this Tribunal had followed above mentioned order and held as under:-

‘’6. This issue had already been decided by the ITAT, Chennai B-Bench in the case of Dassault Systems Simulia P. Ltd (formerly known as Abacus Engineering Pvt. Ltd) through their order dated 16th September, 2011 (2011- TII-143-ITAT-MAD-ITNL). After considering the issue and following the decision of ITAR, Delhi Special Bench in the case of Motorala Inc. vs. DCIT(2005-TII-10-ITAT-DEL-SB- INTL), the Tribunalhas held that the payment is not in ITA No.1399/Mds/2014. :- 9 -: the nature of income arising or accruing in India within the meaning of Section 9(1)(vi) and therefore, no taxability arises in India on such payments. The Tribunal held that it is a case of outright purchase and no income arises in India”.

Contention of the ld. Departmental Representative before us is that there was an amendment to Sec. 9(1) (vi) by Finance Act, 2012 which retrospectively brought in Explanation 4 thereby expanding the meaning of the term ‘Royalty’ to include transfer of any right whether it was through a copy righted software, or a copy right in software. In other words, as per ld. Departmental Representative Royalty would be payable irrespective of whether the item sold was shrink wrapped software or not. However, we find that Co-ordinate Bench had in its orders for the earlier years relied on the DTAA between India and USA for construing the meaning of the term Royalty which was available in Article 12(3). It is not disputed that the said definition had not undergone any change despite the amendment to Sec. 9(1)(vi) brought in through Finance Act, 2012. It is trite law that an assessee can fall back on the DTA when it is more advantageous to it. Hon’ble Delhi High Court in the case of Infrasoft Ltd (supra) had clearly held that subsequent amendment to Sec. 9(1)(vi) of the Act in so far as it relates to definition of Royalty was not relevant when an assessee relied on DTAA provisions which were more beneficial to it. In the ITA No.1399/Mds/2014. :- 10 -: circumstances, following decisions of Co-ordinate Bench of earlier years, we are of the opinion that the receipts of the assessee from DSSPL could not have been considered as Royalty in the hands of the assessee liable for taxation in India. Addition made stands deleted.

Since, we have decided the issue in favour of the assessee in 7. merits, the additional ground raised by the assessee questioning validity of assessment without passing a draft assessment order has become academic and not necessary to adjudicate.

Order pronounced on Wednesday, the 30th day of November, 2016, at Chennai