Income Tax Appellate Tribunal - Mumbai
Intech Billing America Inc., Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "L"
Before S/Shri N.V. Vasudevan (JM) & T.R. Sood (AM)
I.T.A.No. 3196/Mum/07 (Assessment year : 2002-03)
JDIT-OSD(IT)-3(1) Intec Billing America Inc.
Sciendia House (formerly known as ADC
R.NO. 132, 1st floor Vs. Software Systems USA Inc.)
N.M. Road C/o. S.R. Batliboi & Co.,
Mumbai-400 038. 18th Floor
Express towers
Nariman Point
Mumbai-400 021.
APPELLANT RESPONDENT
PAN/GIR No. : AADCA7807M
Assessee by : Shri Firoz Andhyarjuina
& Mr. Prashant Bhojwani
Department by : Shri Narender Singh
ORDER
PER N.V. VASUDEVAN, JM :-
This is an appeal by the Revenue against the order dated 11.12.2006 of learned CIT(A)-XXXI, Mumbai relating to A.Y. 2002-03.
2. Grounds of appeal of the Revenue read as follows :-
On the facts and circumstances of the case and in law, learned CIT(A) erred in holding that the payments received by the assessee from RIL on account of use of its software is not a royalty, ignoring Article 12 of India-USA DTAA and as per section 9(1)(vi) of Explanation 2 of I.T. Act.
The appellant prays that the order of learned CIT(A) on the above grounds be set aside and that of the Assessing Officer restored.
3. The assessee is engaged in the business of providing software solutions across the globe. The assessee entered into a software licensing 2 Intec Billing America Inc. agreement on February 26,2002 with Reliance Industries Limited (RIL), a company incorporated under the laws of India. In pursuance of the agreement, the assessee provided certain software products for the business purpose of RIL during the financial year ended March 31, 2002. The software products so provided, was intended to be used by RIL to prepare invoices to be raised on its customers. During the financial year ended March 31,2002, the assessee earned gross revenues amounting to US$ 1,400,000 as consideration for supply of the software to RIL. The assessee filed its original return of income on October 30, 2002 and subsequently filed a revised return of income on November 20, 2002. Under both the returns, the assessee claimed the aforesaid fees as not taxable in India on the following basis :-
• The assessee is a tax resident of US and is accordingly eligible to claim benefits of the double taxation avoidance agreement between India and USA (India-US tax treaty). • Considering the restrictive and limited rights granted to RIL under the software licensing agreement, based on the OECD Model commentary and UN Model Commentary, fees earned by the assessee are in the nature of 'business profits' and not 'royalty'. • The assessee does not have a fixed place of business in India and also has not undertaken any activity in India pertaining to licensing of software. Accordingly, the assessee does not have a Permanent Establishment (PE) in India in terms of Article 5 of India-US tax treaty.
• In absence of the assessee's PE in India, the business profits earned by the assessee cannot be taxed in India.
However, the Assessing Officer did not accept argument of the assessee and passed the assessment order taxing the income earned from Reliance at 15% on a gross basis as royalty under Article 12 of the India- US tax treaty.
4. On appeal by the assessee, learned CIT(A) held that the payment in question was not in the nature of royalty and was payment for purchase of copyrighted article. It was in the nature of business profits; and since the assessee did not have a PE in India the same was not taxable, in view of Article-7 of the DTAA between India and USA. Addition 3 Intec Billing America Inc. made by the Assessing Officer was deleted by the learned CIT(A) giving rise to the present appeal by the revenue before the Tribunal.
5. We have heard the rival submissions. Agreement between the assessee and RIL provides only a license to use the software. Clause 2(a)(b) of the agreement provides for the terms of license and scope of permitted use. Clause (3) provides of confidentiality of information. Para
14.c provides that the software being supplied is a standard software provided to customers by the assessee. Perusal of para 2.a and 2.b of the Agreement clearly provide that RIL has only a perpetual, non-exclusive, irrevocable, non-transferable license to use the software and documentation. RIL is forbidden from modifying, adapting, translating, reverse engineering, decompiling, disassembling, or creating derivative projects based on the software supplied. Agreement also provides that the software can be used for internal training purposes and the processing of the RIL's own data and that of its affiliates. RIL was permitted to duplicate the software, but only for training, testing, and the development purposes and also for backup purposes. Para 2.b does provide that RIL can configure the software packages. However, configure has been defined to mean only to modify, to create interface, to load change or delete data and to tailor the software using the utility built into the software in order to optimize the software for customer in accordance with the agreement. Thus, configuration only means that the parameters in the software for making it suitable to the user can be set by the user. Configures does not mean that the user can change the software code. From the rights given to RIL as per agreement, it is apparent that RIL has no power either to decode the machine code of software or to make copies of software for commercial use other than for its internal use or backup purposes. It is therefore obvious that the RIL has right to use software only for its business or personal purposes and has obtained no other rights as per the agreement.
4Intec Billing America Inc.
6. The Hon'ble Supreme Court in the case of Tata Consultancy Services Pvt. Ltd. Vs. State of Andhra Pradesh (2004) 271 ITR 401 has held as follows :-
"A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sale tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become 'good'. We see no different between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus, a transaction of sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act."
7. Thus computer software when it is put on to a media and sold has become goods like any other audio cassette or painting on canvas or a book. It is ceases to be transfer of intellectual property right. In fact, Bangalore Bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO, 92 ITD 366 (Bang) has also taken the view that in such a situation there is no acquisition of any right in software. Definition of 'royalty' is given in section (9)(1) Explanation (2) of the Act and the definition of Royalty in Article 12(3) of the Indo-US DTAA shows that definition of royalty under DTAA is more restrictive than what is provided in section (9)(1) of the Act. Under the definition as contained in DTAA, there should be a transfer of copyright. Sale of software by the assessee to the end user does not involve any transfer of copyright either in part or in whole; therefore consideration paid by the distributor 5 Intec Billing America Inc. cannot be said to be a payment for right of use copyright or transfer of use of copyright. It has been uniformly held in several decisions of the ITAT that sale of shrink-wrap software does not involve receipt of consideration, which can be said to be royalty. Decisions in this regard are as follows :-
• Samsung Electronics Co. Ltd. Vs. ITO, 93 TTJ 658 • Motorola Incorporation, 270 ITR (AT) 62 • Sonata Information Technologies Ltd., ITA No. 1561 to 1580/Bang/2004 dated 31.1.2006.
8. Computer programme cannot also be treated as patent and invention. Computer programme cannot said to be an invention and therefore cannot be said to be covered by the Patient Act. Computer software cannot also be treated as process. End user of the software in the case of shrink-wrap software does not have any access to source code. He has only right to use the software for his personal or business use. For all the above reasons, we are of the view that learned CIT(A) was right in concluding that payment received by the assessee was not in the nature of royalty and cannot therefore be brought to tax. We uphold the order of learned CIT(A) on this issue and dismiss the appeal by the revenue.
9. In the result, appeal by the revenue is dismissed.
Order has been pronounced on 5th Day of February, 2010.
Sd/- Sd/-
(T.R. SOOD) (N.V. VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 5th February, 2010
Copy to : 1. The Assessee
2. The Respondent
3. The CIT(A)-concerned.
4. The CIT, concerned.
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Intec Billing America Inc.
5. The DR concerned, Mumbai
6. Guard File
BY ORDER
True copy
ASSTT. REGISTRAR, ITAT, MUMBAI
PS