DCIT, Circle- 1(1)(2), International taxation, New delhi V. Black Duck Software Inc., Noida

ITA 2326/DEL/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 3362 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 04-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K JAIN
• Assessee Lawyers: ABHIMANYU JHAMB
• Keywords: Double taxation relief

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI D BEN CH, NEW DELHI [THROUGH VIDEO CONFERENCE] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI AMIT SHUKLA, JUDICIAL MEMB ER ITA NO. 2326/DEL/2018 [ASSESSMENT YEAR: 2014-15] THE DY. C.I.T VS. M/S BLACK DUCK SOFTWARE INC. CIRCLE 1(1)(2) C/O SHILPI AGARWAL, B-18, LGF NEW DELHI EXPRESS GREEN, SECTOR - 44, NEW DELHI NOIDA PAN : AAECB 2775 L [APPELLANT] [RESPONDENT] DATE OF HEARING : 11.10.2021 DATE OF PRONOUNCEMENT : 11.10.2021 ASSESSEE BY : SHRI ABHIMANYU JHAMB, ADV REVENUE BY : SHRI R.K. JAIN, SR. DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A)- 42, NEW DELHI DATED 23.01.2018 PERTAINI NG TO A.Y 2014-15. 2 2. THE SOLITARY GRIEVANCE OF THE REVENUE IS THAT TH E LD. CIT(A) ERRED IN HOLDING THE ADDITION OF RS. 4,52,11,000/- ON ACC OUNT OF ROYALTY INCOME BEING RECEIPT FROM SUPPLY OF SOFTWARE/FIS U /S 9(1)(VI) OF THE INCOME TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'T HE ACT' FOR SHORT] AND UNDER ARTICLE OF INDIA USA DTAA. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE COMPANY IS A COMPANY REGISTERED IN THE STATE OF DEL AWARE, USA AND IS A LEADING PROVIDER OF PRODUCTS AND SERVICES FOR AMO UNTING THE MANAGEMENT, COMPLIANCE AND SECURE USE OF OPEN SOURC E SOFTWARE IN MUTLI-SOURCE DEVELOPMENT AT ENTERPRISE SCALE. 4. THE ASSESSEE CLAIMS TO BE PROVIDING ITS CUSTOMER S A NON-EXCLUSIVE NON TRANSFERRABLE LICENSE FOR THE PROGRAMS IN WHICH THE COMPANY IS NORMALLY DEALING. CUSTOMERS SUBSCRIBE FOR THESE LIC ENSES FOR A SPECIFIED PERIOD AS PER THE AGREEMENT ENTERED WITH THE COMPAN Y. 5. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEED INGS, THE ASSESSING OFFICER WAS OF THE FIRM BELIEF THAT THE A SSESSEES RECEIPTS FROM SUPPLY OF SOFTWARE ARE TAXABLE IN INDIA AS ROY ALTY BOTH U/S 9(1)(VI) OF THE ACT AND UNDER ARTICLE 12(3) OF USA DTAA. 3 6. THE ASSESSING OFFICER WAS OF THE FURTHER OPINION THAT THE SERVICE PORTION THOUGH NOT SPECIFIED INTO CONTRACT OR INVOI CES SHALL BE SUBJECTED TO TAX AS FTS/FIS, AND ACCORDINGLY, TREAT ED THE RECEIPTS FOR SUPPLY OF SOFTWARE/FIS AMOUNTING TO RS. 4,52,11,000 /- TAXABLE AS ROYALTY. 7. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) AND PLACED STRONG RELIANCE ON THE DECISION OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF INTRASOFT LTD 220 TAXMAN 273 AND FURTHER D REW THE ATTENTION OF THE LD. CIT(A) TOWARDS THE DECISION OF THE TRIBU NAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2012-13. 8. AFTER CONSIDERING THE FACTS AND SUBMISSIONS AND DRAWING SUPPORT FROM THE DECISIONS RELIED UPON BY THE ASSESSEE, THE LD. CIT(A) HELD AS UNDER: 5.10 RELYING UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD (SUPRA), THE APPE LLANT SUBMITTED THAT HERE IN THIS CASE ALSO SIMILAR KIND OF SOFTWAR E LICENSE WAS GIVEN AND EVEN THE TERMS OF AGREEMENT WERE BY AND L ARGE SAME. IN THAT CONTEXT, THE HON'BLE DELHI HIGH COURT HELD THA T INDIA USA TREATY STILL RECOGNIZES THE DIFFERENCE BETWEEN A CO PYRIGHT AND A COPYRIGHTED ARTICLE. THE HON'BLE HIGH COURT AFTER R EFERRING TO ANOTHER DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF 4 DIT VS. NOKIA NETWORKS (SUPRA), HELD THAT, FIRSTLY, AMENDMENT IN SECTION 9(L)(VI) CANNOT BE READ INTO TREATY; AND SE CONDLY, GRANTING LICENSE TO USE COPYRIGHTED SOFTWARE FOR LICENSEES' OWN BUSINESS PURPOSE, CANNOT BE BROUGHT TO TAX UNDER ARTICLE 12( 3) OF INDIA USA DTAA. THE HON'BLE HIGH COURT HAS ALSO DISSENTED FROM THE JUDGMENT OF HON'BLE KARANATAKA HIGH COURT IN THE CA SE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD.(SUPRA) WHICH HAS BEEN STRONGLY REFERRED AND RELIED UPON BY THE AO. THE ASSESSEE BR OUGHT MY ATTENTION TO THE DECISION OF HON'BLE ITAT,DELHI IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2-12-13 WHEREING THE I TAT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. . AS REGARDS THE SCOPE OF LICENSE AGREEMENT ENTERED WITH INFOSYS AND WIPRO , THE HON'BLE ITAT OBSERVED AS UNDER: '14. FROM A PERUSAL OF THE AFORESAID SCOPE OF LICEN SE, IT IS QUITE APPARENT THAT THE ASSESSEE PROVIDE TO ITS CUS TOMERS A NON- EXCLUSIVE; NON-TRANSFERABLE LICENSE WITHIN THE APPLICABLE SUBSCRIPTION PERIOD. THE CLAUSE DEALING WITH LICENS E RESTRICTION CLEARLY ENVISAGES THAT IT IS NOT A PERPETUAL LICENS E AND CUSTOMER HAS NO RIGHT TO RETAIN OR USE THE PROGRAMM E AFTER TERMINATION OF APPLICABLE SUBSCRIPTION PERIOD FOR A NY REASON. THE CUSTOMERS ARE NOT PERMITTED ANY ACCESS OR USE O F THE PROGRAMMES FOR ANY USERS OTHER THAN THE USER'S LICE NSE PAID FOR BY THE CUSTOMER. THOUGH THE CUSTOMER IS ENTITLE D TO MAKE REASONABLE NUMBER OF COPIES OF THE PROGRAMME FOR IN ACTIVE BACK UP; DISASTER RECOVERY; FAILOVER OR ARCHIVAL PU RPOSES, HOWEVER, IT HAS NO RIGHT TO RENT; LEASE, ASSIGN; TR ANSFER; SUB- LICENSE; DISPLAY OR OTHERWISE DISTRIBUTE OR MAKE TH E PROGRAM AVAILABLE TO ANY THIRD PARTY. THE CUSTOMER IS FURTH ER PROHIBITED NOT TO MODIFY; DISASSEMBLE; DECOMPILE OR OTHERWISE REVERSE ENGINEER THE PROGRAM NOR CAN PERMIT ANY THI RD PARTY TO DO SO. IN OTHER WORDS, THE ASSESSEE HAS ALL THE RIGHTS NOT 5 ONLY ON THE COPYRIGHT IN THE SOFTWARE, BUT ALSO DEB ARS ITS CUSTOMERS IN SEVERAL WAYS AS HIGHLIGHTED ABOVE. THU S, THE PAYMENT, WHICH HAS BEEN RECEIVED BY THE ASSESSEE, I S PURELY FOR COPYRIGHTED SOFTWARE PRODUCT AS AGAINST PAYMENT FOR GIVING ANY RIGHT TO USE ANY COPYRIGHT IN THE SOFTWA RE. THE CUSTOMERS HAVE A VERY LIMITED RIGHT TO ACCESS COPYR IGHT SOFTWARE FOR ITS OWN BUSINESS PURPOSE AND DOES NOT ACQUIRE ANY KIND OF RIGHT TO EXPLOIT THE COPYRIGHT IN THE S OFTWARE THESE FACTS ARE UNCONTROVERTED IN THE IMPUGNED ORDE R.' 5.11 HON'BLE ITAT IN THE CASE OF THE ASSESSEE HELD THAT IN ORDER TO FALL WITHIN THE REALM AND AMBIT OF RIGHT TO USE COPYRIGHT THE COMPUTER SOFTWARE PROGRAMME, ANY RIGHT AS ENUMERATE D IN SECTION 14 OF COPYRIGHT ACT, 1957 MUST BE GIVEN AND IF THE SAID RIGHTS ARE NOT GIVEN THEN, THERE IS NO COPYRIGHT IN THE COMPUT ER PROGRAMME OR SOFTWARE. HON'BLE IT A T CATEGORICALLY OBSERVED THA T IN THIS CASE, NONE OF THESE CONDITIONS OR SUCH RIGHTS ARE FLOWING FROM THE MASTER LICENSE AND SUBSCRIPTION AGREEMENT TO THE CU STOMERS, ALBEIT THE AGREEMENT AS INCORPORATED ABOVE ILLUSTRA TES LOT OF RESTRICTIVE COVENANTS AND GIVES VERY LIMITED RIGHT TO THE CUSTOMERS FOR SELF-USE AT ENTERPRISE LEVEL. 5.12 IN THE CASE OF EDIT VS INFRASOFT LTD [SUPRA ] IN FACT THE LICENSE AGREEMENT .WAS BY AND LARGE QUITE AKIN TO T HE LICENSE AGREEMENT IN THE PRESENT CASE. HON'BLE DELHI HIGH COURT IN ITS DETAILED .JUDGMENT HAVE ANALYSED THIS ISSUE THREADB ARE AND HAVE COME TO THE CONCLUSION THAT MERE. COPYRIGHTED MATER IAL, I.E., SOFTWARE PROGRAMME CANNOT BE TAXED AS ROYALTY IN TE RMS OF ARTICLE 12(3) OF INDIA USA DTAA. THE HON'BLE COURT ALSO HELD THAT THE AMENDMENT IN THE DOMESTIC LAW, THAT IS, IN THE INCOME TAX ACT CANNOT BE READ INTO THE TREATY. 6 5.13 HON'BLE ITAT ALSO CONSIDERED THE SUPPLEMENT AGREEMENT WHEREIN THERE IS A STIPULATION OF UNLIMITED NUMBER OF USERS AND UNLIMITED SIZE OF MANAGED CODE BASE; AND ALSO ACCES S HAS BEEN GRANTED AT ENTERPRISE LEVEL. ITAT HELD THAT THE SUP PLEMENTARY AGREEMENT DOES NOT ENLARGE THE SCOPE OF THE MAIN LI CENSE AGREEMENT BUT ONLY ENVISAGES PROVIDING ACCESS TO AL L THE PERSONS WITHIN THE ENTERPRISE. ITAT ALSO HELD THAT SINCE TH E SOFTWARE IS TO BE RUN AT AN ENTERPRISE LEVEL, MANAGED CODE BASE SI ZE HAS TO BE KEPT UNLIMITED BUT WITHIN THE ORGANIZATION AND IS N OT MEANT TO THE OUTSIDERS. FURTHER, ITAT OBSERVED THAT IT IS NOT TH E CASE OF THE REVENUE ALSO THAT SOFTWARE IS BEING COMMERCIALLY EX PLOITED BY THE CUSTOMERS ALBEIT IT HAS TO BE USED ONLY FOR PRIVATE USE WITHIN THE ORGANIZATION. 5.14 THUS, IN VIEW OF THE DISCUSSION MADE ABOVE AND RESPECTFULLY FOLLOWING THE JUDGMENT OF HON'BLE ITATA IN THE CASE OF THE ASSESSEE AND HON'BLE DELHI HIGH COURT, IN THE CASES OF DIT VS. NOKIA NETWORKS (SUPRA); DIT VS. ERICSSON A.F (SUPRA ); DIT VS. INFRASOFT LTD. (SUPRA); AND CIT VS. ALCATEL LUCENT CANADA (SUPRA) I HOLD THAT THE PAYMENT RECEIVED BY THE ASSESSEE DOES NOT FALL WITHIN THE AR OF 'ROYALTY 1 UNDER ARTICLE 12(3) OF INDIA USA DTAA AND HENCE, THE SAME C BE TAXED UNDER THE TERMS OF I NDIA USA TREATY. IF THE RECEIPTS CANNOT BE TAXED UNDER THE T REATY AS ROYALTY , THEN IT CANNOT BE TAXED UNDER THE DOMESTI C LAW U/S 9(1)(V) OF THE ACT AND AMENDED PROVISION CANNOT BE READ INT O TREATY AS HELD BY THE HON'BLE DELHI. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 7 9. NO DISTINGUISHING DECISION HAS BEEN BROUGHT TO O UR NOTICE BY THE LD. DR. THEREFORE, WE DO NOT FIND ANY REASON TO IN TERFERE WITH THE FINDINGS OF THE LD. CIT(A). 10. IN THE RESULT THE APPEAL OF THE REVENUE IN ITA NO. 2326/DEL/2018 IS DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF BOTH THE REPRESENTATIVES ON 11.10.2021. SD/- SD/- [AMIT SHUKLA] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 11 TH OCTOBER, 2021 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI 8 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER