Brief of the Case
Authority for Advance Rulings held In the case of SkillSoft Ireland limited that in the case of Synopsis International Old Ltd. 212 TAXMAN 454 (Kar), high court held that merely because the words non-exclusive and non-transferrable are used in the license agreement, it does not take away the software out of definition of copyright. It was further held that even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid license makes it clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. In this case also similar words have been used in the reseller agreement as well as Master License Agreement. Therefore, irrespective of use of the words like non-exclusive and non-transferable in these two agreements, there is definitely transfer of certain rights of which the applicant is the owner. Hence, the payments received by the applicant are in the nature of royalty under article 12(3) (a) of the India – Ireland Tax Treaty and liable for withholding tax u/s 195.
Facts of the Case
The applicant is a Private Limited Company incorporated under the laws of Ireland. It is engaged in the business of providing on demand elearning course offerings, online information resources, flexible learning technologies and performance support solutions (SkillSoft products). The applicant has entered into a Reseller Agreement dated 9th February, 2009 with SkillSoft Software Services India Private Limited (SkillSoft India) appointing it as a Reseller. SkillSoft India buys the SkillSoft products from the applicant on a principal-to- principal basis and sells the same to Indian end users/customers in its own name. According to the applicant by using software and techniques, it has developed copy righted products on several topics which were electronically stored on its server outside India.
The applicant has raised the following questions for ruling – Whether payment received by the applicant would be cover under fees for technical services under India – Ireland Tax Treaty, whether payment would be cover as ‘royalty’ under Article 12(3)(a) of the India-Ireland Treaty. Whether the applicant has PE in India and whether any withholding tax liability u/s 195 presents.
Submission of Applicant
The applicant has mentioned that the payments for SkillSoft Products are not for services that are managerial or consultancy or technical in nature but instead for a product. According to the applicant the end line software platform should be regarded as software and not services. As regards the second component comprising education content, the applicant has submitted that such content provided through the e-learning software platform is similar to the content of books/learning manuals rather than any services. According to the applicant the payment for provision of access to the SkillSoft Product is not FTS under Article 12(3)(b) of the India-Ireland Treaty.
As regards the question relating to royalty the applicant submitted that the grant of right to the Indian end-users to access the educational content should not be construed as granting a copyright. In order to argue his case that the payments made are not royalty, the applicant’s counsel has mainly relied upon the following case laws:- (I) FactSet Research Systems Inc.(2009-TIOL-18-18ARA-IT (III), (II) Dassault Systems KK., (AAR No.821/2009), (III) Dun and Bradstreet Information Services Private Limited (333 ITR 95) (2011), (IV) Linde AG, Linde Engineering Division and anr. Vs DDIT (2014) 361 ITR 001, (V) DIT vs Infrasoft Ltd (2013) 264 ITR 329 and (VI) Sun Engineering Works Pvt Ltd., (1992) 198 ITR 297 (SC).
The applicant’s argument is that SkillSoft Products are similar to a book, i.e., the customer pays for a copyrighted article and not for the copyright in the article. Since payments for books are not regarded as royalty, it was argued that payments for the educational course offerings like SkillSoft Products, being akin to such books, should not be regarded as royalty under the India-Ireland Treaty. The applicant’s counsel mainly emphasized the facts that no right in the copyright was transferred to the SkillSoft India or to the Indian end-users. He also made a distinction between copyright and copyrighted article and stated that payment received was in respect of copyrighted article. He further argued that Indian end-users were granted only non-exclusive and non-transferable license and therefore it was not covered under the definition of copyright.
The applicant has further cited the cases of DIT vs Ericsson Radio System A.B. (2012) 343 ITR 470 DIT vs Nokia Networks OY (2012) 358 ITR 259 (Del) and DIT vs Infrasoft Ltd (2013) 264 ITR 329 (supra). He relied extensively on the decision of Hon’ble Delhi High Court in the case of Infrasoft Limited wherein it was held that ‘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 an owner retaining his copyright is not the same thing as transferring or assigning the rights in relation to the copy right.’
Submission of Department
The department did not argue that the payments made to the applicant by SkillSoft India were to be classified as FTS or as business income in India. He also did not argue that the applicant had a PE in India. His only emphasis was that the payment made in the course of transactions should be classified as royalty. The Revenue has contended that the payments received by the applicant from SkillSoft India amount to royalty under the India-Ireland Treaty. For this purpose they have relied on the following case laws:- (1) CIT vs Samsung Electronics Co Ltd & Ors. 345 ITR 494 (Kar), (2) CIT vs Synopsis International Old Ltd. 212 TAXMAN 454 (Kar), (3) Verzion Communications Singapore PTE Ltd vs ITO 361 ITR 575 (Mad), (4) GVK Industries Ltd & Anr Vs Ito & Anr (Civil Appeal No.7796/1997), (5) CIT vs CGI Information Systems & Management Consultants(P) Ltd 226 TAX MAN 319 (Kar), (6) CIT VS Wipro Ltd. 203 Taxman 621 (Kar) and (7) Citrix Systems Asia Pacific Pvt. Ltd., In Re 343 ITR 1 (AAR).
The counsel for the Revenue further citied the case of Citirx where this authority has held that the payment received by the applicant or the distributor for sale of its software product is in the nature of royalty within the meaning of section 9(1)(vi) of the IT Act as well as article 12 of the DTAA. It was contended that the facts of the present case are similar to the facts in the case of Citrix (3 Tier transaction involving 3 parties and 2 agreements).
Held by AAR’s
AAR held that a SkillSoft Product consist of two components. The first is course content and the second is the software through which the course is delivered to the end customer. The applicant enters into a Reseller Agreement with the SkillSoft India for sale of SkillSoft Products. SkillSoft India buys the SkillSoft Product from the applicant and sells the same to the Indian end-users under the master license agreement, which is primarily in the nature of a software/content license agreement whereby the Indian endusers are permitted to access the e-learning platforms and the educational content. SkillSoft India provides to the end-users the access code/web-link by which they could access the SkillSoft Products.
It is seen that the facts of the Citrix Systems Asia Pacific Private Limited are also similar. In the case of Citrix also under the first agreement the software products are purchased by the distributor from the applicant and sold by the distributor to the end-users who are provided a ‘key’ to access the software from the server of the applicant. In Citrix also Ingram (distributor) was appointed as a non-exclusive distributor for Citrix products. All transactions between Citrix and the distributor are on a principal to principal basis as in the case of SkillSoft. The authority also considered the decision of the Karnataka High Court in the case of the Samsung Electronics Private Limited and the decision of the Delhi High Court in the case of the Director of IT vs Ericsson A.B., 2012 (246 ITR 422) before giving the ruling in the case of Citrix. After considering all these cases the authority ruled that the payments received by the applicant from the distributor for sale of the software product are in the nature of royalty both within the meaning of section 9(1)(vi) of the IT Act and within the meaning of Article 12 of the DTAA.
Software as ‘literary work’
As regards coverage of computer programme and computer data base within the ambit of ‘literary work’ in Article 12(3)(a) of DTAA, this authority in the case of FactSet held that the computer data base falls within the scope of literary work. Admittedly SkillSoft Products are software as mentioned by the applicant in Annexure III of the application. The issue was settled by the Authority in the case of FactSet (relied upon by the applicant) that ‘By an inclusive definition in section 2(o) of Copyright Act, computer programmes and computer databases are included within the ambit of literary work.’ There is no need to further discuss this aspect. The fact is that software and computer databases created by the applicant are included within the ambit of ‘literary work’ and therefore covered under Article 12(3)(a).
Copyright vs Copyrighted Article
The applicant’s counsel further tried to make a distinction between a copyrighted article and a copyright and said that the payment received by the applicant is only in respect of a copyrighted article and no rights in the copyright are granted to the Indian end-users. We noticed that this authority had examined the same issue in the case of Citrix and had concluded that such distinction is illusory. It was held in this case that when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. That apart, the Copyright Act or the IT Act or the DTAC does not use the expression ‘copyrighted article’, which could have been used if the intention was as claimed by the applicant. In the circumstances, the distinction sought to be made appears to be illusory. We respectfully agree with the ruling.
Grant of non-exclusive, non-transferable rights in the license
It is the applicant’s main argument that it does not involve provision of the right to use in copyright of a literary, realistic or scientific work, in patent, trademark, design or model plan etc. The applicant’s counsel argued that the grant of right to Indian end-users to access the educational content should not be construed as granting a copy right. It is purely a question of fact on the basis of which it can be decided whether the nature of license granted by the applicant would result in royalty or not. We find that similar issue was involved in the case of Citrix Re 343 ITR 1 (AAR) as well as Synopsis 212 TAXMAN 454 (Kar). The Hon’ble High Court in the case of Synopsis had examined clause 2.1 of the agreement entered into between the parties which dealt with grant of rights. It was provided therein that Synopsis granted licensee offering a non-exclusive, non-transferable license, without right of sub-license, of use the software and design technologies only in the quality authorized by a licensee in accordance with the documentation in the use area. In the present case also the reseller agreement grants to customer a non-exclusive, non-transferrable license (without the right to sub-license). The Hon’ble High Court had mentioned categorically that merely because the words non-exclusive and non-transferrable are used in the said license it does not take away the software out of definition of copyright. It was further held that even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid license makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned.
It was further held that it is not necessary that there should be a transfer of exclusive right in the copyright. In this case also similar words have been used in the reseller agreement as well as Master License Agreement. Therefore, irrespective of use of the words like non-exclusive and non-transferable in these two agreements, there is definitely transfer of certain rights of which the applicant is the owner.
As regards definition of royalty under DTAA, it was held by the Hon’ble Karnataka High Court in the case of Synopsis that under the DTAA to constitute royalty there need not be any transfer or any rights in respect of any copy rights and it is sufficient if consideration is received for use of or the use to any copyright. Therefore if the definition of royalty in the DTAA is taken into consideration it is not necessary that there should be a transfer of any exclusive right. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in form of computer programme software itself constitutes royalty. We respectfully agree with the findings of Hon’ble Karnataka High Court in the case of Synopsis.
Accordingly, the payments received by the applicant are in the nature of royalty under article 12(3)(a) of the DTAA and the payment received by the applicant would be subject to withholding tax in accordance with the provisions of the section 195 of the IT Act.