Income Tax Appellate Tribunal - Delhi
Csg International Ltd, vs Ddit International Taxation Circle 1 ... on 1 August, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Sh. Saktijit Dey, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 264/Del/2008 : Asstt. Year : 2003-04
M/s CSG I nternational Ltd. Vs DDIT,
(now known as C omverse K enan UK ), Circle-1(1 ),
Adelphi Hous e, 1-11 John Adam Intl. Taxati on,
Street, L ondon WC2N 6H T New Del hi
(APPELLANT) (RESPONDENT)
PAN No. AACCC3819N
Assessee by : Sh. Salil Kapoor, Adv. &
Sh. Ananya Kapoor, Adv.
Revenue by : Ms. Sapna Bhatia, CIT DR
Date of Hearing: 22.07.2022 Date of Pronouncement: 01.08.2022
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of ld. CIT(A)-XXIX, New Delhi dated 21.11.2007 for A.Y. 2003-04 passed by the AO u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961.
2. Following ground s have been raised by the assessee:
"1. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and taxing revenue earned by the appellant from supply of software as "royalty" under 9(1 )(vi) of the Income-tax Act, 1961.
2. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and taxing revenue earned by the appellant from supply of software as "royalty" under Article 13 of the 2 ITA No.264/Del/2008 CSG International Ltd.
Double Taxation Avoidance Agreement ("DTAA") between India and United Kingdom.
3. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and in taxing revenue earned by the appellant from 'maintenance services' as "royalty and fee for technical services" under 9(1)(vi)/ (vii) of the Income-tax Act, 1961.
4. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and in taxing revenue earned by the appellant from 'maintenance services' as "royalty and fee for technical services" under Article 13 of the DTAA between India and United Kingdom.
5. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer with respect to levy of interest under section 234B of the Income-tax Act, 1961."
3. After hearing both the parties, we find that the issue to be adjud icated by us is "whether payment received by the assessee for sup ply of software is taxable as royalty or not".
4. Facts relevant to the adjudication of the case are that the assessee was incorporated under the laws of United Kingdom ('UK') on June 29, 1992 with the primary objective of carrying on the business of specialists, engineers and dealers in computer systems. For AY 2003-04, the Appellant filed its return of income on March 22, 2005 wherein revenue classified as fees for technical services amounting to Rs. 741,538,511 was offered to tax.
5. The Appellant has contracts with Indian customers such as Bharti, Ericsson and Motorola for licensing of software products and is rendering specified services in relation to its billing 3 ITA No.264/Del/2008 CSG International Ltd.
software. It is submitted that the Appellant has entered into the following two types of agreements with its customers:
6. License agreements with Ericsson and Motorola provide a limited right i.e. a non-exclusive, personal and non- transferable right to the said customers to use the software product solely for the purpose of meeting the latter's obligations to their own customer i.e. BSNL ('sub-licensee'); and a one-time right to sub-license the software product to the 'sub-licensee' is given with further restrictions on the extent and manner of the use of software. The sub-license in such a case is also the ultimate user of the software. The 'sub- licensee' is identified in the license agreement between the Appellant and its customers and the customers cannot sub- license such software product to any other sub-licensee.
7. License agreements with Bharti that provide the license to the Appellant's customers to use the software product in its own business without any further sub-licensing rights to any third party. The customers in such a case are the ultimate user of the software.
8. The Assessing Officer held that the payments amounting to Rs.365,090,258/- received by the assessee for supply of software is taxab le as "royalty" on account of being a payment for grant of a copyright as well as payment received for allowing the use of the process inherent in the software.
9. Aggrieved by the Assessment Ord er, the assessee has filed an appeal before the ld. CIT(A). The ld. C IT(A) upheld the order of the learned AO and observed as under:
4 ITA No.264/Del/2008CSG International Ltd.
(a) Payment under software license agreement represents consideration for transfer of all or any right (including granting of license) in respect of copyright and other intellectual property rights.
(b) Copy of software supplied by the Appellant did not amount to sale b ut it is license to use the software.
(c) The distinction between "copyright right" and "program copy" recommended by the OECD has been d issented by several member states and India is not even a member of OECD.
(d) Indian laws and India's DTAA recognize only two types of transactions in respect of computer software i.e. sale and licenses. No further dissection of licensing is permitted under the Indian Copyright Act, Income-tax Act and Indian DTAA's.
10. Aggrieved the assessee filed appeal before us. The ld. AR argued that terms of the agreements with the customers in India reveal that there is no transfer of any copyright right but only license to use a copyrighted product. It was argued that customer is granted only a non-exclusive, personal and non- transferable rig ht to use the licensed product solely and exclusively for its own internal use unless otherwise allowed by a specific clause to sub-license, the software as agreed on terms with the supplier as in the case of sub-license to BSNL. It was argued that the assessee is the owner and licensor of the software and the customers Motorola, Ericsson, Bharti or for that matter BSNL shall not modify, enhance or otherwise change or supplement, disassembling, decompiling, or reverse engineer, alter or remove, any trade secret proprietary or other notices on the software. Further, it was argued that no title in the material is transferred to the customer and there are 5 ITA No.264/Del/2008 CSG International Ltd.
restricted number of production and non-production cop ies which are granted to the customer under the license agreement, the use of which is subject to the same restrictions. It was comprehensively argued that the right transferred is a right merely to use a copy of the computer programme which is a copyrighted article. The ld. AR relied on a number of case laws:
DCIT vs. Metapath Software International Ltd (9 SOT 305) (Delhi ITAT) Halliburton Export Inc. vs. ADIT(international Taxation) (152 ITD 803) (Delhi ITAT) Alcaltel USA International Marketing Inc. (2009-TIOL-733- ITAT-MUM) (Mumbai ITAT) Sonata Information Technology Ltd. vs. Addl. CIT (103 ITD
324) (Bangalore ITAT)
11. Relying on the judgment of Hon'ble jurisdictional High Court ruling in the case of Ericsson AB (246 CTR 422), it was argued that there is a distinction between the acquisition of a "copyright right" and a "copyrighted article" and the assessee supplies the software, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty.
12. On the other hand, the ld. DR strongly relying on the order of the ld . C IT(A) and argued that the provisions of the agreement, sub-license, methodology of copying & reproduction, use, access and the basis of payment, control & safeguards reveal that the amounts needs to be taxed as 'royalty'. It was argued that the software is commercially exploitable and can be used an accessed by agents as well as contactors. Hence, the reliance placed by the ld. AR on the 6 ITA No.264/Del/2008 CSG International Ltd.
decision of the Infrasoft cannot be applied to the facts of the instant case. The ld . DR has also argued that since the payments for the software depends upon the number of subscribers and variable, it should be rightly taxed as 'royalty payments'. The ld. DR vehemently argued that owing to the nature and customization, the software dealt by the assessee cannot be said to be a shrink-wrapped software. For the sake of completeness, the arguments in writing are reproduced hereunder:
"The ass ess ment order and the order of the CIT(A) are emphatically relied upon. This submission is restricted only to specific aspects . On balanc e as pec ts, above orders a nd oral submissions are relied upon.
Taxation of "S of tware R oyalt y"-
The transac tion i nv olves a transfer of copyri ght rather than mere transf er of a c opyright ed material on account of the f ollowi ng facts -
1. A greement wi th TA TA dt.15/12 /03, Motorola dt. 2 nd Apr. 2002.
Title- S of tware License and S ervices Agreement Need- T o merge the earlier agreements, i nc reas e the subscriber capacity and allow for the s ublicense of the Lic ensed Products i.e. Convergent Instance - Hyderabad ISL Ins tance - Mumbai Mobile Instanc e - Hyderabad A. Cl-2 All Instanc es shall be licens ed to T TL and s ublicens ed to the S ub licens ees.
B. Cl-3 Gra nt of Li cense- CS G grants to TTL a non-excl usiv e, non- transf erable (except f or the right to sublicense as s et out 7 ITA No.264/Del/2008 CSG International Ltd.
bel ow), personal licens e to us e and opera te t he Materi als.... (p.301, PB -II, 2004-05 &p.25, PB -II, 2006-07) C. Cl-3a/Cl-10 Ri ght t o S ublicens e D. Definiti ons - (p.3 14, PB -II, 2004-05) "Materials " means-
i. Licens ed P roduct ii. Doc umenta tion iii. Enhanc ements iv. Revisions v. Updat es vi. Upgrades vii. Modificati ons viii. Derivativ e works t heret o ix. C ust om Programming X. All Copyri ght xi. Pat ent and xii. Ot her Intellectual Pr opert y Ri ghts therei n. "S ub-licensee" s hall mean- i. VSNL, T TML, TISL, IDEA , Aircel , Dis hnet etc. ii. A telec ommunicat ion c ompa ny or utilities company in which
Tata Group has equity and operational c ontrol. (The Licens ee can sublicense to the ab ove group of persons without CSG c ons ent.) iii. Other India n entities (The Licens ee can s ub-licens ee upon writt en c onsent of CSG. However, suc h c onsent s hall not be unreas onably withheld.) E. Copyi ng and Reproducti on-
Cl-8 "All inst ances (i.e. Conv ergent Ins tanc e, ISL Ins tance & Mobile Ins tanc e) shall be conver ted to a Conv ergent Insta nce of -
Kenan/B P 10.1 and 8 ITA No.264/Del/2008 CSG International Ltd.
CSG K enan/OM 1.3x On a HP hardware platf orm and Oracle da tabas e and licens ed to cust omer (Licensee) who s hall sublicense one production c opy to sub-licensees. In additi on t o this, as per s ublicense terms , eac h new sub-licensee may make 5 non-producti on c opies, (p.305, PB-I I, 2004-05) P ro d u c t - C o n v e rg e n t I n s t a n c e ISL Instance M o b il e I n s t a n c e Prodn N o n -P r o d n P ro d n N o n - P r o d n P ro d n N o n - P ro d n L ic e n s e e 1 2 1 2 1 2 S u b -L i c e n s e e 1 5 1 5 1 5 (It m ust be remembered t here is no c ap on the number of sub- licens ees . Henc e, indirectly, there is no cap on total num ber of copies t ool) Cl-6.c of Mai ntenance S ervices Attac hment-
"C ust omer/S ub-licens e will mai nt ain soft ware and database backups external to the hardware proc essors.."(p.321, PB -II, 2004- OS ) F. Use, Acc ess , C onfidentiality & Rest rictions & P ublic Per formance-
Cl-2 of General T erms - "C ustomer agrees not to make available or disclose to anyone else except t o c us tomer's-
i. Employees
ii. Agents
iii. Contractors and
iv. Sub-licens ees
G. Basis of Payment, C ontrols & Safeguards -
i. Cl-4 Payment of "Licens e Fee" on the basis of "Licens ed
Capacity" of "Number of S ubs cri bers". In case of i ncreas e in
subsc riber bas e, Licensee has to purchase "Additional Licens e
Capacity". (p .303, PB -II, 2004-05)
9 ITA No.264/Del/2008
CSG International Ltd.
ii. Cl-3.a TTL will pr ovide CSG, written information of each
licens ed pr oduct s ublicensed wit h the site loc ati on and 'number of subsc ribers' and s hall on an annual basis audit a nd provide t o CSG the upda ted number of s ubscribers per i nstanc e.(p.302, PB -II, 2004-
05) iii. Cl-14 Cus tomer shall keep a nd maintai n complete rec ords of cust omer's l evel or number of s ubscribers i n enough detail to ascertai n payment s due under t his agreement, (p.311, PB-I I, 2004-
05) iv. Additional Mai ntena nce Fee shall be charged upon TTL ac hievi ng 10 million s ubscribers , (p.304, PB-II, 2004-05) H. C ompulsory Upgradati on-C I-8 .a (p.305, PB -II, 2004-05) Fail ure to upgrade to and be producing bills on t he lat est version of the standar d license product as the latest i nst anc e s hall result i n an additi onal char ge of US$ 75,000 per annum per instance.
I. T ermi nation- T ermi nation as per General Terms (p.300, PB-I I, 2004-05) Cl-12 of General Terms-
a. C us tomer Termi nati on & b. CSG Termination- I f customer fails to observe any material ter ms of t he agreement. If c ustomer does not pay a valid i nvoice withi n stipulat ed time.
Effec ts -Cl -12.c (p.311, PB-II, 2004-05) & Cl-3 .a.viii (p.302-303, PB-
II, 2004-05) i. C ust omer to stop using the 'Mat erial s' ii. Cus tom er and Sub-licens ees to RETUR N or destr oy all
'Materials' and f urnish CSG wit h a ret urn or dest ructi on c ertificate.
iii. C ust omer t o pay 'Disconti nua nce Fee'- "C ustomer a grees that, without t he c ert ainty of the additional capacity license and 10 ITA No.264/Del/2008 CSG International Ltd.
mai nt enanc e f ee rev enue s et f orth in t his a greement, CSG would hav e been unwi lling to provide the additional capacit y and mai nt enanc e services."
Infras of t Disti ngui shed-
Infrasoft Lt d. CSG
Non-exclusive & restrict ed license Non-exc lusive, N on-transferable (except for
right t o su blicense)
Single usage for own operation Multi-user support for self, grou p concerns,
specified sublicensees and other entities (with CSG consent which shall not be unreasonably withheld) No commerc ial exploitat ion Commercially exploitable-
Can be Su b-licensed Can be used and access ed by A gents Can be used and access ed by c ontractors No right to make c opies (can only make Can make copies (limited by the number of one copy for bac kup and to mark such sub-licensees. But there is no cap on the co pies with c opyr ight) number of such sub-licensees.)Definition of 'Materials ' include 'All Copyrights', 'patents' and other 'intellectual properties' therein which need to be 're turned' or ' destroyed' on expiry/termination of license.
No r ight to prepare derivative com puter Capable of custom pr ogrammin g and der ivative programs based upon the copyrighted thereto. software Not to be used by any other pers on- Can be used by other person- parent, parent, subsidiary or affiliated entities. subsidiary or affiliated entities.
Not t o be Su blicensed Can be Su blicensed
Payment of lic ense fee Payment of Licence F ee (on the basis of
subscriber base)
License Fee payable on the basis of number License Fee pay able on the basis of number of of c opies sold subscribers with pr ovis ion for supply/purchase of 'addit ional license ca pacity '.
13. The ld . DR further submitted her arguments which are as under:
"During the course of heari ngs, t he appellant had relied upon the decisi on of Hon' ble S upreme Court in t he case of Engi neeri ng Analysis C entre of Excellenc e Private Limited vs The Commissi oner of I ncome Tax & Anr. dated 02.03.2021.
2. The appellant s ubmitt ed that t he tr ansaction of providing an obj ec t c opy of machi ne rea dable c omput er pr ogram to its c us tomers qualifies as sal e and not grant of any copyri ght right henc e not taxabl e as Roy alty but only as busi ness and mai nly relied on f ollowi ng cont enti ons:11 ITA No.264/Del/2008
CSG International Ltd.
a. The appellant has not grant ed any right in the c opyright, it is only a sal e of copyrighted material, b. Sourc e code has not been provided, c. Appellant has granted a limit ed 'ri ght to use' wi th res trictions, d. One time right to sub-licens e only to BS NL with s ame res trictions, e. The tra nsactions relat es t o sal e of s oft ware products , f. Relianc e is placed upon Hon'ble S uprem e Court i n the cas e of Engi neeri ng A nalysis Cent re of Exc ellenc e Private Li mited vs The C ommissioner of Inc ome Tax & Anr. dated 02.03.2021.
3. In this regar d, it is to submit that to constitute an out ri ght sale of any product, the rights of ownership and usage should be compl et ely tra nsf erred t o the buyer/purc haser. However on per usal of t he limited license c ontracts execut ed by the CSG with MIL and EIL, it is found that, there was not a sale of c omput er products by CSG, rather limited license to us e CSG products were provided.
(ii) Further, t he language of the terms of a greement of the c ontrac t is unambi guously clear as it m entions the term licens e a nd not s ale.
(iii) Also, a dedic at ed Staf f team c omprisi ng S oft ware Devel oper, soft ware tester, Program Manager etc. were also pr ovided by CS G in India for further cus tomiz ati on/upgradati on of t he s oft ware accordi ng to the need of the c ustomer .
(iv) Further, the ass essee has not produc ed any evidenc e like c opy of inv oices/ bills etc f or the s oft ware to prove that t he said transaction c onstitut ed a sal e.
(v) Additi onally, ther e is also a clause to del ete a nd destroy the soft ware program copy aft er expiry /termi nati on of the contrac t. So if onc e sal e is executed by the ass essee, how it can conti nue to have the ri ght to delete/ amend the sof twa re? The assessee shoul d not res erv e any ri ght i n t his regar d what soever.
12 ITA No.264/Del/2008CSG International Ltd.
(vi ) Further, it would not be out of place to menti on that one of the contracts was als o sub-licenced to BSNL. If it was a sale of s oft ware in place, ther e wa s no question of sub -licensi ng.
In view of above, it can be emphatic ally stated and i nfer red t hat the said transaction was not a sale of c omputer program by CSG t o MIL & EIL , on t he c ont rary it was t ransfer of licensi ng/s ublicensi ng ri ght and paym ent rec eived was f or transf er of that right. The assess ee by engaging i n the verbal juggl ery cannot amend the nat ure of transaction or c haracterization of i ncome.
4. In respect of the reliance placed b y the assess ee on t he case of Engi neering A nalysis Centre of Exc ellenc e Private Limited vs The Commissi oner of Inc ome Ta x & Anr. dated 02.03.2021, it is submitt ed that it is unaccep table as it is wrong and misplac ed bec aus e of the dif fer ence i n the facts of the i nstant cas e wit h t hat of the j udicial pronounc ement relied upon. It is imperative to poi nt out the diff erence in t he fac ts of t he i ns tant case vis-à-vis t he cited case.
For the applicability of t he cited case t hes e c onditions emanating from the Hon'bl e S uprem e C ourt order are requi red to be satis fied.
(i) That the s oft ware shoul d be s hri nk-wra p/off the shelf sof twa re
(ii) That the cas e of t he assess ee should fall under the f our categories as cit ed in the S C ord er
(iii) That that t here should be no sub-licenci ng
5. Whe ther the so ftware is Shrink wr ap so ftware or custom ize d software ?
However t he factual position of t he inst ant case as c ulled out f rom the terms of the agreement are dif ferent and are stated as under:
a) The ass ess ee licens es billing and cust omer c are s oft ware prod ucts a nd renders mai ntenance and professional services in relation to these softwares . License payment bei ng 13 ITA No.264/Del/2008 CSG International Ltd.
rec eiv ed by the a ppellant is for billing and customer care soft ware from various telecom oper ators , namely, Erricson India Pvt. Ltd., Motorola India Pvt . Ltd., and Bha rti C ellular Ltd.
b) A Billing & Customer C are software provided t o vari ous tel ecom operators is claimed by the ass ess ee to be in the nat ure of 'off the shelf'/s hri nk wrap software, r ather than cust omized s oft ware. There are various erudite sites on googl e whic h ex plain t he dif ferenc e between customized and shri nk wrap software. It is imperati ve to disc uss the same to unders tand ho w the s of tware of t he assess ee falls in the category of c ust omized s of tware and not s hri nk wrap.
c) When a busi ness has specific s oft ware needs t hat off -the-
shelf s oft ware can't ad dress, it commissions d evel opers to creat e custom applications . It is a s ol uti on t hat can handl e one's busi ness's uni que requi rements. Cus tomize d so ftware resour ces are co stly and req uire substantial in-house tech input and supp ort.
Further an article on the dif ferenc e between the t wo sof twar e is reproduc ed below:
Custo m software vs. o ff-the-s helf s oftwar e Pac kaged software applications ar e available for nearly ev ery computi ng, busi ness , pr oductivity and comm unications task imagi nabl e. Thes e pac kages generally off er the followi ng f eat ures .
• Ease o f use : Of f-the-shelf applicati ons serve large a udiences with funda mentally similar needs. For ex ample, Microsoft Word is an enormously popular word processi ng applicati on with f eatur es, functionality a nd cus tomizati on opti ons that orga nizati ons of al l sizes and sc opes can us e. • Easy access for purc hasing or downloading: Of f-t he-s helf soft ware ca n be prepac kaged and purc has ed in a s tore, but it's 14 ITA No.264/Del/2008 CSG International Ltd.
often downl oadabl e from manufact urers ' websit es or availabl e as a cl oud subscri ption.
• Wide availab ility: You can find an of f-t he-shelf soft ware pac kage f or any platf orm your busi ness us es, incl udi ng Wi ndows PCs , Mac s and Li nuxes.
• Custo mizab ility : Popular c ommercial packages, such as Microsoft Office a pplications, have a degree of c ust omizability to make the software work bett er for your team.
Despit e t he variet y of off -the-s helf s of tware av ailable, s ome orga nizati ons require specific ca pabilities that general software can't provide. If t his is the c as e, they may turn to cus tom ized s oft ware dev elopment . Her e's what c ust om sof twa re has to of fer :
• Uniquely tailore d fe atures and functions: When a developer creat es a cus tom software product, tha t applicati on is tailored specifically for t he c ommissioning organiz ation's use. For example, if a develop er c reated an applicati on for JPMorgan C has e, only the bank or one of its specific departments would us e the tool. A cus tom a pplication coul d analyze the bank's cust omer data base and connect t o mar ket data and pres et goals in c ust omer accounts to create s ugges tions f or JPMorgan's i nvestment advis ors .
• A solution o nly for your b usiness: The devel oper would desi gn t he s oftware to work wi th t he commissioni ng c ompany 's inf ras tructure, brandi ng and implementati on needs, and no ot her organiz ati on c ould acc ess the applicati on.
C ust om softwar e devel opment pros :
C ust om software's most significant benefit is providi ng features t hat off-t he-s helf sof tware doesn't . After the custom-desi gned s ol ution is implemented, the probl ems it solves can be well wort h t he costs.
For example, if you c ommission an applicati on desi gned to increase prod uctivity, the res ul ti ng ris e in efficiency ca n offset the cost of building the sol ution. If y our c ustom software addresses uni que time 15 ITA No.264/Del/2008 CSG International Ltd.
and attendanc e or payroll challenges , you c an save money and maximize your employees' time.
If your organiz ati on has a need that's sp ecific enough to warrant cust om softwar e, desi gni ng a s ol ution is a n excellent i dea.
C ust om softwar e devel opment cons :
If implementi ng a custom soft ware s ol ution was i nexpensive and easy, ever yone would do it. Unf ortunately, costs and ris ks make desi gni ng a custom s oft ware sol uti on challengi ng.
Costs: The co st of o ff-the-s he lf software app licatio ns ranges from a fe w do llars to a few thousand dollars. Many standar d business ap p lications have re latively low monthly subscr iptio n costs or one -time fees. Ho wever, designing cus tom ized so ftware re quires significant financ ial resources. The commissio ning business must cover all costs ass ociated with the d evelo pme nt process. So me custom solutio ns can reach five figures or m ore.(emphasis supplied) (so urce- https ://www.busi ness newsdaily.com/5175-c ustom- soft ware-devel opment.html )
7. The various claus es of the c ontra cts which establish unambiguously that the s of tware is a customized softwar e. S ome of them a re r eproduc ed bel ow:
(i) At poi nt 4 of Page no. 19 of paper book-1 stat es clearly t hat CSG UK rendered pr ofessional services/trai ning to its customers in India during the subj ect y ear and the profes sional services rendered by CSG UK entails analysis, confi gurati on, customization, integration, impl ementation and deployment of billing s ol utions of CSG UK.
(ii) The Billing and customer care s of tware used is a specialized one having us age to m anage and automat e t he billing 16 ITA No.264/Del/2008 CSG International Ltd.
process specific to the telecom i ndus try . It can clearly be not applied t o a ny other i ndustry or organization.
(iii) At work order 001 (Exi hibit B) [Page No 65 of Paper Book 1] provisions f or staf fs with the s ki lls of s of tware testi ng, software dev elopment etc are mentioned. It st ates as under:
" CS G will staff this project with the appropriate compliment of managem ent, busi ness and tec hnical professionals......One or more st af f with the f ollowi ng s kills sets may be i nvolved in t he project: Proj ect Manager, Program Manager, Project lead, So ftware Tes ter, Tec hnic al Cons ul tant, So ftware Developer and Trainer."
Had it been an off t he s helf/shri nk wrap s oft ware it woul d not have nec es sitated depl oyment of s killed staf f/team/ manager /trai ner etc f or handling t he softwar e.
(iv) At work order 001 (Exi hibit B ) [P age No 71 of Paper B ook 1]
(v) "The Hardware must be ordered, delivered and i nstalled pri or to i nstallation of the CS G pr oduct s.
De fine d req uir ements ar e required prior to any custom izatio n/config uration."(e mphasis s upplied) The above stat ement is an extrem ely impor tant sta tement in the work order as it categorically st ates that the c us tomer s hould specify if any customizati on is required. This entails that confi gurati on / customization s uiti ng t he needs of t he c ust omer was bei ng cater ed t o. The assess ee ca nnot deny that t hey were not offering any c ust omizati on. The argument of the assess ee that it was a s hri nk wrap sof tware holds no wa ter and above argument s clearly s tates that the CSG pr oducts are c ust omiz ed a ccordi ng to the requirement of cus tomer.
(v) A v ery important as pect of s hri nk wrap s oft ware is t hat it is a very i nexpensive/c heap produc t, however the cus tomized s oft ware is 17 ITA No.264/Del/2008 CSG International Ltd.
an expensive soft ware. This fac t is ubiquit ous and known t o one and all. Had t he concer ned s oft ware been an off the shel f soft ware, the assess ee would not have c harged suc h heavy sums runni ng into crores of r upees /Dollars. In view of above dis cussion it is abunda ntly cl ear that t he software cat ered t o by t he assess ee is a cust omized software and not a shri nk wrap one as it is excl usively dev eloped f or the organization t o suit its busi ness requirement and tha t it is very exp ensiv e whic h is a logical corollary to the cust omized s of tware.
So this fact also excl udes the c ase of t he as sess ee from the applicability of t he case of Engi neering A nalysis Centre of Exc ellenc e Private Limited vs The Commissioner of Inc ome Tax & A nr. dated 02.03.2021.
8. In which category out o f t he fo ur categor ies does the assessee' s case falls?
In para 4 of t he decision i n c ase of Engi neeri ng Analysis, the Hon'ble Court gives the four categories o f cases to whi ch t his decisi on is applicable. The ca tegor y of cas es a re explai ned with examples i n para 44(i) t o 44(iv) of t he said jud gment. None of these f our models allow s ub-licensi ng of softwar e. An anal ysis on these models and the c ategory of c ases c over ed i n the decis ion is further given i n p aras 45 to 47 of the Hon'ble Apex c ourt's decision. The findi ngs of t he Hon'ble S upreme Court in par as 168 to 169 are with res pect to the c ategories of cas es m entioned above.
(i) The ass essee has not specified clearly as to under which category out of the four categories cited in the Hon'ble SC order its case is covered. Ld. AR duri ng the c ours e of heari ng however stated tha t the i n which the c as e of t he assess ee may fall woul d possibly be Category two, whic h wher ei n is sue relat ed t o s oftware sale by Non-resident Soft ware manuf act urer to Indian Distributer/End us er is dealt wit h. In t he las t hearing bef ore Hon'ble Authority, the Ld AR was tr ying to es tablish Ericson & Motorola [Li mited licensor of CSG] 18 ITA No.264/Del/2008 CSG International Ltd.
as an Indian Dist ributors a nd tryi ng to c over the matter with the case of Engi neeri ng A nalysis.
(ii) The same may not be acc epted due t o f ollowi ng reasons:
- That the Para 01 of the sof twar e license c ontract s between CSG and Ericson dated 25.03.2002 read as under, "...acting as Prim e Contractor, may acquire from CSG s of tware products as specified i n this agreement in c onnecti on with c ertain related activities i n the east z one i n India ("India Eas t") i n I ndia f or B harat Sanc har Ni gam Limited......"
- Similar contrac t was ex ec uted wi th Motorola als o.
- It is seen f rom t he above t hat both above were gra nted wi th a limited licens e ri ghts to use CS G software pr oduct s and also granted wit h sub licens e ri ghts (Sub contracti ng license) with exclusive s pecified c ust omer i .e. BSNL. No where, in the contract or e lse where it was me ntioned that the Ericson and Mo torola are acting as ind epe ndent Indian Distrib utors o f CSG, nor are they ind ulg ing into sales of CSG pr od ucts. Now, any attemp t to re de fine them as dis trib utors afte r prono unceme nt of the S C judgm ent m ay not be accep ted.
Ther efore, t he assess ee has not been able to establish concl usively as t o under which category out of the four categories cited i n the Hon'ble S C order it's case is covered . H enc e the assessee cannot be said to have covered by the decision of the Hon'ble S upreme C ourt .
9. Sub-licensing Agreeme nt to BSNL Thirdly and ver y importantly, the agreeme nt o f the asses see with Erricson I nd ia Pvt. L td . has a s ub-lice nse clause, v ide which Erricson sub lice nsed the billing and custo mer c are software to BSNL. It is perti nent t o i nvit e at tention of t he Hon'ble B enc h on the findi ngs of L d. CI T(A) on pg 11, para7 .1 of t he order and pg. 15, para 7.1.3 and para 7 .15 at pg 23 of the order where in it has been 19 ITA No.264/Del/2008 CSG International Ltd.
brought out by Ld. C IT(A ) while citing the cla uses of the s oft ware licensi ng agreement t hat ri ghts of granting licens e were trans f erred to customers which als o incl uded Right to sub-licens e s oft ware consideration under agreem ent wit h EIL and MIL and thes e ri ght s were tr ansf err ed f or heavy amounts of c onsid erati on whic h was in res pect of us e of or right to use t he s oftware(property) It never mea nt absol ute transf er of property.
10. The f our model agreements a s per the decision of Hon'bl e Supreme C ourt allow only f or singl e use of s oft ware on one computer. They do not permit the licens ee to c opy, modif y, r ever se engi neer, dec ompile, disassembl e or otherwise at tempt t o disc over the s ourc e c ode or algorithm of the soft ware. They onl y allow t aki ng bac k up copy which is nec essary for runni ng the program. These facts are also rec orded i n paragraphs 45 and 46 of the judgment and bas ed on thes e fac ts it has been hel d in para 47 as under:
"47. In all these cases, the "licenc e" that is granted vi de the EULA , is not a licenc e i n terms of s ec tion 30 of the C opyri ght Act, which transf ers an i nterest i n all or a ny of the ri ghts contai ned in secti ons 14(a) and 14(b) of the Copyri ght Act, but is a "l icence" which impos es restrictions or c onditions f or the use of computer softwa re. Thus, it c annot be said that any of the EULAs that we are c onc erned with are referable to section 30 of the C opyri ght Ac t, inasmuc h as sec tion 30 of the Copyri ght Act ·speaks of gra nti ng a n i nterest i n any of t he ri ghts m entioned i n sections 14(a) and 14(b) of the Copyri ght Ac t. The EULAs i n all the appeals before us do not grant any suc h ri ght or i nterest , l east of all, a right or i nterest to reproduc e t he computer softwa re."
Thus SC has held that if t he licens e tra nsf ers a n int eres t i n all or any of the ri ghts c ontai ned in section 14 (b) read wi th sec tion 14 (a), of t he C opyri ght Act, it woul d amount t o us e of ri ght in copyri ght and henc e royalt y.
20 ITA No.264/Del/2008CSG International Ltd.
11. In this regard, your kind att ention is also drawn to the para 5 of assessment order of A Y 2003-04 at page No. 5-6, wherei n the case of CSG was categories i n Article 14 (b) of Indian Copy ri ght Act, 1957 and reproduc ed bel ow:
"The ass essee als o s eems to have overlooked the provision of India copyri ght Act, 1957 which clearly bring out t he fact that M/s CS G UK Is earni ng 'royalty' by virtue of granting of a c opyri ght . Article 14(b)(2) of the I ndian C opyright Act, 1957 defines the sc ope of 'c opyright' in t he cas e of a com puter program:
14. Meani ng of c opyright - For the purpos es of this Act , 'copyri ght"
mea ns the exclusive ri ght s ubj ec t t o t he pr ovisions of this Act, to do or aut horize t he doi ng of any of the followi ng acts In res pect of a work or any s ubst antial par t t hereof, namely :-
b) In the c ase of computer progra mme-
i)............................................................
ii) to sell or give on commercial rental or of fer f or sale or for commercial r ental any copy of the com puter programme:
Provided that s uch c ommercial rent al does not apply In respect of computer programmes where t he programme Its elf is not the ess ential obj ec t of the rental .
Clearly, as per Cl auses 4, 5, 6 of t he s oftware licens ing agreement, M/s Ericss on has t he ri ght t o sublicens e t his s oft ware t o a third party L e. M/s B harat Sanc har Ni gam Limited. The fact that the thi rd party has been identified In t he c ontract Itself or t hat only one c opy can be sublicens ed does not help t he ass ess ee's case. The ri ght to sublicense may be exercised only once but it does not alter the fact tha t the recipi ent of t he software has t he ri ght to commercially exploit it. Hence, one can safely Infer t hat M/s CSG International , UK has aut horiz ed M/s Ericsson I ndi a Pvt. L td. to give on c ommer cial rent al the software licens ed to It by the f ormer."21 ITA No.264/Del/2008
CSG International Ltd.
12. Thus as per the judgment of the SC and fac tual position as assess ed by AO, if the owner of the s of tware parts with any of the rights that are listed i n sec tion 14(b) of t he C opyri ght Act rea d with sub-secti on (a)(i)-(vii) thereof, it woul d be a cas e of parting wi th right in copyright and would then amount t o royalty.
13. In view of the detailed disc ussion a t above, it can be subs umed tha t assess ee is engaged i n providing c ust omiz ed s oft ware pr oducts not a Shri nk Wrap one and as his case falls under section 14 (b) of Copyri ght Act a nd not c over ed by any of t he c ategories of c as es as defi ned by the Hon'ble SC in Engi neeri ng Analys is Cas e, the consideration s o rec eived is liable to treated as Royalty i nc ome."
14. We have gone throug h the issue in detail. Perused the material on record.
15. The issue of royalty or not on software has been examined by the Hon'ble H igh Court in case of Nokia Networks OY. Where in it was held that supply of software is not 'royalty' despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as "royalty", the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG (310 ITR 320) (Bombay), it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as "royalty" despite the retrospective amendments to the Act.
22 ITA No.264/Del/2008CSG International Ltd.
16. The Hon'b le Apex Court dealt with four categories:
(i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreig n, non-resident supplier or manufacturer.
(ii) The second category of cases deals with resident Ind ian companies that act as distributors or resellers, by purchasing comp uter software from foreig n, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.
(iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-
users.
(iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distrib utors or end-users.
17. In the instant case, before us, falls under the first two categories. The Hon'ble Apex Court after examination of the entire conundrum held that "45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non- exclusive, non-transferable licence to resell comp uter software, it being expressly stipulated that no copyright in the comp uter programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-
23 ITA No.264/Del/2008CSG International Ltd.
user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non- resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all.
46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA.
47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of comp uter software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act sp eaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is 24 ITA No.264/Del/2008 CSG International Ltd.
expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand , if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence."
18. The Hon'ble Apex Court held that a non-exclusive, non- transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive cond itions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.
19. The right to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the contex t of non- exclusive EULAs, not being so. At this juncture, we have 25 ITA No.264/Del/2008 CSG International Ltd.
examined the written sub mission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user rig ht only. The buyer has no rig ht to re-sale the product and it still remained a cop yrighted article which the buyer cannot alter modified , reproduced i.e. own will unless authorized. And such authorization has been given to re-supply to BSNL for their use, at the same time, keeping the all other rig hts with the assessee.
20. Holding thus, the Hon'ble Supreme Court decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for roy alty for the use of copyright in the computer software considering the definition of royalty und er the DTAAs. Hence, keeping in view the judgment of Hon'ble Apex Court, we hereby allow the appeal of the assessee on merits.
21. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 01/08/2022.
Sd/- Sd/-
(Saktijit Dey) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 01/08/2022
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR