Income Tax Appellate Tribunal - Delhi
Acit, International Taxation, ... vs Datamine International Ltd., , New ... on 26 November, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Sh. Kul Bharat, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 6383/Del/2017 : Asstt. Year : 2014-15
ACIT, Vs Datamine International Ltd.,
International Taxation, (Now CAE Datamine International
Circle-1(2)(2), Ltd.), A-41, Ground Floor, Mohan
New Delhi Cooperative Industrial Area, Mathura
Road, New Delhi-110044
(APPELLANT) (RESPONDENT)
PAN No. AAACD7600A
Assessee by : Sh. V. K. Aggarwal, AR
Revenue by : None
Date of Hearing: 29.09.2021 Date of Pronouncement: 26.11.2021
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Revenue against the order of the ld. CIT(A)-42, New Delhi dated 04.07.2017.
2. Following grounds have been raised by the Revenue:
"1. That in the facts and circumstances of the case, and in law, the ld. CIT(A) erred in deleting the addition made by the AO, and in holding that the revenue received by the assessee from supply of software is not taxable in India as Royalty u/s 9(1)(vi) of the Income Tax Act, as well as Article 13 of the India-UK DTAA.
1.1 That in the facts and circumstances of the case, and in law, the ld. CIT(A) erred in deleting the addition made by the AO, without considering Explanation 4 & 5 2 ITA No. 6383/Del/2017 Datamine International Ltd.
to Section 9(1)(vi) which have been inserted by the Finance Act 2012.
1.2 That in the facts and circumstances of the case, and in law, the ld. CIT(A) erred in deleting the addition made by the AO, after holding that even if the receipts were in the nature of Royalty, this arises through the Permanent Establishment (PE) and Article 7 of the India-UK DTAA shall apply disregarding the fact that the PE was not the owner of the copyright, and Royalty income was not effectively connected to the PE and was rightly taxed as Royalty by the AO, under Article 13(3) o the India-UK DTAA and Section 9(1)(vi) of the Income Tax Act.
1.3 That in the facts and circumstances of the case, and in law, the ld. CIT(A) erred in deleting the addition made by the AO, without considering the decisions in Synopsys International Old Ltd. 212 Taxman 454 (Kar.); Verizon Communications Singapore Pte. Ltd. 361 ITR 575 (Mad.) and Viacom 18 Media Ltd. 153 ITD 384 (Mum.)."
3. The assessee company is a branch office of M/s CAE Mining International Ltd, UK (CMIL, UK). The appellant is engaged in the activity of providing mining solutions through software developed by M/s Datamine Corporate Ltd., UK. The appellant claimed that,
a) It is a simple trader in mining software. First, the end user places the order on the appellant. Then on the basis of this order, the appellant places the order on CMIL, UK. Thereafter, CMIL, UK places the order on Datamine Corporate Ltd., UK and buys the relevant software in the form of CD. CMIL, UK sells the same CD to the appellant. The appellant in turn sells the same CD to the end user.
3 ITA No. 6383/Del/2017Datamine International Ltd.
b) The assessee is also being assessed regularly to sales tax on the sale of goods, i.e. Software.
c) The appellant has filed its return of income for the A.Y. 2014-15 on 27/11/2015 declaring business income of Rs.92,18,420/-.
d) The case of the appellant is covered under Indo-UK DTAA. In particular, the case of the assessee is covered under the exclusionary clause 5(a) of Article 13 of Indo-UK DTAA.
e) The case of the assessee is not covered under clause 3(a) of Article 13 of Indo-UK DTAA because the assessee has derived the business receipts and not royalty by selling software.
f) The amendment made in the definition of royalty in the IT Act is not applicable to the DTAA. Since, there is a market difference in the definition of royalty in the Act and in the DTAA, the definition in the Act is not applicable to the appellant.
g) The accounts of the assessee are duly audited. No defect was found in the books of accounts. Books of accounts are rejected. None of the items of expenditure was found to be disallowed. Under the circumstances, business income could not be estimated and actual business income as per accounts should have been taxed.
4. However, the AO treated the receipts from supply of software as royalty income and the export services as Fee for Technical Services with the following observations:
4 ITA No. 6383/Del/2017Datamine International Ltd.
"On the basis of the above, it is clear that the assessee's receipts from supply of software are taxable in India as royalty income both under section 9(1)(vi) of the Act and under Article 12(3) of India UK DTAA. This royalty income could not be considered to be effectively connected to the PE of the assessee in India as none of the copyright in the given softwares are owned by branch office in India. The parent company is the sole owner of the copyright either directly or indirectly. The branch office in India does not own any of the copyright for which royalty income accrues/arises in India. Therefore, it is held that softwares royalty income received by the company should be brought to tax on gross basis of taxation. Further, the export services provided by company qualify as Fee for Technical Services (FTS). Therefore, amount of Rs. 2,74,16,326/- is to be taxed @ 10% on gross basis."
5. Aggrieved the assessee filed appeal before the ld. CIT(A).
6. The ld. CIT(A) held that, "the appellant is a branch office of Datamine International Limited (DIL), UK. The appellant, on receipt of the orders from the customers places, the order on DIL UK, which is the ultimate holding company, which in turn buys the relevant software in the form of CDs from DCL. The appellant thereafter makes sale of software for perpetuity as per the terms of the agreement. The appellant submitted that the buyer is prohibited from making further copies for the use except for backup purposes. The appellant filed before me a detailed chart which shows that the same buyers purchased multiple number of CDs of the same software, which would certainly not have been 5 ITA No. 6383/Del/2017 Datamine International Ltd.
required, if the buyer was given right to make further copies. In view of this, it is evident that the license granted by the appellant was limited to those rights which were necessary to enable the licensee to operate the program. In view of this, the appellant's case is squarely covered by the decision of Hon'ble Delhi High Court in the case of DIT versus Infrasoft Ltd (supra) and CIT Vs. Dynamic Vertical Software India Private limited (supra). I find that the appellant is also being assessed to Sales Tax on the sale of such software. The appellant's case is also further covered by the ITAT Delhi in the case of Haliburton Exports Inc. Vs. ACIT (supra) and of the ITAT (Hyderabad) in the case of M/s Infotech Enterprises Ltd Vs. Additional CIT (supra).
6.3 The learned AO has relied upon the amendment brought in section 9(1)(vi), by virtue of insertion of explanation to Section 9 by the Finance Act 2012. However, in view of the decision of Hon'ble ITAT Mumbai in the case of B4U International Holding Ltd Vs. DCIT (supra), and of ITAT Delhi in the case of Convergys Customer Management Company (supra), it is a settled issue that the amendment in the in Section 9(1)(vi) will not impact the provisions of the relevant Double Taxation Avoidance Agreements.
6.4 It is seen that the definition of 'Royalty' in the Indo-UK DTAA is quite restrictive, compared to the definition given in section 9(1)(vi) of the Income Tax Act, 1961, and therefore the appellant being a non-resident taxpayer, was eligible to exercise the option to choose the beneficial provisions in the form of section 90 (2). It is seen that in the Indo-Kazakhastan 6 ITA No. 6383/Del/2017 Datamine International Ltd.
DTAA, the definition of the term "royalties" clearly and specifically included "software" in the ambit of "Copyright of literary, artistic, scientific work". However "software" is not included in the definition of "Royalty" in the case of in the Indo- UK DTAA.
6.5 It is seen that as per Article 13(6) of Indo-UK DTAA, if the royalty arises through a permanent establishment to a non- resident, Article 7 shall apply. Since in the case of the appellant, the main business was that of trading of CDs containing software to the end-user procured from the head office of the appellant company and for which purpose the appellant company, being the branch office in India, itself served as the permanent establishment, any income even if were in the nature of royalty, had to be taxed as business income in terms of the Article 7. In view of the above mentioned various grounds, I hold that the receipt of the appellant from sale of software to end-users was not in the nature of "royalty". My Ld. Predecessor has also decided this issue for AY 2008-09 on the similar lines. I have also decided this issue for AY 2012-13 on the similar lines. Accordingly Ground No. 3 and 4 are decided in favour of the appellant."
7. Heard the arguments of both the parties and perused the material available on record.
8. The Co-ordinate Bench of ITAT in assessee's own case in ITA No. 5651/Del/2010 order dated 14.03.2016. The relevant portion of the order is reproduced herewith for ready reference which is as under:
7 ITA No. 6383/Del/2017Datamine International Ltd.
"12.7. There is another dimension of this issue. While going through the Distributors Agreement, we have noted that the assessee has simply purchased shrink-wrapped software or off- the-shelf software from the Corporate. The assessee was not allowed to use the copyright of such software, which obviously vest in the Corporate. Since the assessee itself has not acquired any copyright in the mining software, it cannot resell or transfer anything more than what it has acquired. We, therefore, hold that the consideration received by the assessee for sale of shrink wrapped software cannot be considered as `Royalties' within the meaning of Article 13 of the DTAA as the same is a consideration for sale of a copyrighted product and not use of any copyright.
13.1. Now we take up the contention of the ld. DR that provisions of section 9(1)(vi) should be applied to determine the taxability of the amount. It was contended that as the ld. AR has admitted the amount of sale of software covered under Explanation 4 to section 9(1)(vi), the same should be taxed as such.
13.2. In this regard, we find that sub-section (1) of section 90 of the Act provides that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax in respect of income on which tax has been paid in two different tax jurisdictions. Sub-section (2) of section 90 unequivocally provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax or for avoidance of double taxation, 8 ITA No. 6383/Del/2017 Datamine International Ltd.
then, in relation to the assessee to whom such agreement applies, ' the provisions of this Act shall apply to the extent they are more beneficial to that assessee'. The crux of sub- section (2) is that where a DTAA has been entered into with another country, then the provisions of the Act shall apply only if they are more beneficial to the assessee. In simple words, if there is a conflict between the provisions under the Act and the DTAA, the assessee will be subjected to the more beneficial provision out of the two. If the provision of the Act on a particular issue is more beneficial to the assessee vis-a-vis that in the DTAA, then such provision of the Act shall apply and vice versa. The Hon'ble Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) has held that the provisions of sections 4 and 5 are subject to the contrary provision, if any, in DTAA. Such provisions of a DTAA shall prevail over the Act and work as an exception to or modification of sections 4 and 5. Similar view has been taken by the Hon'ble Bombay High Court in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.). In the light of the above discussion, it becomes vivid that if the provisions of the Treaty are more beneficial to the assessee vis-a-vis its counterpart in the Act, then the assessee shall be entitled to be ruled by the provisions of the Treaty. We have held above that amount from sale of software falls under Article 7 (Business profits) and not under Article 13 (Royalties). Since the position as per the DTAA is more beneficial to the assessee in comparison with that under the Act, in which the receipts admittedly fall under section 9(1)(vi), we hold that the assessee is entitled to exercise option in his favour by choosing to be governed by the DTAA.9 ITA No. 6383/Del/2017
Datamine International Ltd.
14.1. Be that as it may, we find that there is another aspect of the matter. This is without prejudice to our finding that consideration for sale of software does not fall within the scope of the term `Royalties'. Even if the view point of the AO is accepted for a moment, with which we do not really agree, that such amount falls under para 3(a) of Article 13, in our considered opinion, even then the amount cannot be taxed as `Royalties' because of the operation of para 6 of Article 13, which reads as under:-
"6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provision of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply."
14.2. Para 6 of Article 13, to the extent applicable, states that the provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a 10 ITA No. 6383/Del/2017 Datamine International Ltd.
permanent establishment situated therein. In simple terms, this means that the amount falling under para 3 of Article 13 cannot be taxed as Royalties under paras 1 and 2, if the beneficial owner of the royalties, being a resident of a Contracting State (UK), carries on business in the other Contracting State (India) in which the royalties arises through a permanent establishment situated therein (India). Once these conditions are satisfied, then the later part of para 6 comes into play, as per which the provision of Article 7 (Business profits) of this Convention shall apply. In other words, on the fulfillment of the conditions in the first part of para 6, the amount shall not be considered as `royalties' under paras 1 and 2 of Article 13, but shall fall for consideration under Article 7 of the DTAA, being, `Business profits'. There is no dispute on the fact that the assessee is a UK company having its branch office in India (which is its permanent establishment) and the transactions in question are sale of computer software made by such permanent establishment to certain parties in India. This shows that all the requisite conditions for the applicability of first part of para 6 of Article 13 are fully satisfied. On such fulfillment, the amount of `royalties' is liable to be considered under Article 7 (Business profits). As the assessee has declared such receipts under Article 7, the view taken by the authorities in this regard, shifting such amount from Article 7 (business profits) to Article 13 (royalties), being contrary to the mandate of the DTAA, is liable to be and is hereby set aside.
15. In the final analysis, we approve the assessee's stand on the sale of computer software as business profits, by jettisoning the Revenue's viewpoint of royalty. This ground is allowed."
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9. The Supreme Court of India on in the case of Engineering Analysis Centre of Excellence Private Limited( LL 2021 SC 124) settled the long-running contentious issue over how payments made by Indian customers to non-resident suppliers for the use or resale of computer software should be characterised, providing much-needed tax certainty on the issue. On the provisions of DTAA.
10. The excerpts of the order of the Hon'ble Apex Court is as under:
"1 1 . S C ob s e rv e s t h at al l t h e D TA A s i n v ol v ed i n t h e cu r r en t c as e a r e b as e d on O E CD M od el C on v en t i on and ar e si m i l ar. E xam i n es In d i a- S i n g ap o r e D TA A an d r e f e r s t o CB D T Ci rc u l ar N o. 3 3 3 d at ed A p ri l 2 , 1 9 8 2 t o cl ari f y t h at t h e ex p r e ssi on "r o yal t y " , wh en o cc u r ri n g i n s ec t i on 9 of t h e In c o m e Ta x A ct , h a s t o b e c on s t r u ed wi t h re f e r en c e t o A rt i cl e 1 2 o f t h e DT A A . H ol d s t h at r o yal t i es are p a ym en t s of any ki n d r e c ei v ed as c on si d e rat i on f o r "t h e u s e o f , o r t h e ri g h t t o u s e , an y c op yri g h t " o f a li t er a ry wo r k , wh i ch i n cl u d e s a c o m p u t e r p r og ra m m e o r s oft wa r e.
12. Ob s er v e s t h a t A rt i c l e 3 0 of In d i a- U S A DT A A ca rv es ou t a d i st i n ct i on i n 'en t r y i n t o fo r c e ' wh e r e, p r ovi si on s o f t h e DT A A wi ll ap p l y wh en 't ax e s ar e wi t h h el d at s ou r c e' on l y i n t h e c as e o f U S A , n ot In d i a. E xa m i n e s t h e eq u i v al en t of A rt i cl e 3 0 o f In d o- U S D TA A i n o t h e r D TA A s of In d i a an d i n fe r s t h at l og i c b eh i n d the a rt i cl e in the a f o r em en t i on e d D TA A is c on n e ct ed wi t h US1 d om e st i c t ax l a ws an d n ot In d i a n d o m e st i c l aw g o v e rn i n g T DS l i ab ili t y. Hi g h l i g h t s t h at O EC D C om m en t a r y on A rt i cl e 3 0 on ' en t ry i n t o f o r c e ' p r o vi d e s t h at t h e af o r em en t i on ed a rt i cl e d ep en d s on d o m est i c l aw s o f co n t r act i n g s t at e .
13. On ap p l i cat i on of D TA A p r ovi si on s ( on ac c ou n t o f A rt i cl e 3 0 o f In d i a- U S A DT A A ) t o TD S u / s 1 9 5 , r ej ect s R e v en u e' s c on t en ti on t h at s ect i on 1 9 5 d e al s wi t h d e d u c t i o n m ad e p ri o r t o as s es s m en t t o t a x, n ot b ei n g i n t h e n at u r e of t a x an d a s t ag e p ri o r t o d e cl ari n g a p e rson as 'a s s e ss e e i n d e fau l t ' . Refers to SC ru l i n g in CE T e ch n ol og y an d cl ari fi e s t h at a 12 ITA No. 6383/Del/2017 Datamine International Ltd.
d ed u ct i on i s t o b e m ad e u / s 1 9 5 on l y i f t a x i s p a yab l e b y n on - r e si d en t as s e ss e e , h ol d s t h a t ch a rg i n g an d m a c h i n er y p r o vi si on s u / s 9 an d 1 9 5 a r e i n t erl i n ke d .
14. S C su p p or t s i t s o b s e r vat i on b y cl ari fyi n g t h a t a s p e r R e v en u e 's c on t en t i on t h at DT A A i s i n ap p l i cab l e wh i l e d i sch a r gi n g T DS l i ab il i t y u / s 1 9 5 , d ed u ct i o n t o b e m ad e u / s 1 9 5 w ou l d b e m u ch h i gh e r t h an t h e r e sp e ct i v e D TA A r at e wh i ch w ou l d r e su l t i n a d i sp r op o rt i on at e d ed u ct i on o f t ax b y t h e r esi d en t a s c om p a r ed t o t h e rat e s ap p l i cab l e t o t h e n on - r e si d en t .
O n d e fi n it i on of R oy a lt y i n DT A A v i s -a -v i s t he Ac t
15. S C h i g h l i g h t s t h at t h e q u e st i on p o s e d b y S C i n G E T e ch n ol og y, b e f o r e t h e HC wa s wh et h e r ITA T w as j u st i fi ed i n h ol d i n g t h at t h e am ou n t s p ai d b y t h e ap p el l an t s t o t h e f o r ei g n s o ft w a r e su p pl i e rs d i d n ot am ou n t t o r oy al t y , as a r e su l t o f wh i ch , n o l i ab i li ty t o d ed u ct T DS a r o s e an d ob s e rv e s t h at t h e exp r e s si on 'r o yal t y ' u n d e r E x p l an at i on 2 t o s e ct i on 9 ( 1 ) ( vi ) i s wi d e r t h an the ex p r e s si on c on t ai n e d in In d i a- S i n g ap o r e DT A A in the f ol l owi n g a sp e ct s:
(i) i t al so i n cl u d e s l u m p su m c on si d e rat i o n n ot ch a rg ea b l e u n d e r ca p i t al g ai n s;
(ii) ' al l o r an y ri g h t s ' i n cl u d e s t ran s f e r o f l i cen s e; an d ( i ii ) i n cl u d es t h at t e rm t ran s f er 'i n r es p e ct o f an y c op y ri g h t of an y li t er a ry wo r k .
16. S C cl a ri fi e s t h at t ran s f e r of 'al l o r a n y ri g ht s i n r e sp e c t o f' u / s 9 ( 1 ) ( vi ) c o r r es p on d t o s e ct i on s 1 4 ( a) , 1 4 ( b ) an d 3 0 o f t h e Co p y ri g h t A ct , an d i s m o r e e xp an s i ve t h at DT A A p r o vi si on wh i ch r ead s - 'u s e of , o r t h e ri g h t t o u s e' an y c o p y ri g h t .
17. On a p p l i cat i on o f e xp l an at i on 4 t o s e ct i on 9 ( 1 ) ( vi ) , S C h ol d s t h at e xp l an at i on 4 i s n o t a cl ari fi c at o ry o f t h e p o si t i on o f t h e l aw as i t st o od si n c e 1 9 7 6 , si n c e:
(i) ex p l an at i on 3 r ef e r s t o c om p u t e r s o ft wa r e f o r t h e fi r st t i m e w. e . f.
1 9 9 1 an d ex p l an at i on 4 can n ot ap p l y t o an y ri g h t f or t h e u s e o f o r t h e 13 ITA No. 6383/Del/2017 Datamine International Ltd.
ri g h t t o u s e co m p u t e r s o ft w a r e e v en b e f or e t h e t e rm " c om p u t e r so ft wa r e "
wa s i n s e rt e d i n t h e st at u t e;
(ii) se ct i on 2 ( o) o f t h e Co p y ri g h t A ct , t h e t e rm " co m p u t e r s o ft wa r e" wa s i n t ro d u c e d f o r t h e fi rst t i m e i n t h e d e fi n i t i on of a l i t e ra r y w o r k, an d d e fi n ed u n d e r s ec t i o n 2 ( ff c) on l y i n 1 9 9 4 .
18. On ap p l i cat i on of wi t h h ol d i n g p ro vi si on s p ri or to i n s e rt i on of e xp l an at i on 4 on t h e p r e su m p t i on t h at e xp l an at i on 4 al way s exi st e d i n t h e st at u t e, S C r el i e s u p on t ow l at i n m a xi m s - l e x n on c og i t ad i m p os si b i li a, i .e. , t h e l aw d o e s n ot d em an d t h e i m p os si b l e an d i mp ot en t i a ex cu sa t l eg e m i .e . , wh en t h e r e i s a d i sab i li t y t h at m a k es i t i m p o ss i b l e t o ob e y t h e l aw, t h e al l eg ed d i s ob ed i en c e o f t h e l aw i s e xc u s e d. R el i es on S C ru l i n g i n A rj u n P an d i t r a o K h ot ka r v . K ai l ash K u sh an r a o G o ran t yal , wh e r e on t h e b asi s of t h e af o r e m en t i on e d l e g al m a xi m s , t h e r es p on d en t wa s r el i ev e d o f t h e m an d at o r y ob l ig at i on t o fu rn i sh c e rt i fi cat e u n d e r t h e E vi d en c e A ct , 1872, aft e r fai l i n g to o b t ai n it d es p i t e s ev e ral st ep s t ak en by the r e sp on d en t .
19. R e f er s t o B om b a y HC ru l i n g i n NGC N et w o rk s ( In d i a) i n th e co n t ex t o f e xp l an at i on 6 t o s e ct i on 9 ( l ) ( vi ) i n t r od u c ed i n 2 0 1 2 w . r . e. f. 1 9 7 6 an d W es t e rn C o al fi el d s i n t h e c on t ex t of r et r o sp e ct i v e a m en d m en t t o s e ct i on 17(2)(ii) to h i g h li g h t the i m p o s si b il i t y of d i sc h a rg i n g wi t h h ol d i n g ob l i g at i on . H ol d s t h at p e r s on m en t i on e d i n sec t i on 1 9 5 ca n n ot b e ex p ec t ed t o d o t h e i m p o s si b le , n a m el y, t o ap p l y t h e e xp an d ed d efi n i t i on of " r oy al t y"
i n se rt ed b y exp l an a t i on 4 t o s ect i on 9 ( l ) ( vi ) , fo r t h e a s s e s sm en t y ea r s in q u e st i on .
O n v a r io u s A AR r u l in g s an d H C j ud g m e nt s
20. S C u p h ol d s t h e ra t i on al e b eh i n d A A R ru l i n g s i n Da s sau l t S y st e m s an d G eo q u e st S yst e m s wh e re a s h el d t h at Ci t ri x S y st em s d i d n ot st a t e t h e l aw c o r r e ct l y. S C f o u n d t h at on fi rs t p r i n ci p l es, th e ex t ra ct f r om C op i n g er an d S k on e James on C op y ri g h t (14th E d i t i on ) (1999) r e f er r e d to in Da ss au l t S y st e m s m ad e i t cl e ar t h at t h e o wn e rsh i p of c o p y ri g h t i n a w o rk i s d i ff e r en t f r o m t h e o wn er sh i p of t h e p h y si cal m at e ri al i n wh i ch t h e 14 ITA No. 6383/Del/2017 Datamine International Ltd.
c op yri g h t ed w or k m ay b e em b ed d ed wh i ch g o t c om p l et el y m i ss ed o u t i n Ci t ri x S y st e m s .
21. S C fi n d s t h e ru l i ng i n Ci t ri x S y st e m s s el f- c ont ra d i ct o ry as i t l ai d d o wn t h at t h e DT A A wh i ch d e fi n e s ' r oy al t i es ' b e g i v en a g o- b y e an d i n st e ad b e u n d e rs t o od i n co m m on p arl a n c e an d f ou n d i t d i ffi cu l t as t o wh y t h e A A R w a s n ot c o n st rai n ed b y t h e d e fi n i ti on of 'cop y ri g h t ' as p e r s e ct i on 1 4 o f t h e C op y ri g h t A ct si n c e a s p e r s e ct i on 1 6 o f t h e C o p y ri g h t A c t n o p e r s on i s en t i t l ed t o c op y ri g h t ot h e r wi s e t h an u n d er t h e p r o vi si on s o f t h e Co p y ri g h t A ct o r an y ot h e r l aw i n f o r c e.
22. S C fi n d s t h e j u d g m en t o f S a m su n g El e ct r on i c s d e f ec t i ve a s t h e e rr o r sa m e as t h e er r o r m ad e i n Ci t ri x S ys t em s w as m ad e by K arn at a ka HC i . e. , n o d i st i n ct i on wa s m ad e b et w e en co m p u t e r s o ft wa r e th at wa s s ol d / l i cen s e d on a C D/ ot h e r p h ys i cal m ed i u m an d t h e p a rt i n g o f c op y ri g h t i n res p ec t o f an y o f t h e ri g h t s o r i n t e r es t i n an y o f t h e ri g h t s m en t i o n ed i n s e ct i on s 1 4 ( a) an d 1 4 ( b ) o f t h e C op y ri g h t A c t .
23. SC al s o s et asi d e the j u d g m en t in S yn op si s In t e rn at i on al as i n co r r ec t on t h e f ol l owi n g g r ou n d s:
(i) i n cor r e ct l y h el d t h at t h e e xp r e s si on ' i n re sp ect of ' i n e xp l an at i on 2 ( v) of s ect i on 9 ( 1 ) ( vi ) wou l d b e c om e ot i o s e wh en i n t er p r e t ed as syn on y m o u s t o 'o n ' o r 'a t t ri b u t ab l e t o' wh i ch h as b e en s o i n t e rp r et ed b y S C i n S t at e o f M ad r as v. S wa st i k T o b a c c o F a ct o ry , (1 9 6 6 ) 3 S CR 7 9 i n t h e c on t e xt o f t a x st at u t e .
(ii) co m p l et el y m i s s ed s ec t i on 1 6 of t h e C op y ri g h t A ct wh i ch st at e s t h a t 'n o p e r s on sh al l b e en t i t l ed t o co p y r i g h t .. . ot h e rwi s e t h a n u n d e r an d i n ac c o rd an c e wi t h t h e p r ovi si on s o f t h i s A ct o r o f an y o t h e r l aw f o r t h e t i m e b ei n g i n f o rc e 1 an d m ak e s i t cl ea r t h at t h e e xp r e s si on 'c op y ri g h t ' h as t o b e u n d e r st o od o n l y a s i s st at ed i n s ec t i o n 1 4 o f t h e C op y ri g h t A ct an d n ot ot h e r wi s e;
( i ii ) wh ol l y i n co r r e ct i n st at i n g t h at st o r ag e o f c om p u t e r p r og r a m m e p e r s e w ou l d co n st i t u t e i n fri n g e m en t o f c op y ri g h t an d wa s d i r e ct l y c on t r ar y t : o t h e t e rm s of s ec t i on 5 2 ( l ) ( a a) of t h e C o p y ri g h t A ct ;
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( i v) e rr e d i n re f e r ri n g t o s ec t i on 9 ( 1 ) ( vi ) o f t h e A ct an d a p p l yi n g i t t o In d i a- l r el an d DT A A an d fai l ed t o p r o p e rl y ap p r e ci at e e xp l an at i on 4 t o s ec t i on 9 0 ( 2 ) o f t h e A ct ;
( v) i n cor r e ct i n fi n d i n g t h at wh en a co p y ri g h t e d a rt i cl e i s s ol d , t h e en d - u s e r g et s t h e ri g h t t o u s e t h e i n t el l ec t u al p r op e rt y ri g h t s em b od i ed i n t h e c op yri g h t wh i ch w ou l d t h e r ef o r e am ou n t t o t ran s f er of an e x cl u si v e ri g h t of t h e c op y ri g h t own e r i n t h e w o rk , i s al s o wh ol l y i n c o r r ec t .
24. SC ap p r o v ed the j u d g m en t s by D el h i HC in E ri c s s on , N o ki a N et w o r k s, In f ra s o ft , ZT E C o rp o rat i o n an d ad d ed t h at t h e s e j u d g m en t s al s o ac c o rd wi t h t h e O E CD C o m m en t a ry on wh i ch m ost o f Ind i a's D TA A s a r e b as e d . S C su m m a ri z ed t h e l aw l ai d d o w n b y D el h i HC a s f ol l ows :
"i ) C op y ri g h t i s an e x cl u si v e ri g h t , w h i ch i s n eg a ti ve i n n at u r e , b ei n g a ri g h t t o r e st ri ct o t h e r s f r om d oi n g c e rt a i n act s .
ii ) Cop y ri g h t is an i n t an g i b l e, i n c or p o r eal ri g h t , in the n at u r e of a p ri vi l eg e, wh i ch i s q u i t e i n d ep en d en t o f an y m at e ri al su b st a n c e. O wn e rsh i p o f c op y ri g h t i n a wo r k i s d i ff e r en t f r om t h e own e r sh i p of t h e p h y si cal m at e ri al i n wh i ch th e c o p y ri g h t ed w o r k m a y h ap p en t o b e em b od i ed . A n ob vi ou s ex am p l e i s t h e p u rch as e r o f a b o ok o r a C D/ DV D , w h o b e c om e s t h e ow n er o f t h e p h y s i cal art i cl e, b u t d o e s n ot b e c om e t h e own e r o f t h e c op yri g h t i n h e r en t i n t h e w o r k, su ch c op y ri g h t r em ai n i n g e xcl u si v el y wi t h t h e own e r .
ii i ) Part i n g wi t h c o p y ri g h t en t ai l s p art i n g wi t h t h e ri g h t t o d o an y o f t h e act s m en t i on ed i n s ec t i on 1 4 of t h e Co p y ri g h t A ct . Th e t r an sf e r o f t h e m at e ri al su b st an c e d o e s n ot , o f i t s el f, s e rv e t o t ran s f e r t h e co p y ri g h t t h e r ei n . Th e t r an s f e r o f t h e o wn e rsh i p o f t h e p h y si cal su b s t an c e , i n wh i ch c op yri g h t su b si st s , g i ve s t h e p u r ch a s e r t h e ri g h t t o d o wi t h i t wh at ev e r h e p l ea s es , ex c ep t t h e ri g h t t o r e p ro d u ce t h e sam e an d i s su e i t t o t h e p u b l i c, u n l es s su ch c op i e s ar e al r e ad y i n ci r cu l at i on , an d t h e o t h e r a ct s m en t i on ed i n s ec t i on 1 4 of t h e Co p y ri g h t A ct .
i v) A li cen c e fr o m a c o p y ri g h t ow n er , c on f e r ri n g no p ro p ri et a r y i n t e re st on t h e l i cen s e e , d o e s n ot en t ai l p a rt i n g wi t h an y c op yri g h t , an d i s d i ff e r en t f ro m a l i cen c e i s su ed u n d e r s e ct i on 3 0 o f t h e C op y ri g h t A ct , wh i c h i s a 16 ITA No. 6383/Del/2017 Datamine International Ltd.
li cen c e wh i ch g r an t s t h e l i cen s e e an i n t e r e st i n t h e ri g h t s m e n t i on ed i n s ec t i on 1 4 ( a) an d 14(b) of the C o p y ri g h t A ct . Wh e r e the core of a t ra n s ac t i on i s t o au t h o ri z e t h e en d - u s e r t o h av e a cc e ss t o a n d m ak e u s e o f t h e "l i cen s ed " c o m p u t e r s o ft wa r e p r o d u ct o v e r wh i ch t h e l ic en s e e h a s n o e xcl u si v e ri g h t s , no c op y ri g h t is p art e d wi t h an d c on s eq u en t l y , no i n fri n g e m en t t a k e s p l ac e, as i s r e c o g n i z ed b y s ect i on 5 2 ( 1 ) ( aa) o f t h e Co p y ri g h t A ct . It m ak e s n o d i ff e r en c e wh et h e r t h e en d - u s e r i s e n ab l e d t o use c om p u t e r s o ft wa r e t h at is cu st om i s e d to its sp eci fi cat i on s or ot h e r wi s e.
v) A n on - ex cl u si v e , n on - t r an s f e ra b l e l i ce n c e, m e r el y en a b l i ng t h e u s e o f a co p y ri g h t ed p r od u ct , i s i n t h e n a t u r e of r e st ri ct i v e c on d i t i on s wh i ch ar e an ci ll ary t o su c h u s e , an d c an n ot b e c on st ru ed as a l i cen c e t o en j o y al l o r an y of t h e en u m e rat e d ri g h t s m en t i on ed i n s e ct i on 1 4 o f t h e C op y ri g h t A ct , o r c r eat e an y i n t e r e st i n an y su ch ri g h t s s o a s t o a t t ra ct s e ct i on 3 0 o f t h e C o p y ri g h t A ct .
vi ) Th e ri g h t t o r e p ro d u c e an d t h e ri g h t t o u s e c omp u t e r s o f t wa r e a r e d i st i n ct an d s e p a r at e ri g h t s .. . .. t h e f or m e r a m ou n ti n g t o p a rt i n g wi t h c op yri g h t an d t h e l at t e r, i n t h e c on t e x t o f n on - e x cl u si ve E U LA s , n ot b ei ng s o. "
O n D oct r i ne of E x h au st i o n
25. S C su rv e y s d o m es t i c a s wel l as fo r ei g n c as e s d eal i n g wi t h t h e fi r st sal e d o ct ri n e , i n cl u d i n g j u d g m en t s of t h e D el h i H C i n W arn e r B r o s, an d J oh n Wi l ey & S on s . N ot e s t h at t h e f i rst sal e d oc t ri n e wa s st at u t o ri l y r e c og n i z ed f o r ci n e m at og ra p h i c fi l m s f ol l owi n g t h e 2 0 1 2 am en d m en t t o s ec t i on 1 4 ( d ) ( i i ) of t h e Co p y ri g h t A ct , 1 9 5 7 , wh i ch d el et ed t h e ex p r es si on ' r eg a rd l es s of wh et h e r su ch c o p y h a s b e en s ol d o r gi v en o n h i re on ea rl i er o cc a si on ' . Cl a ri fi e s t h at u / s 1 4 ( a) ( i i ) of C op y ri g ht A ct , t h e d i st ri b u t i on ri g h t su b si s t s wi t h t h e o wn e r o f c op yri g h t t o i ssu e c op i e s of t h e w o r k t o t h e p u b l i c, t o t h e e xt en t su ch co p i e s a r e n ot c op i es al r e ad y i n ci r cu l at i on , t h e r eb y m an i f e st i n g a l eg i sl at i v e i n t en t t o ap p l y th e d o ct ri n e o f fi r st sal e / p ri n ci p l e o f e x h au st i on . N ot e s t h a t a si m i l ar am en d m en t wa s m ad e i n 1 9 9 9 t o s e ct i on 1 4 ( b ) ( i i ) wh i ch d efi n ed c op y ri g h t wi t h r es p e ct t o co m p u t e r 17 ITA No. 6383/Del/2017 Datamine International Ltd.
p r og r am m e s . In f e r s t h at t h e fi r st sal e d oc t ri n e d o es ap p l i es t o c om p u t e r p r og r am m e s .
26. S C n o t es t h at s e ct i on 1 4 ( b ) ( i i ) ap p l i es on l y t o t h e 'm aki n g ' of c op i es o f t h e c o m p u t e r p r og ra m m e an d t h en s el li n g t h e m a n d t h e o b j ect of t h e p r o vi si on i s t o i n t e r d i ct r ep r od u ct i on o f t h e sai d c om p u t e r p r og r am m e an d c on s e q u en t t r an s f e r o f t h e r ep r od u c ed c om p u t er p r og ra m m e t o su b s eq u en t acq u i r er s/ en d - u s e rs . Cl a ri fi e s that sa l e by the au t h o r of a c om p u t e r s oft wa r e t o a d i st ri b u t o r f o r on w ar d s al e t o an en d- u s e r , can n ot p o s si b l y b e h i t b y t h e p ro vi si on s o f s e ct i on 1 4 ( b ) ( i i ) .
27. S C h i g h li g h t s t h at i n t h e i n st an t ca s e, t h e d i st ri b u t or can n o t u s e t h e c om p u t er s o ft w a r e at al l an d h as t o p a s s on t h e s ai d s of t wa r e, a s sh ri n k- wr ap p e d by the ow n er , to the en d - u s e r for a c on si d era t i on , the d i st ri b u t o r 's p r ofi t m a rg i n b ei n g t h a t o f an i n t e r m ed i ar y w h o m e r el y r e sel l s t h e s am e p r od u ct t o t h e en d - u s e r. H o l d s t h a t t h e r e i s n o t ran sf e r of t h e i n t er e st in c op y ri g h t p e rt ai n i n g to the d i st ri b u t i on of the co m p u t e r p r og r am m e t o t h e d i st ri b u t o r.
28. S C h ol d s t h at t h e d i st ri b u t i on o f t h e c o p y ri g ht ed c om p u t er s oft wa r e , as d on e i n t h e ca s e s i n ap p eal d o e s n o t c on st i t u t e t h e g r a n t o f an i n t e r e st i n cop y ri g h t u n d e r s ec t i on 1 4 ( b ) ( i i ) , n e c es si t at i n g t h e d e d u ct i on of t a x at s ou rc e u n d e r s ec t i o n 1 9 5 .
On O EC D C om m en t a r y.
29. S C exp r e s s e s t h a t DT A A s t h a t h a v e b e en en t e r e d i n t o b y In d i a wi t h ot h e r C on t ra ct i n g S t at es h a v e t o b e i n t e rp r et e d l i be ral l y wi t h a vi ew t o i m p l em en t t h e t ru e i n t en t i on o f t h e p a rt i es .
30. Ob s er vi n g t h at a ll the D TA A s wh i ch are su b j e ct m at t e r of c on si d e rat i on i n t h e p r e s en t c as e h av e , as t h ei r st a rt i n g p oi n t , ei t h e r t h e O EC D M od el Ta x Co n v en t i on an d / o r the UN M o d el Dou b l e Ta xat i on Co n v en t i on b e t w e e n De v el op ed an d D e v el op i n g C ou n t ri e s i n sof ar a s t h e t ax at i on of r oy al t y f or p a rt i n g wi t h co p y ri g h t i s c on c e rn e d , S C h i g h l i g h t s t h e i m p o rt an c e of O EC D co m m en t a ry p r o vi d ed i n t h e OE CD M o d el Tax Co n v en t i on .
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31. S C r em a r k s "Wh en t h e d e fi n i ti on of " r oy al t i es " i s s e en i n al l t h e DT A A s t h at w e a r e c on c e rn e d wi t h , i t i s f ou n d t h at " r oy al t ie s" i s d e fi n ed i n a m an n e r ei t h e r i d en t i c al wi t h or si m il ar t o t h e d efi n i t i on con t ai n ed i n A rt i cl e 1 2 of t h e O E CD M o d el Tax C o n v en t i on . Th i s b ei n g t h e ca s e , t h e O EC D C o m m en t a ry on t h e p r ovi si o n s o f t h e O E CD M od el Ta x C on v en t i on t h en b e c om e s rel ev an t . "
32. A s re g a rd s In d i a' s p o si t i on w .r .t . O E CD c om m en t a r y ' r e s e rvi n g i t s ri g h t ' t o t ax r o yal t i e s, S C op i n es , " It i s si g n i fi can t t o n o t e t h at a ft e r In d i a t o o k su ch p o si t i on s q u a t h e O EC D C o m m en t a r y , n o b i l at e ral a m en d m en t wa s m ad e by In d i a an d the ot h e r Co n t ra ct i n g S t at e s to c h an g e the d e fi n i t i on of r o yal t i e s c on t ai n ed i n an y o f t h e D TAA s t h at w e a r e c on c er n ed wi t h i n t h es e ap p eal s, i n ac c o rd an c e wi t h i t s p osi ti on ." A l s o r ef e r s t o D el hi HC ru l i n g i n New S ki e s S at el li t e BV wh e r e i t w as h el d t h at m e re t a ki n g of p o si t i on s wi t h r e sp e ct t o t h e O EC D C om m en t a r y w ou l d n ot al t e r t h e DT A A 's p r o vi si on s, u n l es s t h e y a r e ac t u al l y am en d e d b y a bi l at e r al r e- n eg o t i at i on . Th u s, S C st at e s t h at t h e O E CD Co m m en t a ry on A rt i cl e 1 2 o f t h e O E CD Mo d el Ta x Con v en t i on , i n c o rp o rat e d i n t h e D TA A s , wi l l co n t i n u e t o h a v e p e r su a si v e v al u e a s t o t h e i n t e rp r et a t i o n of t h e t erm " r oy al t i es " c on t ai n ed t h e r ei n .
33. S C r ej e ct s R ev en u e 's r el i an c e p l ac ed on t h e E- C om m e r c e R ep o rt 2 0 1 6 t h at p r op os e d eq u al i z at i on l ev y o n sp e ci fi ed di g i t al se r vi ce s an d al s o r e c om m en d ed t h at wi t h h ol d i n g t ax o n d i g i t al t ran s act i on s wo u l d r eq u i r e an e xp r e ss i n cl u si on i n t a x t r ea t i e s i n or d e r t o b e f ea si b l e. S C p oi n t s ou t t h a t these r ep o rt s do n ot ca r ry the m at t e r m u ch fu r t h e r as they are r e c om m en d at o r y r e p o rt s e xp r e ssi n g t h e vi ew s o f t h e c om m i t t e e m e m b e r s, wh i ch t h e G o v e rn m en t o f In d i a m a y a c ce p t or r ej e ct . S C el u ci d at e s t h at e v en i f t h e p osi t i o n p u t f o rt h i n t h e af o r em en t i on ed r ep o rt s w er e t o b e ac c ep t e d , a D TA A wo u l d h av e t o b e b il at e ral l y am en d e d b e f o r e an y su c h r e c om m en d at i on ca n b e c om e l aw i n f o r c e f o r t h e p u rp os e s o f t h e A ct .
34. As r eg a rd s r el i an c e p l ac ed by the R e v en u e on SC ru l i n g in Co m m i s si on e r o f C u st om s v . G .M . Ex p o rt s , wh e r e f ou r p r op o si t i on s w e r e cu l l ed ou t i n t h e c o n t e xt of t h e l e v y o f an an t i - d um p i n g d u t y i n con s on an c e wi t h t h e G en e r al A g r e em en t o n T a ri ff s an d Tr ad e ( G AT T) , 1 9 9 4 , S C st at e s t h at t h e c on cl u si on s d r awn i n t h e a f o r e sai d c a se h a v e "n o d i re ct r el e van c e 19 ITA No. 6383/Del/2017 Datamine International Ltd.
t o t h e f ac t s at h an d as t h e ef f e ct o f se ct i on 9 0 ( 2 ) of t h e In c om e Ta x A ct , r ea d wi t h ex p l an at i o n 4 t h e r e of . .. "
35. S C al s o r ef e r s t o CB DT Ci r cu l ar N o. 1 0/ 2 0 0 2 d at ed O ct 9 , 2 0 0 2 wh er e b y C BD T , a ft e r r e f e rri n g t o S e c .1 9 5 h a d i t s el f m a d e a d i s t i n ct i on b et w e en r e m i t t an c e s f o r r o yal t i es an d r em i t t an c e s fo r su p p l y of a rt i cl e s o r c om p u t er s of t wa r e i n t h e p r of o r m a of t h e c er t i fi cat e t o b e i ssu e d as p e r t h e ci rc u l ar . S C op i n e s " Th i s i s on e m o r e ci r cu m st an c e t o sh o w t h at t h e R e v en u e h a s i t s el f ap p r e ci at ed t h e d i ffe r en c e b et w een t h e p a ym en t of r oy al t y an d t h e su p p l y/ u s e o f c o m p u t e r s o ft wa r e i n t h e fo r m o f g o od s, wh i ch i s t h e n t r e at ed a s b u si n e s s i n c o m e o f t h e a sse s s e e t axa b l e i n In d i a i f i t h a s a P E i n In d i a. "
11. The Hon'ble Apex Court held, "168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end- users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.
169.Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non- resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and 20 ITA No. 6383/Del/2017 Datamine International Ltd.
that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.
170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed."
12. Hence, keeping in view the judgments of the Co-ordinate Bench of ITAT in the assessee's own case and that of the Hon'ble Apex Court, we hereby dismiss the appeal of the Revenue.
Order Pronounced in the Open Court on 26/11/2021.
Sd/- Sd/-
(Kul Bharat) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 26/11/2021
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR