Delhi High Court
Dy. Cit, Non Resident Circle, New Delhi vs Metapath Software International Ltd. on 28 July, 2006
Equivalent citations: [2006]9SOT305(NULL)
ORDER
N.V. Vasudevan, J.M. IT Appeal No. 1797 (Delhi) of 2001 is an appeal by the Revenue against the order dated 13-2-2001 of the Commissioner of Income-Tax (Appeals)-XXIV, New Delhi, relating to assessment years 1997-98. The assessed has filed a cross objection against the very same order of the Commissioner (Appeals). First we shall take up for consideration the appeal by the revenue, namely, IT Appeal No. 1797 (Delhi) of 2001.
2. The assessed is a company incorporated under the laws of United Kingdom ("UK") and is a leading provider of software solutions to wireless communication providers. A notice under section 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was issued by the Deputy Commissioner of Income-Tax, Non Resident Circle, New Delhi (hereinafter referred to as learned Assessing Officer) to the assessed on 3-11-1999. Pursuant to the notice, the assessed filed a letter (dated 17-11-1999) submitting that it did not constitute a Permanent Establishment ("PE") in India under the provisions of the Avoidance for Double Taxation between India and United Kingdom ("Treaty") and is not taxable in India. Subsequently, on 21-1-2000, the learned assessing officer issued another notice to the assessed under section 142(1) of the Act, in reply to which, the assessed filed return of income declaring taxable income at NIL.
2.1 In response to the queries of the assessing officer, the assessed furnished the details of software and hardware supplied by the assessed to Indian customers during the assessment year 1997-98, the details of which were as follows Financial Year 1996-97 [1-4-1996 to 31-3-1997] Supply of Software:
Name of party and address Particulars Amount In GBP Bharti Cellular Ltd. Qutab Ambience H-5/12, Old Mehrauli Road, New Delhi - 110 030.
Supply of Software Planet, automatic frequency planning module and Databuild.
141,693 BPL US West Cellular Supply of software Planet 67,475 Telecommunications Services Pvt. Ltd. Rockline Centre, 54 - Richmond Road, Bangalore - 560 025.
FICS software license TEMS to Planet conversion.
2,272 Skycell Communications Ltd. Tarapore Towers, 826/827, Annai Salai, Chennai - 600 002.
Supply of software Planet 71,955 Name of party and address Particulars Amount In GBP Sterling Cellular Ltd. Suit No. 318, Hotel Samrat, Chanakyapuri, New Delhi.
Supply of software Planet 199,846 Supply of Hardware [Prior to December, 1996] :
Name of party and address Particulars Amount In GBP BPL US West Cellular Hardware [Delivery of 4 Nos.
252,400 Telecommunications Services Pvt. Ltd., Rockline Centre, 54-Richmond Road, Bangalore-560 025.
RF Survey Systems TEMS (Ericsoft Test Mobile Station) Equipment (2 Magellan GPS 2000 units).959
Equipment (2 sets of GPS PCMCIA card including antenna).
2,211 2.2 The assessed explained that the assessed is primarily involved in supply of software and also certain hardware used to enhance the effectiveness of telecom networks. These items are specialized products devised to serve a particular group of persons engaged in a particular line of business likely to use assesseds products. There was no marketing undertaken in India to effect sales and there was consequently no marketing support available to the assessed in India. The assessed also submitted that two expatriates, Chris Denley and Howard Martindale were deputed to India to assist in the set up, establishment and on-going operations of an Indian company [Metapath Software International (India) Private Limited ("MSI India")], incorporated as a joint venture with Bharti Cellular Limited. That both these individuals were in the country for approximately a period of one year. Further, their salaries were borne by the assessed since both expatriates were deputed to the Indian joint venture during its initial set up stage and MS1 India was not in a position to absorb the burden associated with expatriate compensation. However, these expatriates were in India as employees of the Indian joint venture and their local expenses, i.e., accommodation, travel etc. were being borne by the Indian joint venture company. The assessed also submitted that income from supply of hardware in India is not taxable for the following reasons. That under the provisions of section 9(1)(i) of the Act, income derived by the assessed from supply of hardware to Indian customers would be taxable in India only where the same has arisen to the assessed from a business connection in India. Further, as per Explanation (a) to section 9(1)(i) of the Act, only so much of the income would be taxable in India as is attributable to operations carried on by the assessed in India. The assessed referred to Circular No. 23 [F. No. 7A/38/58-IT (A-II)], dated 23-7-1969, issued by the Central Board of Direct Taxes regarding the applicability of section 9 of the Act, wherein it has been clarified that income derived by a nonresident exporter selling goods to Indian importers would not be deemed to accrue or arise in India and consequently not be subject to tax in India provided the some conditions are satisfied. The assessed submitted that the assessed does not carry on any business operations in India. The hardware in question is supplied by the assessed to Indian third party customers directly from overseas. Title in the hardware is transferred outside India i.e. before the hardware reaches India and consideration for the same is also received overseas. Additionally, the contracts for supply of hardware have been executed between the assessed and the Indian parties on a principal to principal basis, i.e., :
(a) in their capacity as independent buyers and sellers, with the assessed exercising no control over the business of the Indian customers; and
(b) on terms and conditions prevalent in the market and on an arms length basis; and further
(c) the payment for the hardware is not dependent in any manner on the resale of hardware by the Indian purchaser.
2.3 In view of the provisions of section 9 of the Act read with the said circular, the assessed is not liable to pay taxes in India on income arising from supply of hardware to customers during the financial years relevant to the subject assessment year. Without prejudice to the above the assessed submitted that the assessed being a tax resident of UK, has the option to be taxed in India under the provisions of the India-UK tax treaty. Under the provisions of the India-UK tax treaty, income derived by the assessed from supply of hardware to Indian parties qualifies as Business Income. Accordingly, taxability of such income is governed by the provisions of article 7 of the India-UK tax treaty.
2.4 As per article 7(1) of the India-UK tax treaty, Business income earned by a resident of UK is taxable in India only if it constitutes a Permanent Establishment ("PE") in India. Further, only the portion of the income as is attributable to activities of such PE in India is taxable in India. Further as per article 5 of the India-UK treaty, a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Further, the term PE has been defined to inter alia, include :
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) premises used as sales outlet;
(g) .
2.5 That the assessed does not carry on any business operations in India. Further, it neither has a branch nor any other office in India. During the financial year in which the hardware was sold in India, the assessed did have an equity stake in a joint venture company with Bharti Telecom. However, the Indian joint-venture company was only incorporated on 23-12-1996, which was subsequent to the period when all the hardware was sold by the assessed to customers in India. No hardware sales have been made to customers in India subsequent to this date. Accordingly, the India joint venture company had no role to play in the sale of hardware effected by the assessed. Accordingly, the assessed did not constitute a PE in India and, hence, income derived by the assessed from such activity is not liable to Indian taxes even under the provisions of the India-UK tax treaty.
2.6 The assessed also submitted that its income from supply of software should not be taxed as "Royalty". The assessed had during the relevant financial year supplied software called, "Planet" to Indian telecommunications operators, in form of single-user site license for internal use. The assessed took a stand that since the supply of software by the assessed to its customers in India is in the nature of sale of software from overseas, for the same reasons outlined earlier while discussing the taxability of sale of hardware, income derived by the assessed from supply of software to Indian customers is not taxable in India either under the domestic law or based on the provisions of the India-UK tax treaty. The assessed also further submitted that notwithstanding our above contention, even where the supply of software is construed as licensing of software, the same should not qualify as "royalty" income both under the provisions of the Act as well as the India-UK tax treaty. It may be clarified here that if the income from supply of software is held to be in the nature of Royalty then notwithstanding the fact that there is no PE of the assessed in India, the same is taxable in India under the Indo-UK DTAA.
2.7 As per Explanation 2 to section 9(1)(vi) of the Act, "royalty" means consideration (including any lump sum consideration, but excluding any consideration which would be income of the recipient chargeable under the head Capital Gains) for
(i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, intention, model, design, secret formula or process or trademark or similar property;
(iii) the use of any a patent, invention, model, design, secret formula or process or trademark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; and
(v) the transfer of all or any rights (including the granting of a license), in respect of any copyright, literary, artistic or scientific work ...............
2.8 It was contented by the assessed that software being an item typically protected by copyright, the provisions of clause (v) of Explanation 2 to section 9(1)(vt) of the Act were relevant in the case of the assessed. Accordingly, consideration for license of software would be taxable in India only where the license of software involves transfer of all or any rights in the copyright relating to the software supplied. It was pointed out that the term copyright has not been defined in the Act and therefore reliance can be placed on its definition as per section 14 of the Copyright Act, 1957. The term copyright, in the case of computer software, means the exclusive right to do or authorize the doing of the following acts :
To reproduce the work in any material from including the storing of it in any medium by electronic means;
To issue copies of the work to the public, not being copies already in circulation;
To perform the work in the public, or communicate it to the public;
To make any translation/adaptation of the work;
To sell or give the software on hire.
2.9 It was contended by the assessed that a person can be said to have acquired a copyright or the right to use the copyright in a product, where he is authorized to do all or any of the above acts. Accordingly, where a payer does not acquire any of the above rights, including the right to further sell or give the software on hire, but is merely permitted to use the subject-matter of the copyright (software in the instant case), it cannot be said that the payer has acquired the copyright or the right to use the copyright of the software supplied, but has in fact merely acquired the right to use the subject-matter of the copyright (i.e., the product). The assessed pointed out that the software acquired by its customers does not give any right to the customers to reproduce and commercially distribute them. In other words, the customers have no right to exploit the underlying copyright but are merely permitted to use the subject-matter of the copyright. Accordingly, payments made by the Indian parties for acquisition of software from the assessed fall outside the scope of the definition of royalty as per clause (v) of Explanation 2 to section 99(l)(vi) of the Act. The assessed also, pointed out that Article 13(3) of the tax treaty between India and UK defines the term royalties to mean payments of any kind received as a consideration for the use of or the right to use
(a) any copyright of a literary, artistic or scientific work, including cinematograph films or work on films;
(b) any patent, trade mark, design or model, plan, secret formula or process, major information concerning industrially, commercial or scientific experiences;
(C) ...........................
For the reasons already given in the context of section 9(1)(vi) of the Act, the assessed submitted that only payments which allow a payer to use/acquire a right to use a copyright in a literary artistic or scientific work, or which allow payer to use or acquire the right to use a patent, invention etc. are sought to be covered within the definition of royalty. Payments made for acquiring the right to use the product itself, without allowing any right to use the copyright in the product are not sought to be covered within the scope of royalty.
3. The assessing officer, however, was of the view that the income of the assessed is covered under the provisions of section 9(1) of the Act for the following reasons :
1. The contract is signed in India;
2. The supply is on CIF basis and installation and maintenance is the responsibility of the assessed. The upgrade of the software is the responsibility of the assessed;
3. The assessed-company having employees who are working in India and have stayed here for more than one year;
4. The software is not sold but has been licensed to use and the same is covered under the term royalty.
4. The assessing officer also made a reference to article 5(k) of the DTEA between India and UK, which defines the expression Permanent Establishment. Article 5(k-) reads as follows Section 5 of the agreement is reproduced below :
Article 5: Permanent Establishment :
1. For the purposes of this Convention, the term "Permanent Establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially :
(k) the furnishing of services, including managerial services other than those taxable under Article 13 (royalties and fees for technical services) within a Contracting State by an enterprise through employees or other personnel, but only if :
(i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-months period; or
(ii) the services are performed within that State for an enterprise [within the meaning of paragraph 1 of article 10 (associated enterprises)] and continue for a period or periods aggregating to more than 30 days within any 12 months period.
5. The assessing officer concluded that the assessed had a PE in the form of its employees as per article 5(k) of the treaty and that these employees were carrying on the business for the assessed in India and have stayed in India for more than one year. The assessing officer held that the salaries of these employees were paid by the assessed. The assessing officer also held that the assessed-company had been deputing expatriates for negotiations and finalizing the contracts and for after sale services and that these visiting expatriates were nothing but permanent establishment of the assessed. The assessing officer, therefore, concluded that the income of the assessed was taxable in India.
6. As far as the income from supply of software is concerned, the assessing officer held that the income for supply of software was taxable as royalty, for the following reasons :
"The assessed has given the definition of Permanent Establishment in its letter but has avoided service PE. it has only submitted that the assessed does not carry out any business in India. The assessed has submitted that the joint venture was formed subsequent to the supply of the hardware. The assessed has not addressed to the facts that three sales negotiations were carried on in India. The supply is on CIF basis. The assessed has installed the hardware in India. It has carried out training programmes in India. It has provided after sales services in India. It has sent regular expatriates in India. All these activities cannot be carried out without the assessed having a fixed place of business in India. Further the expatriates of the assessed-company for more than 90 days are permanent establishment of the assessed as per clause 5(k) of the treaty.
The income of the assessed from supply of software is taxable as royalty due to the following reasons
1. The software has been granted under a license. There is a proper agreement between the assessed and Bharti Cellular Limited under the name "license agreement for use of mobile systems international cellular system planning tool PLANET". This clarifies the position that the software is given on license and is not sold. Throughout the contract the world license is specifically mentioned wherever the contract is referred.
As per Article 2 of the agreement "The licensor hereby grants to the licensee a non-exclusive and non-transferable right by way of license to use the licensed software (2.5) on the specified computer at the location from the date hereof on the terms and conditions herein contained)."
This clarifies that the customer cannot transfer the right and the license is a non-exclusive license.
2. While discussing the use in Article. 4 of the agreement certain restrictions have been further imposed like the software can be used in the specified computer. It can only be used at specified location. At article 5 it is written that "the licensed software is the sole property of the licensor and the licensee has no right in the licensed software other than the right to use it in accordance with the expressed terms and conditions." It further says "All copyright and other intellectual property rights in the licensed software in all times remain vested in the licensor." There is a further restriction that the licensee cannot alter, amend, modify, reverse engineer, interrogate, compile, disassemble or decode the licensed software.
Form the above it is clear that the software has not been sold to the customer as per the Sales of Goods Act. The right to use the software has been granted which is covered under article 13 of the Indo-UK Treaty.
The assessed has given detailed submissions why the same should not be taxed as royalty and has submitted that since the software is not a customized software and is available off the self and the customer has not been granted right to use the copyright, the payment is not covered under royalty. However the assessed has no reply to the fact that the software is not sold but licensed. The license is granted for the use of the software. Further it can neither be sub-licensed nor can be altered or sold. Therefore, the payment on supply of software is covered under Royalty, but since the assessed has a permanent establishment in India, royalty will be taxed at the rate of 30 per cent.
With the above remarks, income of the assessed is computed as follows :
1. Total hardware supply = 255670 Pounds.
Profit @ 40 per cent = 1,02,268 Pounds.
Converted into INR g Rs. 60 = Rs. 61,36,080 Tax @ 55 per cent = Rs. 33,74,844.I
2. Total software supply = 483241 Pounds.
Converted into INR @ Rs. 60 = Rs. 2,89,94,460 Tax @ 30 per cent = Rs. 86,98,338 II"
7. The assessing officer ultimately worked out 40 per cent of the total value of hardware supplied as income of the assessed. The assessing officer also brought to tax the value of software supplied by the assessed treating the same as akin to royalty.
8. The assessed was aggrieved by the order of the assessing officer and preferred appeal before the Commissioner (Appeals). Before the Commissioner (Appeals) firstly it was contended that no income accrued or arose in India and that there was no PE of the assessed in India as held by the assessing officer. Secondly, it was contended that the action of the assessing officer in concluding that the profit margin of the assessed on supply of hardware was 40 per cent was highly arbitrary. It was contended that the assessed as such is not in the business of manufacturing and supplying hardware. Equipment supplied by the assessed to its customer in India was sourced from other vendors, specializing in Hardware. In certain exceptional cases (an isolated case in India) where the assesseds customers systems were not configured to operate the assesseds software, the assessed procured and supplied the relevant hardware to its customers. That the assessed essentially acted as an intermediary, by procuring and supplying hardware to its customers. It was submitted that the profit margin of 40 per cent applied on hardware sales in order to compute the tax liability of the assessed for the subject assessment year, is extremely high and unsustainable. It was submitted that the net profit margins earned by assessed would be 12-14 per cent. Thirdly, it was contended that the income from supply of software is not taxable as royalty income as no rights in the copyright have been transferred to the purchaser of the software.
9. The Commissioner (Appeals) held as follows :
(a) With regard to the stand that no income accrued or arose in India, the Commissioner (Appeals) concurred with the view of the assessing officer. The Commissioner (Appeals) noticed that the assessed was required to file copies of contracts and bills of lading and these were not filed by the assessed. He held that the facts were within the special knowledge of the assessed and the onus was, therefore, on the assessed to bring facts and evidence on record. In the circumstances, the Commissioner (Appeals) was of the view that adverse inference had to be drawn against the assessed. From the fact that the sales have been made in India of software and hardware the Commissioner (Appeals) held that there was presumption of accrual or arising of income in India. He, therefore, held that income accrued and arose to the assessed in India;
(b) With regard to the assessed having a permanent establishment in India the Commissioner (Appeals) held that the assessed again failed to furnish details and admittedly two employees for the assessed stayed for the whole year in India and thus they constituted its PE under article 5(2)(k) of the DTAA. He also held that the transfer of ownership in goods both with regard to hardware and software passed only in India and there was nothing on record brought by the assessed to rebut the presumption;
(c) With regard to the application of 40 per cent of the turnover for computation to profits the Commissioner (Appeals) held that the same was excessive. From the own audited profits and loss account filed before the Commissioner (Appeals) he noticed that the weighted average of profit was only 10.5 per cent, but the assessing officer applied a rate of 40 per cent without any basis. The assessed also pointed out before the Commissioner (Appeals) that the supply of hardware was not its main business, but was only an incidental business. Taking into consideration the above aspect the Commissioner (Appeals) thought it fit to apply a rate of 12 per cent of the turnover as the profits on supply of hardware. 4 per cent of the profits was held to be attributable to operations outside India and 8 per cent attributable to PE operations in India. The assessing officer was accordingly directed the assessing officer to compute the income of the assessed;
(d) With regard to the income from sale of software the Commissioner (Appeals) held as follows "Ground No. 4 is against the finding that fees received on licensing of software amounts to receipt of royalties. We have seen that tax authorities in USA and Australia distinguish between copyright and copyrighted articles. The term copyrighted article is an oxymoron term and it means that the subject-matter of licensing is both copyright and article at the same time. The appellant has also agreed that use of copyrighted article does lead to copy of the Underlying IPR on the system, howsoever tempoarily. Other facts are, - (i) PLANET is a branded software; (ii) it is used internally by customers for enhancing efficiency of their systems and (iii) it is not used wholly or partly by customers customers by embedding in their hand sets. Honble AP High Court decision has already been discussed. This dicision holds that provisions in APGST regarding levy of sales tax on amounts received on transfer of the right to use the software are not ultra vires Article 366 of the Constitution of India. As mentioned earlier, there are some difficulties in coming to the conclusion that branded software is copyrighted articles. These are articulated as,-(i) the agreement is regarding the license, namely, to use the software internally for business; (ii) property in the IPR is not passed, but positively retained by the licenser, (iii) the rights of the acquire of licenses to alienate the license or underlying IPR are totally curtailed. The mere right to use an article under an agreement does not lead to inference of sale of goods. Thus, the issue requires deeper discussion. Nonetheless, AP High Court has held that the transaction of license of branded software as one of sale. Respectfully, following this decision, it is held that the instant transaction is one of sale leading business profits and not royalties. Therefore, this ground of appeal is allowed."
10. There was also another issue with regard to the charging of interest under sections 234A and 234B of the Act. On this issue the Commissioner (Appeals) held that in the case of Sedco Forex International Drilling Inc. v. Dy. CIT (2000) 72 ITD 415, the Honble Delhi Bench of the Tribunal has held that where any payment is made to a non-resident, the same is subject to deduction of tax at source. Wherever there is an obligation to deduct tax at source in the case of a non-resident there was no liability to pay advance tax. Thus the Commissioner (Appeals) held that the interest for non-payment of advance tax cannot be levied. The revenue is aggrieved by the adverse findings of the Commissioner (Appeals) and has preferred the present appeal before the Tribunal.
11. The first ground of appeal of the revenue is with regard to the action of the Commissioner (Appeals) in reducing the profit attributable to profits from 40 per cent to 8 per cent. On this issue we have heard the learned Departmental Representative, who relied on the order of the assessing officer. The learned counsel for the assessed, on the other hand, brought to our notice the fact that the audited accounts have been filed before the assessing officer. He also brought to our notice the fact that there was a loss from operations as on 31-12-1997 as against a positive income as on 31-12-1996. It was submitted by him that taking into consideration these audited financial results, the basis of 10 to 12 per cent as suggested by the assessed was very reasonable. He also drew our attention to rule 10(ii) of the Income-Tax Rules, which mandates adopting proportion of total profits to the receipts accruing or arising in India bear to the total receipts of business. In the light of the availability of global accounts of the assessed this was highlighted by the learned counsel for the assessed as the most appropriate basis. Reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Iraqi Airways v. IAC (1987) 23 ITD 115. The learned counsel also drew our attention to the fact that the assessed had furnished comparative cases, copies of which are placed at page 417 of the assesseds paper-book. At page 416 of the paper-book is the comparative margins of similarly placed assessed world-wide. He also highlighted the fact that even according to the assessing officer the service PE of the assessed in India does only the job of negotiations and in doing such service there cannot be said to be much profit attributable to the PE. Reliance was further placed on the decision of the Special Bench of the Tribunal in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (SB) (Delhi). Our attention was drawn to para 287 of the saidjudgment wherein an identical issue had been dealt with by the Special Bench.
12. We have considered the submissions of the learned counsel for the assessed. The case of Motorola Inc. (supra) cited before us dealt with by the Special Bench also involved a case of ascertainment of profits attributable to PE in India, which had supplied hardware in India. In fact in the case of Motorola Inc. (supra) there were three activities attributable to the PE, namely, (i) network planning; (ii) negotiations in connection with the sale of equipment; and (iii) the signing of the supply and installation contracts. The Tribunal sustained 20 per cent of the net profits in respect of the Indian sales as income attributable to the PE. In the present case, as we have already stated the PE was merely doing the job business of negotiations. From the material available in the present case, we are of the view that the Commissioner (Appeals) was justified in reducing the profits attributable to PE to 8 per cent. The above percentage would also meet the requirements of rule 10(ii) of the IT Rules. We find no merits in the first ground of appeal of the revenue and consequently, the same is dismissed.
13. The next issue that arises for consideration is as to whether the consideration received by the assessed on licensing of software should be taxed as the business income or as royalty. This issue has again been elaborately dealt with in the case of Motorola Inc. (supra).
13.1 The assessed-companies in the case of Motorola Inc. (supra) were leading suppliers of telecommunication equipments comprising of both hardware and software. They had entered into supply agreements with cellular operators in India for supply of hardware and software during the relevant assessment years and received payments therefore. The assessed had no permanent establishment in India and, therefore, payments received by it could not be taxed as business profits under article 7 of the DTAA. However, the Commissioner (Appeals) held it to be taxable under article 13 of the DTAA as royalty. The crux of the issue was whether the payment was for a copyright or for a copyrighted article. If it was for copyright, it should be classified as royalty both under the Income-Tax Act and under the DTAA and it would be taxable in the hands of the assessed on that basis. If the payment was really for a copyrighted article, then it only represented the purchase price of the article and, therefore, could not be considered as royalty either under the Act or under the DTAA. If any of the cellular operators did not have any of the rights mentioned in clauses (a) and (b) of section 14 of the Copyrights Act, 1957, it would mean that it did not have any right in a copyright. In that case, the payment made by the cellular operator could not be characterized as royalty either under the Act or under the DTAA.
13.2 After analysis of the terms of the contract, the Special Bench held as follows :
"A conjoint reading of the terms of the supply contract and the provisions of the 1957 Act, clearly showed that the cellular operator could not exploit the computer software commercially which was the very essence of a copyright. In other words, a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what he had acquired could not be considered as a copyright. In that case, it could only be said that he had acquired a copyrighted article. One cannot have the copyright without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Therefore, the payment by the cellular operator was not for any copyright in the software but was only for the software as such as a copyrighted article. It followed that the payment could not be considered as royalty within the meaning of Explanation 2 below section 9(l) or article 13.3 of the DTAA with Sweden."
The definition of royalty under Indo-Sweden DTAA and Indo-UK DTAA are the one and the same.
13.3 The assessed has also filed before us a chart indicating as to how the facts of his case are identical to the case of Motorola Inc. (supra). The learned Departmental Representative, however, submitted that the software was a tailor made software to suit the assesseds requirement and was, therefore, not an off the shelf product.
13.4 In the assesseds case a copy of the software PLANET (an "off the shelf" software) is stored on a CD and sold to the buyers. In order to protect its copyright in this software and enable the buyer to use it, the assessed executes a license agreement (which is customary) with its clients. The typical rights and obligations of the assesseds clients by virtue of the transaction are as follows :
Article 3 of the contract envisages that the software can be used in perpetuity;
The client is free to exploit the software for the purpose of its business. The same is however subject to certain restrictions e.g. use on specific computer, prohibition on duplication, transfer etc. These restrictions are customary and with a view to comply with the relevant copyright legislation;
Article 5.10 of the contract, provides that risk of loss and damage to the software and supporting documentation will be with the client (licensee).
14. We have also perused the agreements under which the software PLANET has been licensed for use in India. Some of the clauses in the agreement, which are relevant for adjudication of the present dispute, are as follows :
"Clause No. Particulars :
2. The Licensor hereby grants to the Licensee a non-exclusive and non-transferable right by way of license to use the Licensed Software (Version 2.5) on the Specified Computer at the Location from the date hereof on the terms and conditions herein contained;
4.2 The Licensed Software shall be used only at the location for the sole purpose of planning and optimizing the licensees cellular network. The Licensed Software shall not be used for any other purpose including but not limited to providing a data processing service to any third party whether by trade or otherwise;
5.6 To instruct all its staff from time to time having access to the Licensed Software not to copy or duplicate the Licensed Software nor to make any disclosure relating to the Licensed Software to any third party. The Licensed Software is provided to the Licensee f or the purpose only of the Licensees own use. The Licensee shall treat the Licensed Software and the Supporting Documentation as confidential and shall only disclose them to those employees of the Licensee who need to know the same and the Licensee undertakes to ensure that such employees are made aware of their confidential nature prior to such disclosures;
5.3 The Licensor shall retain the exclusive right to the copy right and to reproduce, publish, patent, sell, license and otherwise make use of all such inventions, discoveries, improvements, enhancements, methodologies, techniques and know-how;
5.4 The licensee hereby acknowledges and agrees not to alter, amend, modify, reverse engineer, interrogate, compile, disassemble or decode the Licensed Software or translate the Licensed Software into another language or write or derive any other software from the Licensed Software;
5.5 The licensee hereby acknowledges and agrees not to make copies of or duplicate the licensed software by any means for any purpose whatsoever;
5.2 The licensee hereby acknowledges and agrees that all copyright and other intellectual property rights in the licensed software will at all times remain vested in the licensor;
5.5 The Licensee will ensure that all copyright and other proprietary notices contained on such original version also appear on any such copy;
4.2 The licensed software shall not be used for any other purpose including but not limited to providing a data processing service to any third party whether by trade or otherwise;
5.3 The Licensor shall retain the exclusive right to the copyright and to reproduce, publish, patent, sell, license and otherwise make use of all such inventions, discoveries, improvements, enhancements, methodologies, techniques and know-how."
14.1 A comparative chart of the various clauses of the agreements in the case of the assessed and that of the Agreements in the case of Motorola Inc. (supra) has also been filed before us by the learned counsel for the assessed. We are of the view in the light of the similarity of facts as it exists in the case of the assessed and that of the case of Motorola Inc. (supra) as is evident from the comparative chart filed before us, the plea of the assessed was rightly accepted by the Commissioner (Appeals). We, therefore, confirm the order of the Commissioner (Appeals) on this issue and dismiss this ground of appeal of the revenue.
15. The third ground of appeal of the revenue is with regard to the charging of interest under sections 234A and 234B of the Act. On this issue, we are of the view that in the light of the decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. v. Dy. CIT (supra), which has since been confirmed by the Honble Uttranchal High Court in the case of CIT v. Sedco Forex International Drilling Co. Ltd. (2003) 264 ITR 320 (Utt). No interference with the order of the Commissioner (Appeals) is called for. Consequently, the third ground of appeal of the Revenue is also dismissed.
16. In the result, the appeal of the revenue, is dismissed.
17. Coming to the cross objection filed by the assessed, it is noticed that there is a delay of 403 days in the filing of the cross objection.
17.1 In the cross objection the assessed has challenged the assessment order as null and void on the ground that the notice under section 142(1) of the IT Act had been issued after the end of the assessment year. In the application for condensation of delay the assessed has submitted that recently in the case of Motorola Inc. (supra) Special Bench of the Tribunal had taken the view that if notices under section 142(1)(i) are issued after the end of the relevant assessment year, the assessment is invalid. This decision in the case of Motorola Inc. (supra) throws sufficient light on the issue and since this decision had been recently rendered, the assessed has raised this ground in the cross objection. The ground is stated to be a legal ground and, therefore, should be allowed to be raised before the Tribunal. When this cross objection was taken up for hearing, the learned counsel did not press for adjudication of the cross objection. In the circumstances, the cross objection is dismissed, as not pressed.
18. In the result, both the appeal as well as the cross objection, are dismissed the appeal as well as the cross objection, are dismissed.