|Amit Shukla (JM), Ashwani Taneja (AM)
|9(1)(vi), Article 12
|Domestic Tax, International Tax
|royalty, software licensing
|Jitendra Jain, Percy Pardiwala
|January 21, 2017 (Date of pronouncement)
|January 4, 2017 (Date of publication)
|Click here to download the file in pdf format
|S. 9(1)(vi)/ Article 12: Law on whether consideration received for licensing of software programmes can be assessed as "royalty" u/s 9(1)(vi) and Article 12 of the DTAA explained
The assessee, viz. Qad Europe B.V. is a company incorporated in Netherlands. It is also a tax resident of Netherlands. It is a 100% subsidiary of Qad Inc., USA (in short, Qad Inc.) which is the ultimate parent company of Qad group. Qad Inc. was engaged during these years in the development and sale of Enterprise Resource Planning (ERP) software products. As per the global arrangement, the said company acted as a distributor of aforesaid software products only in USA and Latin American countries, whereas the other Qad group companies worldwide, including the assessee company, undertook marketing responsibilities for countries other than USA and Latin American countries. The assessee company purchased software from Qad Inc. and resold the same to multinational companies outside USA and Latin American countries. Qad Inc. had entered into a multinational software product licence agreement dated 01-06-1977 (called as ‘Master Agreement’) with M/s Unilever N.V., a multinational company incorporated in Netherlands for sale of licensed product, i.e. ERP software either directly or through its subsidiaries to M/s Unilever N.V. (UNV, in short) and its subsidiaries for a consideration to be received either from UNV or through any of its subsidiaries, as the case may be. In pursuance to the said Master Agreement, the assessee company entered into another agreement with M/s Hindustan Lever Ltd (HLL, in short), which is an Indian subsidiary of UNV for the sale of licensed product, i.e. ERP software by the assessee company to HLL. Now, in pursuance to the agreement entered into with HLL, ERP software was sold by the assessee company to HLL. Income arsing from the said transaction was treated as business income by the assessee company, and in absence of any PE in India, the same was not offered to tax in India. But, according to the AO, the payment received by the assessee company on account of sale of ERP software product to HLL amounted to payment of ‘Royalty’ by HLL to assessee and, therefore, it was held as taxable in India in the hands of the assessee company u/s 9 (1)(vi) of the Act. On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) A parallel to practical, every-day examples would be useful. Take, for instance, the example of when one buys a book from Amazon for their Kindle device. In this case, Amazon can transfer the intellectual property of the book to multiple other users simultaneously, but each single transaction would still be a sale. This would also be true of the example of a music CD. The CD is the ‘medium’ by which the intellectual property, viz. the songs, passes to the buyer. The manufacturer can sell it to an end-user or to an intermediate retailer. The same song can be put on countless CDs. This too is a sale. When one buys a car, one buys the technology that is contained in the body of the car; the body is just the medium. On ITunes, when one buys a song, the song is transferred into a format which is accessible to the buyer, a proprietory format that needs a special device or software. Yet it is a sale. Limitless ITunes users can buy the song simultaneously. This is a sale to each of them. In the case of CD containing software, say for example Microsoft Word, the medium would again be the CD holding the intellectual property, which would be the software technology. This would also be a sale, despite the fact that this same software technology could be put on unlimited number of CDs and sold to multiple users simultaneously. Effective control of that particular software on that one CD is passed to the buyer. The buyer could use it, alienate it, destroy it, and do anything at all that he likes with it. If he made illicit copies of it, this would constitute infringement; and that in itself would not make the transfer of the software on a CD a service. Even if the buyer transferred this nontransferable software, it would amount to a breach of contract provided in the CD package, just as it would under Monsanto India’s sub-licensing agreement. However, this does not do anything to disqualify the transaction itself from being a sale. These are all sales.
(ii) A perusal of the provisions of the Copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work such as to reproduce the work, to issue copies, to make translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. Our above also finds support from certain other provisions of the Copyright Act.
(iii) In absence of transfer of rights to authorise doing of certain acts as mentioned in sections 2, 13 & 14 of the Copyright Act it cannot be said that there was transfer of copyright. Therefore, in view of these judgments payment on sale of software shall not fall within the definition of ‘Royalty’, as per DTAA.
(iv) If we analyse and compare various provisions of the Copyright Act with the relevant clauses of the master agreement, it is noted that the said agreement does not permit HLL to carry out any alteration or conversion of any nature, so as to fall within the definition of ‘adaptation’ as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of HLL in India and no right was given to HLL for commercial exploitation of the same. It is also noted that the terms of the agreement do not allow or authorise HLL to do any of the acts covered by the definition of ‘copyright’. Under these circumstances, the payment made by HLL cannot be construed as payment made towards ‘use’ of copyright particularly when the provisions of Indian Income-tax Act and DTAA are read together with the provisions of the Copyright Act, 1957.
(iv) It was also argued by the Revenue that provisions of section 9(1)(vi) should be applied, and if these are so applied, then the sale of software shall be covered under Explanation 4 to section 9(1)(vi), and, therefore, the same should be brought to tax as such. In this regard also, it is noticed by us that no corresponding amendment has been made in the provisions of the DTAA. Under these circumstances, the assessee would be entitled to the provisions, which are more beneficial to the assessee out of the provisions of Indian Income-tax Act and DTAA between India and the Netherlands, in view of provisions contained in section 90(2) of the Act. We have already held that as per the provisions of India Netherlands DTAA, the amount received by the assessee on account of sale of software would not fall within the definition of ‘Royalty’ as provided in Article 12(4) of the DTAA. Under these circumstances, it will not be legally permissible for us to refer to the provisions of the Act to decide the taxability of this amount in the hands of the assessee in India. Thus, in our considered view, based upon the facts and circumstances of the case and legal position as discussed above, the impugned amount received by the assessee is in the nature of business profits assessable under Article 7 of India Netherlands DTAA and would not be taxable as ‘Royalty’ under Article 12 of the DTAA.
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