Income Tax Appellate Tribunal - Pune
M/S. A.B. Sandvik Materials ... vs Dy. Comm. Of Income-Tax,, Pune on 24 March, 2017
आयकर अपील य अ धकरण] पण
ु े यायपीठ "ए" पण
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
स
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ी अ नल चतव
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# , लेखा सद य के सम&
BEFORE MS. SUSHMA CHOWLA, JM AND
SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No.1719/PUN/2011
नधा(रण वष( / Assessment Year : 2008-09
M/s. AB Sandvik Materials Technology, .......... अपीलाथ /
(Formerly known as AB Sandvik Steel)
Appellant
C/o.Sandvik Asia Limited,
Mumbai - Pune Road, Dapodi,
Pune - 411 012.
PAN :AADCA5374K
बनाम v/s
Deputy Commissioner of Income Tax,
(International Taxation) -I, Ground Floor,
Praptikar Sadan, 60/61, Erandawana, .......... यथ /
Pune - 411 004. Respondent
अपीलाथ क ओर से / Appellant by : Shri Dhanesh Bafna
यथ क ओर से / Respondent by : Shri A.K. Modi
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 05.01.2017 Date of Pronouncement: 24.03.2017
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
This appeal filed by the assessee is emanating out of the order of Dy.Director of Income Tax (International Taxation) - I, Pune dt.28.10.2011 for the assessment year 2008-09.
2. The relevant facts as culled out from the material on record are as under :-
2ITA No.1719/PUN/2014
AY.No.2008-09 2.1. Assessee is a foreign company which filed its return of income for A.Y.2008-09 on 30.09.2008 declaring total income of Rs.Nil. The case was taken up for scrutiny and thereafter a draft assessment order was passed u/s 144C r.w.s. 143(3) vide order dt.21.12.2010 and the total taxable income was determined at Rs.5,42,070/-. The draft assessment order was served on assessee on 24.12.2010. The assessee filed objections under Rule 4 of the Income-Tax (Dispute Resolution Panel) Rules 2009 issued vide notification dt.20.11.2009 by C.B.D.T before DRP. DRP thereafter passed order u/s 144C(5) of the Act on 20.05.2011. Consequent upon the D.R.P's order giving directions u/s 144C(5) of the Act, order u/s 143(3) r.w.s. 144C(13) was passed by the AO on 28.10.2011 and the total taxable income was assessed at Rs.5,42,070/-. Aggrieved by the order of AO, assessee is now in appeal before us and has raised the following grounds:
"The Ld Assessing Officer and Ld Dispute Resolution Panel have erred in holding that the fee of INR 542,070 received by the company for providing limited user access to a database to store and manage customer and sales related data and providing Information Technology support is taxable in India as 'Royalty' within the meaning of Article 12 of the India- Sweden Double Taxation Avoidance Agreement ('DTAA' or 'the treaty')"
3. AO in the assessment order has noted that assessee is a non- resident company incorporated in Sweden and is tax resident of Sweden under the Double Taxation Avoidance Agreement between India and Sweden. It is a developer and producer of advanced stainless steels, special alloys, titanium and other high-performance materials. Assessee had provided certain information technology 3 ITA No.1719/PUN/2014 AY.No.2008-09 support services to steel divisions of Sandvik Group Companies all over the world. It was noticed by AO that during the year assessee had received amount of Rs.5,42,070/- towards license fee for information technology support from its Associate concern M/s. Sandvik Asia Private Limited and the receipts was claimed to be non-taxable in India on the pleas that assessee did not have Permanent Establishment (PE) in India. The submission of the assessee was found not acceptable to the AO because on the basis of agreement that was entered between the assessee and Sandvik Asia Private Limited, AO concluded that assessee had not mainly given database for use of its affiliate concern but also license to certain software which can be used for its business purpose. It was therefore concluded by the AO that license fee for the use of customized software received by the assessee from its affiliate concern partakes the nature of royalty within the meaning of Sec.9(1)(vi) of the I.T.Act, 1961 and within the meaning of Article 12 of DTAA between India and Sweden. He accordingly held the amount received by the assessee to be royalty and taxable at 10%. The draft order of AO was upheld by DRP by holding as under :
"a) First Ground of objection.
10. The submission of the assessee and the facts brought out by the Assessing Officer were / considered in detail by the Panel. The issue is whether the amount received by the assessee was royalty. There was no controversy about the arrangement that the assessee maintained an Enterprise Resource Planning (ERP) System, namely, SSCS and SSSS. The data was maintained in a central hub and was upgraded from time-to-time by the assessee. The data was essential to maintain the sales related data of the group in a central location to enable the Sandvik group devise appropriate marketing strategies by analyzing the market position of the group, devise strategies to develop new customers, make plans to retain the old customers, develop an overall market 4 ITA No.1719/PUN/2014 AY.No.2008-09 strategy and to handle customer relations more effectively. The Sandvik Group companies all over the world had only limited user rights to this database to enable them manage their customer relations and sales in an effective manner. The above facts show that all the group company was only subscribing to the data. In fact, the data was something of a "secret" database which allowed the group companies to devise their marketing strategies. Nobody in the group had any access to the data. They however had the right to use the data and for that reason were paying the assessee. Such business arrangement suggests that the assessee had some important data which was available only for use. Such arrangement would basically be termed as "working" of the intellectual property. "Working" Of an intellectual property means commercial exploitation of the intellectual property. In this case, the assessee commercially exploited the data base, the intellectual property in this case used for devising appropriate marketing strategies by analyzing the market position of the group, devising strategies to develop new customers, making plans to retain the old customers, developing an overall market strategy and to handle customer relations more effectively. The database was thus an intellectual property or secret formula, as stated by the Assessing Officer in Para 6.5 of her order. Any payment received for its use would always be royalty. The case laws provided by the assessee do not have the same facts of the case, and hence are not applicable.
11. Considering the above, the action of the Assessing Officer in treating the fee received by it for the user access to the database as 'Royalty' within the meaning of Article 12 of the India-Sweden Double Taxation Avoidance Agreement ('DTM' or 'the treaty') as well as under the Income-tax Act, 1961 needs to be supported."
4. Aggrieved by the aforesaid directions of DRP which was followed by AO while passing the order u/s 143(3) r.w.s. 144C(13) of the Act, assessee is now in appeal before us.
5. Before us, ld. AR reiterated the submissions made before AO and DRP and further submitted that the amount received by the assessee is not taxable in India as it does not qualify as Fee for Technical Service (FTS) under Article 12 of the Indian Sweden Tax Treaty. He further submitted that for any services to be quantified as FTS under the Treaty, following 3 conditions are required to be 5 ITA No.1719/PUN/2014 AY.No.2008-09 cumulatively satisfied. i) Such services 'make available' knowledge, experience, skill, know-how, processes or consist of the development and transfer of technical plan or design; ii) The service recipient is enable to make use of the technical knowledge for his own benefit and without recourse to the performer of the services in future; and
iii) Such knowledge, experience, skill, know-how, processes are technical in nature. He therefore submitted that mere provision of services is not enough to attract Article 12. He further submitted that assessee is providing application development services for various IT-platforms. The services include project planning and control, system analysis, test and documentation. Services are performed both as new development and as maintenance and further development/enhancement. The software is made available to the related concerns for which the assessee receives periodic payments on actual usage of software. He further submitted that assessee is not into the trade of the software and the payment which were received by the assessee was not for selling the software but for transforming its affiliates to use the license on need basis. He also pointed to the copy of the agreement entered by the assessee and which is placed at Pages 1 to 3 of the paper book and pointed to the terms and conditions of the agreement. He also pointed to the copy of the invoices which are placed at Page 11 of the paper book. He further submitted that there is no commercial exploitation of the property but its use for internal usage and the access is only to the relevant date and the user does not have access to the data to the group of other companies. He further submitted that on the identical facts in the case of sister concern of the assessee, the 6 ITA No.1719/PUN/2014 AY.No.2008-09 Co-ordinate Bench of the Tribunal vide order dt.31.01.2013 had held that the amount to be not taxable in India. He placed on record the copy of the aforesaid order. He further placed reliance on the decision of Authority for Advance Ruling in the case of Bharati Axa General Insurance Company Limited reported in (2010) 326 ITR 4727. He further submitted that assessee put its own data in the system and has exclusive right to update the same and then there is no question of copy rights involved. Therefore he submitted that the payment is neither royalty nor FTS and therefore, the amount is not taxable. Ld. D.R. on the other hand supported the order of AO and further placed reliance on the decision in the case of CIT(IT) Vs. Wipro Ltd., reported in (2013) 355 ITR 284 (Kar). Ld. AR in the rejoinder submitted that Hon'ble Karnataka High Court while deciding the case in Wipro Ltd. (supra) had relied on the decision in the case of CIT Vs. Samsung Electronics Company Limited reported in (2012) 345 ITR 494 (Kar). He submitted that the Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Limited (2013) 39 Taxmann.com 88(Del) did not agree with the decision of the Karnataka High Court in the case of Samsung Electronics (supra). He thus submitted that the amount is not taxable in India.
6. We have heard the rival submissions and perused the material on record. The issue in the present case is as to whether the payment of Rs.5,04,070/- received by the assessee from Sandvik Asia Private Limited is taxable in the hands of assessee. It is an undisputed fact that assessee is non-resident company incorporated in Sweden and it is the contention of the assessee that it is not 7 ITA No.1719/PUN/2014 AY.No.2008-09 having any permanent establishment in India and hence the said income is not taxable in India. The submission of the assessee of not having permanent establishment in India is not controverted by the Revenue. As per the agreement dated 01.01.2013 entered between the assessee and Sandvik Asia Private Limited the nature of services is as under:
"ABSS is providing application development services for various IT-platforms.
The services include project planning and control, analysis, systems analysis, test and documentation. Services are performed both as new development and as maintenance and further development/enhancements.
The Customer has the right to acquire development services. If not otherwise agreed the Customer is the owner of the acquired systems/performed development.
The Customer is responsible for appointing a system owner who is responsible for seeing to that his applications have the required quality, security level, functionality, legal adherence and user instructions. The Customer/system owner is also responsible for seeing to that the established user instructions are followed.
ABSSS is responsible for seeing to that the application development services acquired is meeting agreed requirements.
The system owner responsibilities are defined in detail on the Sandvik Group Intranet.
The application development is mostly charged via a yearly license fee according to § above. If external resources are utilized these are charged according to their cost with a mark- up for internal administration and environmental costs.
§4-400 Sopic Steel Version and SSCS/SSSS (Sandvik Steel Customer and Supplier System) ABSS is providing services for 400-Sopic Steel version and SSCS/SSSS AS A Sandvik/ABSS specific standard system.
The services include application development, maintenance and trouble shooting interfaces to other systems and help desk for user handling matters, project management, project participation and planning, system analysis, testing and user documentation.8 ITA No.1719/PUN/2014
AY.No.2008-09 The 400-Sopic Steel System is owned by ABSS for usage by the different Sandvik subsidiaries.
The Customer has the right to acquire 400-Sopic Steel Version services.
Responsibilities as described above for application development are also valid for these services.
The services are charged as a fixed yearly charge (400-Sopic license fee respectively SSCS/SSSS license fee) depending on size of the implementation.
The 400-Sopc respectively the SSCS/SSSS license fee covers the ABSS costs for the ABSS IT Services as described above
7. From the perusal of nature of services provided by assessee, it is seen that the assessee is providing IT support and advisory services for solving IT related problems by its users and various application softwares. In order to qualify the payment as Royalty, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literacy, artistic or scientific work. Further in order to meet the consideration paid by the licencee as royalty, it is to be established that the licencee by making such payments has obtained all or any of the copyright rights. We further find that Hon'ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd., reported in (2013) 39 taxmann.com 88(Del) has observed as to what qualifies as royalty and the distinction between royalty paid on transfer of copyright and consideration for transfer of copyrighted articles. The relevant observations of Hon'ble High Court are as under :
"87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the 9 ITA No.1719/PUN/2014 AY.No.2008-09 copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty.
88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.
89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto.
90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility 10 ITA No.1719/PUN/2014 AY.No.2008-09 extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do.
91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA.
92. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft.
93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft.
94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty.11 ITA No.1719/PUN/2014
AY.No.2008-09
95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial.
96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.
97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO. LTD (SUPRA) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income."
8. We further find that on identical facts and in the case of the Sandvik Australia Pty. Ltd. Vs. DDIT (ITA No.93/PN/2011) order dt.31.01.2013), the Co-ordinate Bench of the Tribunal has decided the issue in favour of assessee by holding as under :
"16. In the present case, as per the terms of the agreement between the assessee company and Sandvik Asia Ltd., does not support the case of the Revenue that the assessee's case is covered in clause (g) of para 3 to Article 12 of the India Australia Treaty as the assessee has not made available any 12 ITA No.1719/PUN/2014 AY.No.2008-09 technical knowledge or expertise to the recipient Indian company. In our opinion, the assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are not made available, same cannot be taxable in India. We, therefore hold that the services rendered by assessee company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty and hence, the same is not taxable in India. We also hold that the amount received by the assessee cannot be treated as a Royalty even under the normal provisions of I.T. Act. But under the normal provision of the I.T. Act the same constitute consideration for rendering the technical services covered u/s.9(1)(vii) of the I.T.Act. Accordingly, Ground No.1 is allowed and issue is decided in favour of the assessee."
9. In the present case, we are of the view that the issue is identical to that of Sandvik Australia Pty. Ltd. (supra). We therefore following the aforesaid decision and the relying on the decision of Hon'ble Delhi High Court, are of the view that the amount received by assessee cannot be considered to be royalty or FTS and therefore not taxable in India. We therefore hold accordingly. Thus, the grounds of the assessee are allowed.
10. In the result, the appeal of the assessee is allowed.
Order pronounced on 24th March, 2017.
Sd/- Sd/-
(SUSHMA CHOWLA) (ANIL CHATURVEDI)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पण
ु े Pune; दनांक Dated : 24th March, 2017.
Yamini
13
ITA No.1719/PUN/2014
AY.No.2008-09
आदे श क* + त,ल-प अ.े-षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. Dispute Resolution Panel, Pune.
4. Dy.Director of Income-Tax (IT)-I, Pune.
5. #वभागीय &त&न'ध, आयकर अपील य अ'धकरण, "ए" / DR, ITAT, "A" Pune;
6. गाड, फाईल / Guard file.
आदे शानस ु ार/ BY ORDER,स // या////// True Copy //T // // True // //Copy // // True Copy // //////// सहायक रिज12ार/ Assistant Registrar, आयकर अपील य अ'धकरण ,पुणे / ITAT, Pune.