Brief of the Case
ITAT Mumbai held in the case of M/s. Capgemini Business Services (India) Ltd. vs. ACIT that the definition of royalty given in the treaty is more beneficial to the assessee as compared to the provisions of section 9 of the Income Tax Act and the assessee has opted for the definition that is provided under the DTAA, thus as per section 90 of the Income Tax Act, definition of royalty as provided in the DTAA will prevail as over the general definition of ‘royalty’ provided under the Income Tax Act. The assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of ‘good’ by the owner. The consideration paid by the assessee thus as per the clauses of DTAA cannot be said to be royalty and the same will be outside the scope of the definition of royalty as provided in DTAA and would be taxable as business income of the recipient.
Facts of the Case
The assessee formerly known as Unilever India Shared Services Limited for a part of A.Y 2007-08 was a subsidiary of Hindustan Unilever Limited (HUL), which is in turn a subsidiary of Unilever Plc. CBSIL. Out of various grounds raised, ground No.4 is in relation to disallowance of expenditure of Rs.9,53,437/- incurred for purchase of “off the shelf” software from ‘QAD Singapore Pvt. Ltd.’ under section 40(a)(i) of the Act on the ground that the said expenditure was subject to deduction of tax at source under section 195 of the Act. The AO noticed that the assessee had incurred expenses in foreign currency for the purchase of software from QAD Singapore Pvt. Ltd. The case of the assessee has been that it had not purchased any copyright in the software rather; it had purchased only a copyrighted article named as ‘MFG Pro Software.’ The AO, however, observed that the assessee had purchased the right to use the software and the software is used for the business purpose in India. He, therefore, held that the same was liable for deduction of tax at source under section 195 of the Act in view of the provisions of section 9 of the Income Tax Act, wherein it has been provided that the income on account of consideration paid for royalty is to be deemed to have accrued in India.
Contention of the Assessee
The ld counsel of the assessee submitted that ‘MFG Pro Software purchased by the assessee is an accounting software and is available off the shelf. QAD Singapore Pvt. Ltd. supplied the said software to the assessee company outside India on a computer disk with free on board basis and further that the said entity does not have a permanent establishment in India. He, therefore, has contended that the said disk purchased by the assessee would fall in the definition of ‘goods’ as defined in the ‘Sale of Goods Act’ and the consideration paid is the sale price of the goods and not the royalty and hence the assessee was not liable to deduct TDS on the payment for the purchase of goods from the foreign company as the same was business income in the hands of the recipient and not the royalty. The Ld. A.R. of the assessee, in this respect has relied upon the decision of the Hon’ble Delhi High Court in the case of DIT vs. Infrasoft Ltd.(2013) 39 taxmann.com 88 (Del.) and further on another decision of the Hon’ble Delhi High Court in the case of DIT vs. Ericson A.B (2012) 343 ITR 470.
He further contended that the definition of royalty, since provided in the DTAA is to be looked into only and that the definition, if any, provided under the Act is to be ignored.
Contention of the Revenue
The ld counsel of the revenue relying upon the decisions of the coordinate bench of this Tribunal in the case of Reliance Infocom Ltd. and in specific relying on para 29, 35 & 36 of the said decision, has contended that the software purchased by the assessee was a separate software and the same was not supplied along with the equipments and that the same was not an embedded software in the computer/equipment. The assessee was not the owner of the software, the ownership of the software had remained with the owner; the assessee was just a given license to use the software which was the right to use of copyright in the software.
He further stated that the definition of royalty under the Act is parametria with that of the treaty; therefore, the same is to be read into the definition of treaty as provided in the DTAA for determining the tax liability of the assessee in this respect.
Held by DRP
The DRP, after perusal of the documents submitted by the assessee, has held that the software purchased was a one “off the shelf” product. However, the DRP further observed that the software was not sold but a license was given to the assessee to use it in a particular manner in consideration of the license fee. Even after obtaining a copy of the software, the assessee required permission to use the software by way of activation on a certified machine. Therefore, payment made by the end user was towards license to use copyright in software and not for sale of software. The DRP, therefore, held that the license to use the software would fall under the purview of royalty.
Held by ITAT
ITAT held that while interpreting the definition of ‘royalty’ as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the ‘copyright’ itself has been purchased or what the assessee has purchased is only a ‘copyrighted work’. It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product i.e. off the shelf software, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957.
The DRP has given a specific finding of fact that what the assessee in the present case has purchased is the shrink wrapped /off the shelf software. It has also been discussed in detail that the definition of ‘royalty’ given in the treaty is more beneficial to the assessee as compared to the provisions of section 9 of the Income Tax Act and the assessee has opted for the definition that is provided under the DTAA, thus as per section 90 of the Income Tax Act, definition of ‘royalty’ as provided in the DTAA will prevail as over the general definition of ‘royalty’ provided under the Income Tax Act. Hence, without expressing our opinion or any view in relation to the definition of ‘royalty’ vis-à-vis ‘computer software’ as provided under the Income Tax Act, we have given our findings only in respect of the scope of ‘royalty’ under the DTAA.
The assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of ‘good’ by the owner. The consideration paid by the assessee thus as per the clauses of DTAA cannot be said to be royalty and the same will be outside the scope of the definition of ‘royalty’ as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act, 1957. The Hon’ble Bombay High Court in the case of The Addl. Commissioner of Sales Tax vs. M/s Ankit International,” Sales Tax Appeal No.9 of 2011 vide order dated 15 September, 2011 while relying upon the decisions of the Hon’ble Supreme Court in The Commissioner of Income Tax V. Vegetable Product Ltd. (1973) 88 ITR 192 and in Mauri Yeast India Pvt. Ltd. V. State of U.P. (2008) 14 VST 259(SC): (2008) 5 S.C.C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. Reliance can also be placed in this regard on the decision of Hon’ble Supreme Court in “Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another: (1997) 5 SCC 289.
Accordingly issue decided in favour of the assessee.