[2016] 69 Taxmann 311 (Mumbai Trib.)
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06/06/2016www.taxmann.com[2016] 69 taxmann.com 311 (Mumbai Trib.)IT/ILT : To constitute "royalty" under India USA DTAA, it is theconsideration for transfer of "use of copyright in the work" and not the "useof work" itself. However, 'Explanation 4' inserted under section 9(1)(vi) bythe Finance Act, 2012, provides that the transfer of rights includes and hasalways included the right for use or right to use a computer softwareincluding granting of a license. Thus, it cannot be said that the definition ofroyalty under the Income Tax Act is in paramateria with that under theDTAA. Even otherwise, TDS liability does not arise on basis of retrospectiveamendment in definition of royaltyFacts(a) The assessee had purchased software from residents of different countries forits business of oil and gas exploration. It made payment for such purchasewithout deducting tax at source.(b) Assessing Officer was of the view Explanation 4 has been inserted withretrospective effect in section 9(1)(vi) which specifically includes computersoftware in the definition of royalty. These payments would be liable for TDSdeduction u/s 195. Thus, assessee to be treated as assessee in default.(c) On appeal, the CIT(A) held that the payment made by the assessee forpurchase of software would not amount to royalty.(d) The aggrieved revenue filed an instant appeal before the Tribunal.The Tribunal Held in favour of assessee as under:(1) A perusal of the definition of royalty as provided in Article 12 of the India USA'DTAA' reveals that it is the payment which is received as consideration for the'use of' or the 'right to use' 'any copyright of literary, artistic, scientific workincluding .'(emphasis supplied)(2) Hence, what is relevant is the consideration paid 'for the use of' or the right 'touse' any 'copyright'. The right to use a computer software programme has notbeen specifically mentioned in the DTAA with any country(3) However, 'Explanation 4' inserted under section 9(1)(vi) by the Finance Act,2012, provides that the transfer of rights in respect of any right, property orinformation includes and has always included the right for use or right to use acomputer software including granting of a license.(4) Under the circumstances, it cannot be said that the definition of royalty under theIncome Tax Act is in paramateria with that under the DTAA. Since the definitionprovided under the royalty in the DTAA is more beneficial to the assessee, asper the provisions of section 90, the definition of royalty as provided under DTAAis to be taken.(5) One has to understand the difference between the term "use of copy right insoftware"and "use of software" itself. To constitute "royalty" under DTAA, it is the1/28
06/06/2016www.taxmann.comconsideration for transfer of "use of copyright in the work" and not the "use ofwork" itself.(6) In our view the sale of a CD ROM/diskette containing software is not a licensebut it is a sale of a product which, of course, is a copyrighted product and theowner of the copyright by way of agreement puts the conditions and restrictionson the use of the product so that his copyrights in such copyrighted article or thework may not be infringed.(7) The assessee could not be said to have paid the consideration for use of or theright to use copyright but had simply purchased the copyrighted work embeddedin the CD ROM which could be said to be sale of 'good' by the owner. Theconsideration paid by the assessee as per the clauses of the DTAA could not besaid to be royalty and the same would be outside the scope of the definition of'royalty' as provided in the DTAA.(8) Amendment vide which the Explanation 4 has been with retrospective effect tosection 9(1)(vi) and has the effect of change in the law. By the introduction of thesaid Explanation 4, computer software has been specifically included in thedefinition of 'right, property or information' which was never assumed to havebeen included by any court of law prior to such insertion(9) The assessee was under the bonafide belief that there was no liability to deducttax in respect of the consideration paid for the said purchase of software. Hence,assessee was not supposed to deduct TDS on such purchases. [2016] 69 taxmann.com 311 (Mumbai Trib.)IN THE ITAT MUMBAI BENCH 'L'Deputy Director Income tax (IT) 2 (1), Mumbaiv.Reliance Industries Ltd.SANJAY GARG, JUDICIAL MEMBERAND ASHWANI TANEJA, ACCOUNTANT MEMBERIT APPEAL NOS. 1980 TO 1982, 1984, 1986 OF 2008,5264 TO 5266 (MUM.) OF 2009 AND OTHERMAY 18, 2016Jasbir Chauhan for the Appellant. Sunil Moti Lala and Rajesh Lakhara for the Respondent.ORDERSanjay Garg, Judicial Member The above titled appeals by the Revenue, but two by theassessees have been preferred against the different orders of the Commissioner of Income Tax(Appeals) [hereinafter referred to as the CIT (A)] involving identical issue.2. The common issue raised in all the appeals is as to whether the remittance made by the Indianresidents assessee companies to the foreign parties/residents of Foreign States on account ofconsideration for the purchase of certain software for internal use in the business of the assessee isliable to tax in India as 'Royalties' under the provisions of section 9(1)(vi) of the Income Tax Act orthe same is to be treated as business income of the foreign company recipient/supplier of thesoftware, not taxable in India as per the provisions of DTAA with that respective country. It is2/28
06/06/2016www.taxmann.compertinent to mention here that the facts in ITA No. 5829/M/2009 and 5264/M/2009 are a bitdifferent on the aspect that the software in these cases had been purchased by the assessee from theresident of Hong Kong with which India has no tax treaty/DTAA. We will discuss the effect ofabsence of DTAA in the above stated two appeals in the latter part of this order.3. The assessees herein purchased different type of software from residents of different countriessuch as Australia, Canada, Singapore, Netherlands, Germany, USA, UK, and France etc.;Undisputedly, India has a tax treaty/Double Taxation Avoidance Agreement (hereinafter referred toas DTAA) with all these countries. According to the AO, the consideration paid by the assessees inthese cases for the purchase of the software form the foreign resident companies, falls in thedefinition of 'royalty' hence taxable in India, whereas, the contention of the assessees is that thesame does not constitute royalty hence not taxable in India and they, therefore, were not liable towithhold tax upon the said consideration paid.4. Before proceeding further, we list out below the appeal wise, name of the party and the name ofthe country from whom the assessees had purchased the software and also the brief description ofthe software supplied along with the date of purchase order etc.Name of assessee: Reliance Industries Limited.Sr.No.ITA No.Name of theVendorCountry ofResidenceBrief description of software suppliedDate ofpurchaseorder1. 1980/M/08 M/sParadigmGeophysicalPty Ltd.AustraliaGeological and Seismic DataProcessing/Interpretation software forOil & Gas business17.02.032. 1981/M/08 M/sHampson Russell LtdCanada(Hampson)Seismic Data Processing/InterpretationSoftware31.03.033. 1982/M/08 M/s SunSingaporeMicrosystems (Sun)Pte LtdInformation Technology Software10.07.024. 1984/M/08 M/s ClarityInternationalLtdAustraliaInformation Technology Software28.02.025. 1986/M/08 M/s VeritasDGC AsiaPacific LtdSingaporeRC2 Seismic DataProcessing/Interpretation Software14.02.036. 2523/M/08 M/s ShellNetherlands Downstream Solutions Components for 19.12.03Globaluse in assessee's logistics andSolutionsdistribution activities and midstreamInternational,solutions for use in assessee'sBVmidstream activities7. 2529/M/08 M/s IESIntegratedExplorationSystemsGermany8. 3576/M/10 Murex South SingaporeEast Asia PteLtdSoftware modeling package, parallelprocessing package, prospect riskingand ranking package etc. for O&GProjects.15.05.04Mx Generation 2000 and Mures Limits 08.03.06Controller3/28
06/06/2016www.taxmann.com9. 3577/M/10 HalliburtonExport IncUSAG&G Software16.02.0710. 3578/M/10 HalliburtonExport IncUSAG&G Software18.03.06KBC Petrosim software18.01.0711. 3579/M/10 KVC Process UKTechnologyLtd12. 3582/M/10 Fugro JasonNetherlandsBVNetherlands My bench software15.02.0613. 4587/M/10 BechtelFrance SASFranceTopnir multiuser software for crudepetroleum refinery at Jamnagar11.05.0714. 4590/M/10 HalliburtonExport IncUSAG&G Software for 3D interpretationfor O&G Division21.11.0715. 4593/M/10 Ansys IncUSAAnsys fluent bundle of software forfluid flow analysis.18.02.0816. 5264/M/09 HewlettHong Kong Information Technology SoftwarePackard AsiaPacific Ltd10.05.0213.05.0217. 5265/M/09 ThinMultimediaIncUSAInformation Technology Software08.10.0218. 5266/M/09 Flying J IncUSAInformation Technology Software31.07.0219. 5829/M/09 M/s Business Hong Kong Information Technology SoftwareObjectsGreaterChina Ltd.26.09.0320. 5832/M/09 ScandpowerPetroleumTechnologyFZ LLCUAEOLGA Engineering Software for O &G Division27.06.0721. 3219/M/12 AspenTechnologyInc ReUSAInformation Technology Software16.11.05Name of assessee: Reliance Industrial Infrastructure Ltd.22. 3354/M/11 EMC Computer System (South Asia) Singapore EDMS packagePte. Ltdsoftware26.07.07Name of assessee: Reliance Corporate IT Park Ltd.23. 2728/M/2012 Codeware Inc USA Compress pressure vessel design software 06.02.065. Both the Ld. Representatives of the parties have submitted that they would like to argue thematter taking the facts of ITA No.1980/M/2008 as a lead case. Hence, for the sake of convenience,4/28
06/06/2016www.taxmann.comITA No.1980/M/2008 is taken as lead case for the purpose of narrating the facts.6. The facts in the lead case as derived from the impugned order of the lower authorities are thatM/s. Reliance Industries Limited (assessee), is a Public Limited company. The assessee placedPurchase Order No.2001 GEL E1 CG S 426 ME dated 17.02.2003 with M/s. ParadigmGeophysical Pty. Ltd. Australia (Paradigm) for supply of Geological and Seismic DataProcessing/Interpretation Software for its Oil & Gas business. Copy of the agreement and copy ofpurchase order was filed by the assessee before the AO along with the application u/s.195 seekingremittance of US 5,27,250/ without deduction of tax. The assessee explained to the AssessingOfficer that 'Paradigm' was a company registered in Australia and tax resident of Australia and thatas per the Conditions/terms of the purchase agreement, assessee did not acquire any copyright inthe software so purchased within the meaning of Article 13 of Indo Australia Double TaxationAvoidance Agreement ('DTAA') and hence the payment made by assessee to 'Paradigm' did notamount to royalty. 'Paradigm' did not have a Permanent Establishment ('PE') in India andaccordingly its business income was not taxable in India as per Article 7 and 5 of the DTAA.7. The AO, however, observed that the assessee had only got a license to use the software and thatno other title or interest in the software was transferred to the payer/assessee, hence, there was noquestion of sale of software per se. He, further, observed that if at all there was an element of sale,it was only in respect of career media i.e. the CD (Compact Disk) in which the software wastransacted/loaded. He, therefore, observed that there was enormous difference in the values of thecareer media i.e. the CD and the software loaded on it. He ignored the sale price of the careermedia being very low, but, held that what the assessee was given was the license to use softwareand that the payments made for the import of software were in the shape of royalty and as per theprovisions of section 9(1)(vi) of the Act, the income in respect of the same was deemed to haveaccrued in India and thus the assessee was liable to deduct the tax at source under section (40)(a)(i)of the Act in respect of such payments. He, accordingly, vide order dated 16.08.04 directed theassessee to deduct TDS at the rate of 17.65% on the gross amount of license fees payable to M/s.Paradigm Geophysical Pvt. Ltd. (foreign resident). He therefore rejected the petition of the assesseemoved under section 195(2) of the Act.8. In appeal, the Ld. CIT (A) relying upon the definition of 'royalty' as provided under the DTAA ofIndia with Australia and following his own decision dated 29/10/2007 in another appeal bearingNo.CIT (A)XXXI/DDIT(IT)2(1)/IT 303/02 03 in the assessee's own case in relation to thepurchase of software for internal business use of the assessee from certain residents of the US, heldthat the payment made by the assessee for purchase of software did not amount to royalty. Heobserved that in the case of non resident, covered by DTAA, provisions of DTAA would beapplicable, if, they are beneficial to the non resident as per section 90(2) of the Income tax Act; ifthe definition of royalty under the DTAA did not cover the payment for purchase of software asroyalty, provisions of section 9(1)(vi) would be immaterial. He held that vide the agreement inquestion, assessee got the right to use the software for its internal business purpose only and not forcommercial exploitation. That the assessee did not receive any copyright over the software. Sincethe M/s. Paradigm Geophysical Pvt. Ltd. hadn't any PE (Permanent Establishment) in India,business profits of the M/s. Paradigm Geophysical Pvt. Ltd. were not taxable in India as per Article5 & 7 of DTAA. He therefore allowed the appeal of the assessee.9. Being aggrieved from the order of the CIT (A), the revenue has thus come in appeal before us onthe following grounds:"1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred inholding that the payment made to M/s. Paradigm Geophysical Pty. Ltd., Australia(Paradigm) for supply of certain Geological and Seismic Data Interpretation Software isonly business income of Paradigm and in the absence of any Permanent Establishment inIndia, the business profit arising in the transaction is not taxable in India.2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) failed to5/28
06/06/2016www.taxmann.comappreciate that the payment for the supply of certain Geological and Seismic DataInterpretation Software is in the nature of royalty which is liable for taxation in India.3. The Appellant prays that the order of the Ld. CIT (A) on the above grounds be set asideand that of the A.O. restored.4. The Appellant craves leave to amend or alter any ground or add a new ground whichmay be necessary."10. It is pertinent to mention here that the identical grounds have been taken by the Revenue in allthe appeals of the Revenue. However in the two appeals preferred by the assessee i.e. ITANo.2728/M/2012 and ITA No.3219/M/2012, the Ld. CIT (A) has upheld the findings of the AOrejecting the application of the assessee under section 195(2) of the Act and hence, the assessee hascome in appeal in the said cases.11. We have heard the rival contentions of the ld. Representatives of the parties. We note that boththe lower authorities have relied upon the following clauses of the license agreement in arriving outat their respective conclusions."1.1. SoftwareSELLER'S Proprietary software tool/products for application in Processing/Interpretation ofSeismic data in Oil and Gas Exploration industry.1.2 Copy of Software & agreementUnder each Software Copy, SELLER supplies Software Users Kit that comprises(a) a CD with executable code and documentation for the Software(b) Installation manual and User manuals in one softcopy (on CD) and Two Hard copies and(c) One Security key. The Security key allows the software tools to be installed on Networkserver and any number of client machines connected to the Network server. Softwarecopies can be Concurrently accessed and used by as many users as are the Suppliednumber of software Copies. The Software copy shall be fully functional permanently.The Software copy shall provide complete authorization to BUYER with regards to its usage.SELLER shall indemnify the BUYER against breach of any intellectual property or Patentregulations in developed, maintaining or selling of the software tools."12. From the above, the undisputed facts before us are that the software purchased by the assesseewas operational software for the internal use of the assessee's business of oil and gas explorationindustry. The software had been embedded in a CD with executable code documentation along withinstallation manual and user manuals in one softcopy (on CD) and two hard copies. There was onesecurity key which allowed the software tools to be installed on network server and any number ofclient machines connected to the network server. There was no time limit of the expiry of the saidsoftware which meant that the software copy would be fully functional permanently. Theagreement of the assessee with the supplier of the software provided complete authorization to theassessee with regard to its usage. It is also undisputed that the software purchased by the assesseewas a standardized software for use in the own business of the assessee only. The assessee had notbeen given any commercial right to reproduce and sell the copies of the software. The party fromwhom the assessee acquired the software was not having any permanent establishment (PE) inIndia.13. The ld. AR has placed reliance on a number of decisions in the own cases of the assessee that inidentical facts in relation to purchase of software by the assessee from foreign resident companiesfor use in its business, the tribunal consistently has decided the issue in favour of the assessee. Thatthe CIT (A), while allowing the appeals of the assessees for the assessment years underconsideration, has followed his orders for earlier years which have already been upheld by the 6/28
06/06/2016www.taxmann.comconsideration, has followed his orders for earlier years which have already been upheld by theTribunal.The Ld. D.R, however, though, has admitted that the identical issue in earlier years has alreadybeen decided by the different co ordinate benches of the Tribunal in favour of the assessee,however, has submitted that there is a change of position of law in view of the recent decisions ofthe Hon'ble Karnataka High Court in the case of "CIT v. Samsung Electronics Co. Ltd. and others"[2012] 345 ITR 494 and in the case of "CIT v. Synopsis International Old Ltd." [2013] 212 taxman454. The Ld. D.R. has further relied upon the decision of the co ordinate bench of the Tribunal inthe case of "Reliance Infocom Ltd." dated 06.09.13 reported in [2013] 37 CCH 0069 (Mum. Trib.)to contend that the software purchased by the assessee was a separate software and the same wasneither supplied along with the equipment nor the same was an embedded software in thecomputer/equipment. That the assessee was not the owner of the software, the ownership of thesoftware had remained with the seller; that the assessee was just given a license to use the software,which was only the right to use of 'copyright' in the software. He has further contended that theTribunal in the case of "Reliance Infocom Ltd." (supra) has relied upon the decision of the Hon'bleKarnataka High Court in the case of "CIT v. Samsung Electronics Company Ltd. & Others" [2012]345 ITR 494 and upon another decision of the Hon'ble Karnataka High Court in the case of "CIT v.Synopsis International Old Ltd." [2013] 212 taxman 454. The Ld. DR in this respect has also reliedupon the amended definition of the 'royality' u/s 9(1)(vi) of the Income Tax Act made videamendment Act of 2012, vide which 'Explanation 4' has been added to section 9(1)(vi) of the Actwith retrospective effect, whereby, including the 'software' in the definition of royalty. The Ld. DRhas stated that the definition of royalty under the Act is in parametria with that of the DTAA,therefore, the same is to be read into the definition of treaty as provided in the DTAA fo
06/06/2016 www.taxmann.com 1/28 [2016] 69 taxmann.com 311 (Mumbai Trib.) IT/ILT : To constitute "royalty" under India USA DTAA, it is the consideration for transfer of "use of copyright in the work" and not the "use of work" itself. However, 'Explanation 4' inserted under section 9(1)(vi) by
11/12/2018 www.taxmann.com 1/17 [2018] 95 taxmann.com 165 (Mumbai - Trib.) IT/ILT: Payment received by asses see a Singapore based company from its AE in India towards reimbursement of salary for seconded employees, being pure reimbursement of salary, cost incurred by
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