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Showing contexts for: Software Source code in Tti Team Telecom International Ltd, ... vs Adit (It) 2(2), Mumbai on 30 November, 2016Matching Fragments
a. The assessee company entered into a Software Supply & License Agreement (SSLA) with Reliance Infocom Ltd. (Reliance/RJL) on 27.09.2002 for supply of software, acceptance testing, installation and arrangements for annual maintenance (Annexure A) b. In the year under consideration an amendment to the Software Supply & License Agreement (SSLA) was made on 17.09.2007.
c. The agreement also envisaged transfer of Source Code of the software to be transferred to Reliance through an escrow.
9. It is also contested by the Revenue that since source code of the software was transferred to the buyer, as a necessary condition for the said supply of software, there is a definite transfer of proprietary material from the assessee to the client. The specialized product was developed in tandem with the requirements and feedback of the client (Reliance) as is also illustrated by the UAT process. The software supplied by the assessee was not a 'canned software' (not specifically created for a particular consumer). It does not have a market, except a select few CDMA telecom service provider all over the world. There are no known clients of the same software, either in India or outside. All the above facts on to strengthen Revenue's claim that the receipt for supply of software through the SSLA and its subsequent amendment in the previous year corresponding to the assessment year under consideration in a receipts in the nature of royalty." 4.7. Thereafter, Ld. AO made analysis of various clauses of the agreement and took note of a clause with regard to transfer of Source Code of the software by the assessee to M/s. Reliance Communication Ltd. (i.e. the buyer) and held that the amount received by the assessee from Reliance amounted to payment for 'royalty' under the provisions of Act as well as Article 12 of the Indo Israel DTAA, by observing, inter alia, as under:
43. In view of the above facts it is held that where the assessee has developed and supplied software, along with the source code, to the client the consideration received is in the nature of royalty and not for sale of goods. This is especially true where the software has no available market or another known client in the country or elsewhere.
44. The income from the purported sale of good has been treated by the Assessing Officer in the past as royalty income in AY 2003-04 onwards. There have been new findings-namely the terms & conditions of the SSLA, the Escrow agreement for transfer of Source Code, and the agreement between Reliance & Indian subsidiary TTI India on the guarantee of the assessee. These new findings clearly explicate the nature of payment received by the assessee. It is a mischief of highest degree on the part of the assessee to color the payments received for supply of software and its proprietary Source Code as 'sale of goods'.
"Section 11: Escrow of Source Code 11.1. Escrow, concurrent with the execution or this Agreement, the parties will duly execute and deliver the Escrow Agreement, and TTI, upon Acceptance of the software, will deliver to the Escrow Agent a complete master, reproducible copy of all source code relating to the 23 TTI Team Telecom. I. Ltd.
software. TTI promptly will update the source code in escrow to reflect all revisions, modifications and enhancements to the software that are provided to Reliance hereunder. In the event that the Escrow Agreement has not been executed and the source code delivered to Escrow Agent within thirty (30) days after acceptance of the Software, then until such events have occurred Reliance shall be entitle to terminative this agreement by written notice provided that Reliance has given written notice and details of such breach to TTI and has advised TTI of its intention to terminate and TTI has failed to deliver the Source Code to the Escrow Agent within thirty (30) days from Reliance's notice thereof no payment obligation with respect to such software or nay support services (and if Reliance has previously paid any sums in respect thereof, TTI will promptly refund all such sums to Reliance). 11.2. Release of Source Code. Upon occurrence of the conditions described in the Escrow Agreement (each, a "Release condition") the Source Code placed in escrow will be delivered to Reliance for us, copying in connection with Reliance's use, maintenance and support of the software in accordance with its rights under this Agreement. 11.3 License; Ownership. TTI hereby grants and agrees to grant to Reliance a perpetual, non-exclusive, worldwide license to use, copy, and create derivative works the purposes specified in Section 11.2 (the Derivative Works"). Reliance will be the exclusive owner of any modifications to or Derivative Works of the Source Code created by or for Reliance under this terms and circumstances Section 11."