M/s. A.B. Sandvik Materials Technology, Pune V. Dy. Comm. of Income-tax, Pune

ITA 1719/PUN/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6925 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 14-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 30-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Business income; Double taxation relief; Permanent establishment; Advance ruling
• Section: 143(3)

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , ! ' # , % & BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.1719/PUN/2011 ! ( ( / ASSESSMENT YEAR : 2008-09 M/S. AB SANDVIK MATERIALS TECHNOLOGY, (FORMERLY KNOWN AS AB SANDVIK STEEL) C/O.SANDVIK ASIA LIMITED, MUMBAI PUNE ROAD, DAPODI, PUNE 411 012. PAN :AADCA5374K . / APPELLANT V/S DEPUTY COMMISSIONER OF INCOME TAX, (INTERNATIONAL TAXATION) I, GROUND FLOOR, PRAPTIKAR SADAN, 60/61, ERANDAWANA, PUNE 411 004. . / RESPONDENT / APPELLANT BY : SHRI DHANESH BAFNA / RESPONDENT BY : SHRI A.K. MODI ) / ORDER PER ANIL CHATURVEDI, AM : THIS APPEAL FILED BY THE ASSESSEE IS EMANATING OUT OF THE ORDER OF DY.DIRECTOR OF INCOME TAX (INTERNATIONAL TA XATION) I, PUNE DT.28.10.2011 FOR THE ASSESSMENT YEAR 2008-09. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- / DATE OF HEARING : 05.01.2017 / DATE OF PRONOUNCEMENT: 24.03.2017 2 ITA 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 A SSESSMENT 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.5,42,07 0/-. THE DRAFT ASSESSMENT ORDER WAS SERVED ON ASSESSEE ON 24.1 2.2010. 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.PS ORD ER GIVING DIRECTIONS U/S 144C(5) OF THE ACT, ORDER U/S 143(3) R.W.S. 1 44C(13) WAS PASSED BY THE AO ON 28.10.2011 AND THE TOTAL TAXAB LE INCOME WAS ASSESSED AT RS.5,42,070/-. AGGRIEVED BY THE ORDER O F AO, ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FO LLOWING GROUNDS: THE LD ASSESSING OFFICER AND LD DISPUTE RESOLUTION PANEL HAVE ERRED IN HOLDING THAT THE FEE OF INR 542,070 R ECEIVED BY THE COMPANY FOR PROVIDING LIMITED USER ACCESS TO A D ATABASE 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 TH E 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 RESI DENT OF SWEDEN UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND SWEDEN. IT IS A DEVELOPER AND PRODUCER OF AD VANCED STAINLESS STEELS, SPECIAL ALLOYS, TITANIUM AND OTHER HIGH-PERFOR MANCE MATERIALS. ASSESSEE HAD PROVIDED CERTAIN INFORMATION TECHN OLOGY 3 ITA NO.1719/PUN/2014 AY.NO.2008-09 SUPPORT SERVICES TO STEEL DIVISIONS OF SANDVIK GROUP CO MPANIES ALL OVER THE WORLD. IT WAS NOTICED BY AO THAT DURING THE Y EAR 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 T O 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 O N THE BASIS OF AGREEMENT THAT WAS ENTERED BETWEEN THE ASSESSEE A ND SANDVIK ASIA PRIVATE LIMITED, AO CONCLUDED THAT ASSESSEE HAD NOT MAINLY GIVEN DATABASE FOR USE OF ITS AFFILIATE CONCERN BUT ALSO LICEN SE TO CERTAIN SOFTWARE WHICH CAN BE USED FOR ITS BUSINESS PURP OSE. IT WAS THEREFORE CONCLUDED BY THE AO THAT LICENSE FEE FOR THE US E OF CUSTOMIZED SOFTWARE RECEIVED BY THE ASSESSEE FROM ITS AFFILIA TE CONCERN PARTAKES THE NATURE OF ROYALTY WITHIN THE MEAN ING OF SEC.9(1)(VI) OF THE I.T.ACT, 1961 AND WITHIN THE MEANING OF AR TICLE 12 OF DTAA BETWEEN INDIA AND SWEDEN. HE ACCORDINGLY HELD T HE AMOUNT RECEIVED BY THE ASSESSEE TO BE ROYALTY AND TAX ABLE 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 BR OUGHT OUT BY THE ASSESSING OFFICER WERE / CONSIDERED IN D ETAIL BY THE PANEL. THE ISSUE IS WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE WAS ROYALTY. THERE WAS NO CONTROVERSY ABOU T THE ARRANGEMENT THAT THE ASSESSEE MAINTAINED AN ENTERPR ISE RESOURCE PLANNING (ERP) SYSTEM, NAMELY, SSCS AND SS SS. THE DATA WAS MAINTAINED IN A CENTRAL HUB AND WAS UP GRADED FROM TIME-TO-TIME BY THE ASSESSEE. THE DATA WAS ESS ENTIAL TO MAINTAIN THE SALES RELATED DATA OF THE GROUP IN A C ENTRAL LOCATION TO ENABLE THE SANDVIK GROUP DEVISE APPROPR IATE MARKETING STRATEGIES BY ANALYZING THE MARKET POSITI ON OF THE GROUP, DEVISE STRATEGIES TO DEVELOP NEW CUSTOMERS, MAKE PLANS TO RETAIN THE OLD CUSTOMERS, DEVELOP AN OVERA LL MARKET 4 ITA NO.1719/PUN/2014 AY.NO.2008-09 STRATEGY AND TO HANDLE CUSTOMER RELATIONS MORE EFFE CTIVELY. 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 ONL Y SUBSCRIBING TO THE DATA. IN FACT, THE DATA WAS SOME THING OF A 'SECRET' DATABASE WHICH ALLOWED THE GROUP COMPANIES TO DEVISE THEIR MARKETING STRATEGIES. NOBODY IN THE GR OUP 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. SU CH ARRANGEMENT WOULD BASICALLY BE TERMED AS 'WORKING' OF THE INTELLECTUAL PROPERTY. 'WORKING' OF AN INTELLECTUAL PROPERTY MEANS COMMERCIAL EXPLOITATION OF THE INTELLECTUAL P ROPERTY. IN THIS CASE, THE ASSESSEE COMMERCIALLY EXPLOITED THE DATA BASE, THE INTELLECTUAL PROPERTY IN THIS CASE USED FOR DEV ISING APPROPRIATE MARKETING STRATEGIES BY ANALYZING THE M ARKET POSITION OF THE GROUP, DEVISING STRATEGIES TO DEVEL OP 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 A N 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 C ASE 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 ASSES SING OFFICER IN TREATING THE FEE RECEIVED BY IT FOR THE USER ACC ESS 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 AC T, 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 SWED EN TAX TREATY. HE FURTHER SUBMITTED THAT FOR ANY SERVICES TO B E QUANTIFIED AS FTS UNDER THE TREATY, FOLLOWING 3 CONDITIONS ARE REQUIRE D TO BE 5 ITA NO.1719/PUN/2014 AY.NO.2008-09 CUMULATIVELY SATISFIED. I) SUCH SERVICES MAKE AVAILABLE KNOWLE DGE, EXPERIENCE, SKILL, KNOW-HOW, PROCESSES OR CONSIST OF THE DEV ELOPMENT AND TRANSFER OF TECHNICAL PLAN OR DESIGN; II) THE SERVICE REC IPIENT 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 P ROVISION 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. SERVIC ES ARE PERFORMED BOTH AS NEW DEVELOPMENT AND AS MAINTENANCE A ND 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 SO FTWARE BUT FOR TRANSFORMING ITS AFFILIATES TO USE THE LICENSE ON NEED BASIS. HE ALSO POINTED TO THE COPY OF THE AGREEMENT ENTERED BY THE A SSESSEE AND WHICH IS PLACED AT PAGES 1 TO 3 OF THE PAPER BOOK AND P OINTED 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 T HE DATA TO THE GROUP OF OTHER COMPANIES. HE FURTHER SUBMITTED THAT ON THE IDENTICAL FACTS IN THE CASE OF SISTER CONCERN OF THE ASSESS EE, 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 PLA CED ON RECORD THE COPY OF THE AFORESAID ORDER. HE FURTHER PLAC ED RELIANCE ON THE DECISION OF AUTHORITY FOR ADVANCE RULING IN THE CASE O F 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 SUBMITTE D THAT THE PAYMENT IS NEITHER ROYALTY NOR FTS AND THEREFORE, THE AM OUNT IS NOT TAXABLE. LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDE R 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 HONBLE KARNATAKA HIGH COURT W HILE DECIDING THE CASE IN WIPRO LTD. (SUPRA) HAD RELIED ON THE D ECISION IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS COMPANY LIMITED R EPORTED IN (2012) 345 ITR 494 (KAR). HE SUBMITTED THAT THE HON BLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LIMITED (2013) 3 9 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 WHETHE R THE PAYMENT OF RS.5,04,070/- RECEIVED BY THE ASSESSEE FROM S ANDVIK ASIA PRIVATE LIMITED IS TAXABLE IN THE HANDS OF ASSESSEE. IT IS AN UNDISPUTED FACT THAT ASSESSEE IS NON-RESIDENT COMPANY IN CORPORATED 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 TH E SAID INCOME IS NOT TAXABLE IN INDIA. THE SUBMISSION OF THE ASSE SSEE OF NOT HAVING PERMANENT ESTABLISHMENT IN INDIA IS NOT CONTROVER TED BY THE REVENUE. AS PER THE AGREEMENT DATED 01.01.2013 ENTERE D 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 MAINTENANC E AND FURTHER DEVELOPMENT/ENHANCEMENTS. THE CUSTOMER HAS THE RIGHT TO ACQUIRE DEVELOPMENT S ERVICES. IF NOT OTHERWISE AGREED THE CUSTOMER IS THE OWNER O F THE ACQUIRED SYSTEMS/PERFORMED DEVELOPMENT. THE CUSTOMER IS RESPONSIBLE FOR APPOINTING A SYSTEM OWNER WHO IS RESPONSIBLE FOR SEEING TO THAT HIS APPLICATI ONS HAVE THE REQUIRED QUALITY, SECURITY LEVEL, FUNCTIONALITY, LE GAL ADHERENCE AND USER INSTRUCTIONS. THE CUSTOMER/SYSTEM OWNER I S ALSO RESPONSIBLE FOR SEEING TO THAT THE ESTABLISHED USER INSTRUCTIONS ARE FOLLOWED. ABSSS IS RESPONSIBLE FOR SEEING TO THAT THE APPLICA TION DEVELOPMENT SERVICES ACQUIRED IS MEETING AGREED REQUIREMENTS. THE SYSTEM OWNER RESPONSIBILITIES ARE DEFINED IN DE TAIL ON THE SANDVIK GROUP INTRANET. THE APPLICATION DEVELOPMENT IS MOSTLY CHARGED VIA A YEARLY LICENSE FEE ACCORDING TO ABOVE. IF EXTERNAL RES OURCES ARE UTILIZED THESE ARE CHARGED ACCORDING TO THEIR COST WITH A MARK- UP FOR INTERNAL ADMINISTRATION AND ENVIRONMENTAL CO STS. 4-400 SOPIC STEEL VERSION AND SSCS/SSSS (SANDVIK S TEEL CUSTOMER AND SUPPLIER SYSTEM) ABSS IS PROVIDING SERVICES FOR 400-SOPIC STEEL VERS ION AND SSCS/SSSS AS A SANDVIK/ABSS SPECIFIC STANDARD SYSTE M. THE SERVICES INCLUDE APPLICATION DEVELOPMENT, MAINT ENANCE AND TROUBLE SHOOTING INTERFACES TO OTHER SYSTEMS AN D HELP DESK FOR USER HANDLING MATTERS, PROJECT MANAGEMENT, PROJECT PARTICIPATION AND PLANNING, SYSTEM ANALYSIS, TESTIN G AND USER DOCUMENTATION. 8 ITA NO.1719/PUN/2014 AY.NO.2008-09 THE 400-SOPIC STEEL SYSTEM IS OWNED BY ABSS FOR USA GE BY THE DIFFERENT SANDVIK SUBSIDIARIES. THE CUSTOMER HAS THE RIGHT TO ACQUIRE 400-SOPIC STE EL 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) DEP ENDING ON SIZE OF THE IMPLEMENTATION. THE 400-SOPC RESPECTIVELY THE SSCS/SSSS LICENSE FEE COVERS THE ABSS COSTS FOR THE ABSS IT SERVICES AS DESCRIBE D ABOVE 7. FROM THE PERUSAL OF NATURE OF SERVICES PROVIDED BY ASS ESSEE, IT IS SEEN THAT THE ASSESSEE IS PROVIDING IT SUPPORT AND A DVISORY 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 COPYRIGH T OF A LITERACY, ARTISTIC OR SCIENTIFIC WORK. FURTHER IN ORDER TO ME ET THE CONSIDERATION PAID BY THE LICENCEE AS ROYALTY, IT IS TO BE E STABLISHED THAT THE LICENCEE BY MAKING SUCH PAYMENTS HAS OBTAINED ALL OR ANY OF THE COPYRIGHT RIGHTS. WE FURTHER FIND THAT HONBLE DELH I HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD., REPORTED IN (20 13) 39 TAXMANN.COM 88(DEL) HAS OBSERVED AS TO WHAT QUALIFIES AS RO YALTY AND THE DISTINCTION BETWEEN ROYALTY PAID ON TRANSFER OF COPYRIGHT AN D CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTICLES. THE RELE VANT OBSERVATIONS OF HONBLE 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 RIGH TS (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 ESTABL ISHED THAT THE LICENSEE, BY MAKING SUCH PAYMENT, OBTAINS ALL OR AN Y 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 T HE MATERIAL OBJECT, COPYRIGHTED. COPYRIGHT IS AN INTANGIBLE INC ORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MANUSCRIPT. JUST BECAUSE ONE H AS THE COPYRIGHTED ARTICLE, IT DOES NOT FOLLOW THAT ONE HA S ALSO THE COPYRIGHT IN IT. IT DOES NOT AMOUNT TO TRANSFER OF ALL OR ANY RIGHT INCLUDING LICENCE IN RESPECT OF COPYRIGHT. COPYRIGH T OR EVEN RIGHT TO USE COPYRIGHT IS DISTINGUISHABLE FROM SALE CONSI DERATION 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 PRO GRAM. THE RIGHTS TRANSFERRED ARE SPECIFIC TO THE NATURE OF CO MPUTER PROGRAMS. COPYING THE PROGRAM ONTO THE COMPUTER'S H ARD 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 TH E USER, SHOULD BE DISREGARDED IN ANALYZING THE CHARACTER OF THE TRANSACTION FOR TAX PURPOSES. PAYMENTS IN THESE TYP ES OF TRANSACTIONS WOULD BE DEALT WITH AS BUSINESS INCOME IN ACCORDANCE WITH ARTICLE 7. 89. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY PA ID ON TRANSFER OF COPYRIGHT RIGHTS AND CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTICLES. RIGHT TO USE A COPYRIGHTED ARTICLE OR PRO DUCT WITH THE OWNER RETAINING HIS COPYRIGHT, IS NOT THE SAME THIN G AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYR IGHT OWNER HAS, IS NECESSARY TO INVOKE THE ROYALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON-TRANSFERABLE LI CENCE ENABLING THE USE OF A COPYRIGHTED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERAT ED 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 ITSE LF OR RIGHT TO USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. THE P ARTING OF INTELLECTUAL PROPERTY RIGHTS INHERENT IN AND ATTACH ED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/CUSTOMER IS WHAT IS CONTEMPLATED BY THE TREATY. MERELY AUTHORIZING OR E NABLING A CUSTOMER TO HAVE THE BENEFIT OF DATA OR INSTRUCTION S CONTAINED THEREIN WITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT, AMOUNT TO TRANSFER OF RIGHT S IN RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING TH E COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONFERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRAN SFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIAL LY CO-EXTENSIVE WITH THE OWNER/ TRANSFEROR WHO DIVESTS HIMSELF OF T HE RIGHTS HE POSSESSES PRO TANTO. 90. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AND STORING IT IN T HE 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 COPYRIG HTED PRODUCT FOR HIS INTERNAL BUSINESS PURPOSE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO H AVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM TH E RIGHT CONTEMPLATED BY THE SAID PARAGRAPH BECAUSE IT IS ON LY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH INCIDENTAL FACILITY, THE LICENSEE HAS NO RIGHT TO DEAL WITH TH E 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 A ND REPRESENTS THE PURCHASE PRICE OF AN ARTICLE AND CANNOT BE CONS IDERED AS ROYALTY EITHER UNDER THE INCOME TAX ACT OR UNDER TH E DTAA. 92. THE LICENSEES ARE NOT ALLOWED TO EXPLOIT THE CO MPUTER SOFTWARE COMMERCIALLY, THEY HAVE ACQUIRED UNDER LIC ENCE 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 SOF TWARE 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 INFRASO FT COPYRIGHT AND ALL COPIES OF THE SOFTWARE SHALL BE EXCLUSIVE P ROPERTIES 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 CUST OMERS STIPULATES THAT ALL COPYRIGHTS AND INTELLECTUAL PRO PERTY RIGHTS IN THE SOFTWARE AND COPIES MADE BY THE LICENSEE WERE O WNED BY INFRASOFT AND ONLY INFRASOFT HAS THE POWER TO GRANT LICENCE RIGHTS FOR USE OF THE SOFTWARE. THE LICENCE AGREEME NT STIPULATES THAT UPON TERMINATION OF THE AGREEMENT FOR ANY REAS ON, THE LICENCEE SHALL RETURN THE SOFTWARE INCLUDING SUPPOR TING INFORMATION AND LICENCE AUTHORIZATION DEVICE TO INF RASOFT. 94. THE INCORPOREAL RIGHT TO THE SOFTWARE I.E. COPY RIGHT REMAINS WITH THE OWNER AND THE SAME WAS NOT TRANSFERRED BY THE ASSESSEE. THE RIGHT TO USE A COPYRIGHT IN A PROGRAM ME IS TOTALLY DIFFERENT FROM THE RIGHT TO USE A PROGRAMME EMBEDDE D IN A CASSETTE OR A CD WHICH MAY BE A SOFTWARE AND THE PA YMENT 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 TH E COPYRIGHT ARTICLE WHEREAS THE COPYRIGHT REMAINS WITH THE OWNE R AND THE LICENSEES HAVE ACQUIRED A COMPUTER PROGRAMME FOR BE ING USED IN THEIR BUSINESS AND NO RIGHT IS GRANTED TO THEM T O UTILIZE THE COPYRIGHT OF A COMPUTER PROGRAMME AND THUS THE PAYM ENT 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 SUBSEQUE NT AMENDMENT TO SECTION 9 (1)(VI) OF THE ACT AND ALSO WHETHER THE AMOUNT RECEIVED FOR USE OF SOFTWARE WOULD BE ROYALT Y 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 L ICENCE AGREEMENT FOR ALLOWING THE USE OF THE SOFTWARE IS N OT 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 W HAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIGHTED MAT ERIAL OR ARTICLE WHICH IS CLEARLY DISTINCT FROM THE RIGHTS IN A COPY RIGHT. THE RIGHT THAT IS TRANSFERRED IS NOT A RIGHT TO USE THE COPYR IGHT BUT IS ONLY LIMITED TO THE RIGHT TO USE THE COPYRIGHTED MATERIAL AND THE SAME DOES NOT GIVE RISE TO ANY ROYALTY INCOME AND W OULD BE BUSINESS INCOME. 98. WE ARE NOT IN AGREEMENT WITH T HE DECISION OF THE ANDHRA PRADESH HIGH COURT IN THE CASE OF SAM SUNG ELECTRONICS CO. LTD (SUPRA) THAT RIGHT TO MAKE A CO PY OF THE SOFTWARE AND STORING THE SAME IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TAKING BACKUP COPY WOULD AM OUNT TO COPYRIGHT WORK UNDER SECTION 14(1) OF THE COPYRIGHT ACT AND THE PAYMENT MADE FOR THE GRANT OF THE LICENCE FOR THE S AID PURPOSE WOULD CONSTITUTE ROYALTY. THE LICENSE GRANTED TO TH E LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME A ND STORING IT IN THE COMPUTER FOR HIS OWN USE WAS ONLY INCIDENTAL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE O F THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPO SE. THE SAID PROCESS WAS NECESSARY TO MAKE THE PROGRAMME FUNCTIO NAL AND TO HAVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID PROVISION BECAUSE IT IS ON LY 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 ACQUI RING A COPYRIGHT IN THE SOFTWARE. IN VIEW OF THE ABOVE WE ACCORDINGLY HOLD THAT WHAT HAS BEEN TRANSFERRED IS NOT COPYRIGH T OR THE RIGHT TO USE COPYRIGHT BUT A LIMITED RIGHT TO USE TH E COPYRIGHTED MATERIAL AND DOES NOT GIVE RISE TO ANY ROYALTY INCO ME. 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) O RDER DT.31.01.2013), THE CO-ORDINATE BENCH OF THE TRIBUNAL HAS DE CIDED THE ISSUE IN FAVOUR OF ASSESSEE BY HOLDING AS UNDER : 16. IN THE PRESENT CASE, AS PER THE TERMS OF THE A GREEMENT BETWEEN THE ASSESSEE COMPANY AND SANDVIK ASIA LTD., DOES NOT SUPPORT THE CASE OF THE REVENUE THAT THE ASSESS EES CASE IS COVERED IN CLAUSE (G) OF PARA 3 TO ARTICLE 12 OF TH E INDIA AUSTRALIA TREATY AS THE ASSESSEE HAS NOT MADE AVAIL ABLE ANY 12 ITA NO.1719/PUN/2014 AY.NO.2008-09 TECHNICAL KNOWLEDGE OR EXPERTISE TO THE RECIPIENT I NDIAN COMPANY. IN OUR OPINION, THE ASSESSEE HAS ONLY PROV IDED THE BACK-UP SERVICES AND IT SUPPORT SERVICES FOR SOLVIN G IT RELATED PROBLEMS TO ITS INDIAN SUBSIDIARY. HENCE, UNLESS AN D UNTIL THE SERVICES ARE NOT MADE AVAILABLE, SAME CANNOT BE TAX ABLE IN INDIA. WE, THEREFORE HOLD THAT THE SERVICES RENDERE D BY ASSESSEE COMPANY TO ITS INDIAN GROUP COMPANIES, THO UGH ARE IN THE NATURE OF TECHNICAL SERVICES, BUT IS NOT COVERE D IN PARA (3)(G) TO ARTICLE 12 OF THE INDIA AUSTRALIA TREATY AND HEN CE, THE SAME IS NOT TAXABLE IN INDIA. WE ALSO HOLD THAT THE AMOU NT 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 DE CIDED IN FAVOUR OF THE ASSESSEE. 9. IN THE PRESENT CASE, WE ARE OF THE VIEW THAT THE IS SUE IS IDENTICAL TO THAT OF SANDVIK AUSTRALIA PTY. LTD. (SUPRA). WE THEREFORE FOLLOWING THE AFORESAID DECISION AND THE RELYING ON THE DECIS ION OF HONBLE 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 ALLOWE D. ORDER PRONOUNCED ON 24 TH MARCH, 2017. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER % / ACCOUNTANT MEMBER PUNE; ! DATED : 24 TH MARCH, 2017. YAMINI 13 ITA NO.1719/PUN/2014 AY.NO.2008-09 ) * +',- .-' ' COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3 . 4. 5. 6. DISPUTE RESOLUTION PANEL, PUNE. DY.DIRECTOR OF INCOME-TAX (IT)-I, PUNE. #$% &&'()* '() / DR, ITAT, A PUNE; %+,-' GUARD FILE. )! / BY ORDER, // //// // TRUE COPY // T // // TRUE // //COPY // // TRUE COPY // //////// . /012 / ASSISTANT REGISTRAR, * '( , / ITAT, PUNE.