CSG International Ltd, V. DDIT International Taxation Circle 1 (1),

ITA 264/DEL/2008

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 1494 (ITAT-DELHI)
• Duration Of Justice: 14 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2003-2004
• Appeal Filed On: 28-01-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Retrospective amendment
• Section: 143(3); 234B; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI Before Sh. Saktijit Dey, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 264/Del/2008 : Asstt. Year : 2003-04 M/s CSG International Ltd. (now known as Comverse Kenan UK), Adelphi House, 1-11 John Adam Street, London WC2N 6HT Vs DDIT, Circle-1(1), Intl. Taxation, New Delhi (APPELLANT) (RESPONDENT) PAN No. AACCC3819N Assessee by : Sh. Salil Kapoor, Adv. & Sh. Ananya Kapoor, Adv. Revenue by : Ms. Sapna Bhatia, CIT DR Date of Hearing: 22.07.2022 Date of Pronouncement: 01.08.2022 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order of ld. CIT(A)-XXIX, New Delhi dated 21.11.2007 for A.Y. 2003-04 passed by the AO u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: “1. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and taxing revenue earned by the appellant from supply of software as “royalty” under 9(1 )(vi) of the Income-tax Act, 1961. 2. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and taxing revenue earned by the appellant from supply of software as “royalty” under Article 13 of the ITA No.264/Del/2008 CSG International Ltd. 2 Double Taxation Avoidance Agreement (“DTAA”) between India and United Kingdom. 3. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and in taxing revenue earned by the appellant from ‘maintenance services’ as “royalty and fee for technical services” under 9(1)(vi)/ (vii) of the Income-tax Act, 1961. 4. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer and in taxing revenue earned by the appellant from ‘maintenance services’ as “royalty and fee for technical services” under Article 13 of the DTAA between India and United Kingdom. 5. The learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in upholding the order of the learned Assessing officer with respect to levy of interest under section 234B of the Income-tax Act, 1961.” 3. After hearing both the parties, we find that the issue to be adjudicated by us is “whether payment received by the assessee for supply of software is taxable as royalty or not”. 4. Facts relevant to the adjudication of the case are that the assessee was incorporated under the laws of United Kingdom (‘UK’) on June 29, 1992 with the primary objective of carrying on the business of specialists, engineers and dealers in computer systems. For AY 2003-04, the Appellant filed its return of income on March 22, 2005 wherein revenue classified as fees for technical services amounting to Rs. 741,538,511 was offered to tax. 5. The Appellant has contracts with Indian customers such as Bharti, Ericsson and Motorola for licensing of software products and is rendering specified services in relation to its billing ITA No.264/Del/2008 CSG International Ltd. 3 software. It is submitted that the Appellant has entered into the following two types of agreements with its customers: 6. License agreements with Ericsson and Motorola provide a limited right i.e. a non-exclusive, personal and non- transferable right to the said customers to use the software product solely for the purpose of meeting the latter’s obligations to their own customer i.e. BSNL (‘sub-licensee’); and a one-time right to sub-license the software product to the ‘sub-licensee’ is given with further restrictions on the extent and manner of the use of software. The sub-license in such a case is also the ultimate user of the software. The ‘sub- licensee’ is identified in the license agreement between the Appellant and its customers and the customers cannot sub- license such software product to any other sub-licensee. 7. License agreements with Bharti that provide the license to the Appellant’s customers to use the software product in its own business without any further sub-licensing rights to any third party. The customers in such a case are the ultimate user of the software. 8. The Assessing Officer held that the payments amounting to Rs.365,090,258/- received by the assessee for supply of software is taxable as “royalty” on account of being a payment for grant of a copyright as well as payment received for allowing the use of the process inherent in the software. 9. Aggrieved by the Assessment Order, the assessee has filed an appeal before the ld. CIT(A). The ld. CIT(A) upheld the order of the learned AO and observed as under: ITA No.264/Del/2008 CSG International Ltd. 4 (a) Payment under software license agreement represents consideration for transfer of all or any right (including granting of license) in respect of copyright and other intellectual property rights. (b) Copy of software supplied by the Appellant did not amount to sale but it is license to use the software. (c) The distinction between “copyright right” and “program copy” recommended by the OECD has been dissented by several member states and India is not even a member of OECD. (d) Indian laws and India’s DTAA recognize only two types of transactions in respect of computer software i.e. sale and licenses. No further dissection of licensing is permitted under the Indian Copyright Act, Income-tax Act and Indian DTAA’s. 10. Aggrieved the assessee filed appeal before us. The ld. AR argued that terms of the agreements with the customers in India reveal that there is no transfer of any copyright right but only license to use a copyrighted product. It was argued that customer is granted only a non-exclusive, personal and non- transferable right to use the licensed product solely and exclusively for its own internal use unless otherwise allowed by a specific clause to sub-license, the software as agreed on terms with the supplier as in the case of sub-license to BSNL. It was argued that the assessee is the owner and licensor of the software and the customers Motorola, Ericsson, Bharti or for that matter BSNL shall not modify, enhance or otherwise change or supplement, disassembling, decompiling, or reverse engineer, alter or remove, any trade secret proprietary or other notices on the software. Further, it was argued that no title in the material is transferred to the customer and there are ITA No.264/Del/2008 CSG International Ltd. 5 restricted number of production and non-production copies which are granted to the customer under the license agreement, the use of which is subject to the same restrictions. It was comprehensively argued that the right transferred is a right merely to use a copy of the computer programme which is a copyrighted article. The ld. AR relied on a number of case laws:  DCIT vs. Metapath Software International Ltd (9 SOT 305) (Delhi ITAT)  Halliburton Export Inc. vs. ADIT(international Taxation) (152 ITD 803) (Delhi ITAT)  Alcaltel USA International Marketing Inc. (2009-TIOL-733- ITAT-MUM) (Mumbai ITAT)  Sonata Information Technology Ltd. vs. Addl. CIT (103 ITD 324) (Bangalore ITAT) 11. Relying on the judgment of Hon’ble jurisdictional High Court ruling in the case of Ericsson AB (246 CTR 422), it was argued that there is a distinction between the acquisition of a “copyright right” and a “copyrighted article” and the assessee supplies the software, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. 12. On the other hand, the ld. DR strongly relying on the order of the ld. CIT(A) and argued that the provisions of the agreement, sub-license, methodology of copying & reproduction, use, access and the basis of payment, control & safeguards reveal that the amounts needs to be taxed as ‘royalty’. It was argued that the software is commercially exploitable and can be used an accessed by agents as well as contactors. Hence, the reliance placed by the ld. AR on the ITA No.264/Del/2008 CSG International Ltd. 6 decision of the Infrasoft cannot be applied to the facts of the instant case. The ld. DR has also argued that since the payments for the software depends upon the number of subscribers and variable, it should be rightly taxed as ‘royalty payments’. The ld. DR vehemently argued that owing to the nature and customization, the software dealt by the assessee cannot be said to be a shrink-wrapped software. For the sake of completeness, the arguments in writing are reproduced hereunder: “The assessment order and the order of the CIT(A) are emphatically relied upon. This submission is restricted only to specific aspects. On balance aspects, above orders and oral submissions are relied upon. Taxation of “Software Royalty”- The transaction involves a transfer of copyright rather than mere transfer of a copyrighted material on account of the following facts- 1. Agreement with TATA dt.15/12/03, Motorola dt. 2nd Apr. 2002. Title- Software License and Services Agreement Need- To merge the earlier agreements, increase the subscriber capacity and allow for the sublicense of the Licensed Products i.e. Convergent Instance - Hyderabad ISL Instance - Mumbai Mobile Instance – Hyderabad A. Cl-2 All Instances shall be licensed to TTL and sublicensed to the Sub licensees. B. Cl-3 Grant of License- CSG grants to TTL a non-exclusive, non- transferable (except for the right to sublicense as set out ITA No.264/Del/2008 CSG International Ltd. 7 below), personal license to use and operate the Materials.... (p.301, PB-II, 2004-05 &p.25, PB-II, 2006-07) C. Cl-3a/Cl-10 Right to Sublicense D. Definitions - (p.314, PB-II, 2004-05) "Materials” means- i. Licensed Product ii. Documentation iii. Enhancements iv. Revisions v. Updates vi. Upgrades vii. Modifications viii. Derivative works thereto ix. Custom Programming X. All Copyright xi. Patent and xii. Other Intellectual Property Rights therein. "Sub-licensee" shall mean- i. VSNL, TTML, TISL, IDEA, Aircel, Dishnet etc. ii. A telecommunication company or utilities company in which Tata Group has equity and operational control. (The Licensee can sublicense to the above group of persons without CSG consent.) iii. Other Indian entities (The Licensee can sub-licensee upon written consent of CSG. However, such consent shall not be unreasonably withheld.) E. Copying and Reproduction- Cl-8 "All instances (i.e. Convergent Instance, ISL Instance & Mobile Instance) shall be converted to a Convergent Instance of- Kenan/BP 10.1 and ITA No.264/Del/2008 CSG International Ltd. 8 CSG Kenan/OM 1.3x On a HP hardware platform and Oracle database and licensed to customer (Licensee) who shall sublicense one production copy to sub-licensees. In addition to this, as per sublicense terms, each new sub-licensee may make 5 non-production copies, (p.305, PB-II, 2004-05) Product - Convergent Instance ISL Instance Mobile Instance Prodn Non-Prodn Prodn Non-Prodn Prodn Non-Prodn Licensee 1 2 1 2 1 2 Sub-Licensee 1 5 1 5 1 5 (It must be remembered there is no cap on the number of sub- licensees. Hence, indirectly, there is no cap on total number of copies tool) Cl-6.c of Maintenance Services Attachment- "Customer/Sub-license will maintain software and database backups external to the hardware processors.."(p.321, PB-II, 2004- OS) F. Use, Access, Confidentiality & Restrictions & Public Performance- Cl-2 of General Terms- "Customer agrees not to make available or disclose to anyone else except to customer’s- i. Employees ii. Agents iii. Contractors and iv. Sub-licensees G. Basis of Payment, Controls & Safeguards- i. Cl-4 Payment of "License Fee" on the basis of "Licensed Capacity" of "Number of Subscribers". In case of increase in subscriber base, Licensee has to purchase "Additional License Capacity". (p.303, PB-II, 2004-05) ITA No.264/Del/2008 CSG International Ltd. 9 ii. Cl-3.a TTL will provide CSG, written information of each licensed product sublicensed with the site location and 'number of subscribers' and shall on an annual basis audit and provide to CSG the updated number of subscribers per instance.(p.302, PB-II, 2004- 05) iii. Cl-14 Customer shall keep and maintain complete records of customer's level or number of subscribers in enough detail to ascertain payments due under this agreement, (p.311, PB-II, 2004- 05) iv. Additional Maintenance Fee shall be charged upon TTL achieving 10 million subscribers, (p.304, PB-II, 2004-05) H. Compulsory Upgradation-CI-8.a (p.305, PB-II, 2004-05) Failure to upgrade to and be producing bills on the latest version of the standard license product as the latest instance shall result in an additional charge of US$ 75,000 per annum per instance. I. Termination- Termination as per General Terms (p.300, PB-II, 2004-05) Cl-12 of General Terms- a. Customer Termination & b. CSG Termination- If customer fails to observe any material terms of the agreement. If customer does not pay a valid invoice within stipulated time. Effects-Cl-12.c (p.311, PB-II, 2004-05) & Cl-3.a.viii (p.302-303, PB- II, 2004-05) i. Customer to stop using the ‘Materials' ii. Customer and Sub-licensees to RETURN or destroy all 'Materials’ and furnish CSG with a return or destruction certificate. iii. Customer to pay 'Discontinuance Fee’- "Customer agrees that, without the certainty of the additional capacity license and ITA No.264/Del/2008 CSG International Ltd. 10 maintenance fee revenue set forth in this agreement, CSG would have been unwilling to provide the additional capacity and maintenance services." Infrasoft Distinguished- Infrasoft Ltd. CSG Non-exclusive & restricted license Non-exclusive, Non-transferable (except for right to sublicense) Single usage for own operation Multi-user support for self, group concerns, specified sublicensees and other entities (with CSG consent which shall not be unreasonably withheld) No commercial exploitation Commercially exploitable- Can be Sub-licensed Can be used and accessed by Agents Can be used and accessed by contractors No right to make copies (can only make one copy for backup and to mark such copies with copyright) Can make copies (limited by the number of sub-licensees. But there is no cap on the number of such sub-licensees.)Definition of 'Materials’ include ‘All Copyrights’, ‘patents' and other 'intellectual properties’ therein which need to be 'returned' or 'destroyed' on expiry/termination of license. No right to prepare derivative computer programs based upon the copyrighted software Capable of custom programming and derivative thereto. Not to be used by any other person- parent, subsidiary or affiliated entities. Can be used by other person- parent, subsidiary or affiliated entities. Not to be Sublicensed Can be Sublicensed Payment of license fee Payment of Licence Fee (on the basis of subscriber base) License Fee payable on the basis of number of copies sold License Fee payable on the basis of number of subscribers with provision for supply/purchase of 'additional license capacity’. 13. The ld. DR further submitted her arguments which are as under: “During the course of hearings, the appellant had relied upon the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02.03.2021. 2. The appellant submitted that the transaction of providing an object copy of machine readable computer program to its customers qualifies as sale and not grant of any copyright right hence not taxable as Royalty but only as business and mainly relied on following contentions: ITA No.264/Del/2008 CSG International Ltd. 11 a. The appellant has not granted any right in the copyright, it is only a sale of copyrighted material, b. Source code has not been provided, c. Appellant has granted a limited ‘right to use’ with restrictions, d. One time right to sub-license only to BSNL with same restrictions, e. The transactions relates to sale of software products, f. Reliance is placed upon Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02.03.2021. 3. In this regard, it is to submit that to constitute an outright sale of any product, the rights of ownership and usage should be completely transferred to the buyer/purchaser. However on perusal of the limited license contracts executed by the CSG with MIL and EIL, it is found that, there was not a sale of computer products by CSG, rather limited license to use CSG products were provided. (ii) Further, the language of the terms of agreement of the contract is unambiguously clear as it mentions the term license and not sale. (iii) Also, a dedicated Staff team comprising Software Developer, software tester, Program Manager etc. were also provided by CSG in India for further customization/upgradation of the software according to the need of the customer. (iv) Further, the assessee has not produced any evidence like copy of invoices/ bills etc for the software to prove that the said transaction constituted a sale. (v) Additionally, there is also a clause to delete and destroy the software program copy after expiry/termination of the contract. So if once sale is executed by the assessee, how it can continue to have the right to delete/ amend the software? The assessee should not reserve any right in this regard whatsoever. ITA No.264/Del/2008 CSG International Ltd. 12 (vi) Further, it would not be out of place to mention that one of the contracts was also sub-licenced to BSNL. If it was a sale of software in place, there was no question of sub-licensing. In view of above, it can be emphatically stated and inferred that the said transaction was not a sale of computer program by CSG to MIL & EIL, on the contrary it was transfer of licensing/sublicensing right and payment received was for transfer of that right. The assessee by engaging in the verbal jugglery cannot amend the nature of transaction or characterization of income. 4. In respect of the reliance placed by the assessee on the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02.03.2021, it is submitted that it is unacceptable as it is wrong and misplaced because of the difference in the facts of the instant case with that of the judicial pronouncement relied upon. It is imperative to point out the difference in the facts of the instant case vis-à-vis the cited case. For the applicability of the cited case these conditions emanating from the Hon’ble Supreme Court order are required to be satisfied. (i) That the software should be shrink-wrap/off the shelf software (ii) That the case of the assessee should fall under the four categories as cited in the SC order (iii) That that there should be no sub-licencing 5. Whether the software is Shrink wrap software or customized software? However the factual position of the instant case as culled out from the terms of the agreement are different and are stated as under: a) The assessee licenses billing and customer care software products and renders maintenance and professional services in relation to these softwares. License payment being ITA No.264/Del/2008 CSG International Ltd. 13 received by the appellant is for billing and customer care software from various telecom operators, namely, Erricson India Pvt. Ltd., Motorola India Pvt. Ltd., and Bharti Cellular Ltd. b) A Billing & Customer Care software provided to various telecom operators is claimed by the assessee to be in the nature of ‘off the shelf’/shrink wrap software, rather than customized software. There are various erudite sites on google which explain the difference between customized and shrink wrap software. It is imperative to discuss the same to understand how the software of the assessee falls in the category of customized software and not shrink wrap. c) When a business has specific software needs that off-the- shelf software can't address, it commissions developers to create custom applications. It is a solution that can handle one’s business’s unique requirements. Customized software resources are costly and require substantial in-house tech input and support. Further an article on the difference between the two software is reproduced below: Custom software vs. off-the-shelf software Packaged software applications are available for nearly every computing, business, productivity and communications task imaginable. These packages generally offer the following features. • Ease of use: Off-the-shelf applications serve large audiences with fundamentally similar needs. For example, Microsoft Word is an enormously popular word processing application with features, functionality and customization options that organizations of all sizes and scopes can use. • Easy access for purchasing or downloading: Off-the-shelf software can be prepackaged and purchased in a store, but it’s ITA No.264/Del/2008 CSG International Ltd. 14 often downloadable from manufacturers’ websites or available as a cloud subscription. • Wide availability: You can find an off-the-shelf software package for any platform your business uses, including Windows PCs, Macs and Linuxes. • Customizability: Popular commercial packages, such as Microsoft Office applications , have a degree of customizability to make the software work better for your team. Despite the variety of off-the-shelf software available, some organizations require specific capabilities that general software can’t provide. If this is the case, they may turn to customized software development. Here’s what custom software has to offer: • Uniquely tailored features and functions: When a developer creates a custom software product, that application is tailored specifically for the commissioning organization’s use. For example, if a developer created an application for JPMorgan Chase, only the bank or one of its specific departments would use the tool. A custom application could analyze the bank’s customer database and connect to market data and preset goals in customer accounts to create suggestions for JPMorgan’s investment advisors. • A solution only for your business: The developer would design the software to work with the commissioning company’s infrastructure, branding and implementation needs, and no other organization could access the application. Custom software development pros: Custom software’s most significant benefit is providing features that off-the-shelf software doesn’t. After the custom-designed solution is implemented, the problems it solves can be well worth the costs. For example, if you commission an application designed to increase productivity, the resulting rise in efficiency can offset the cost of building the solution. If your custom software addresses unique time ITA No.264/Del/2008 CSG International Ltd. 15 and attendance or payroll challenges, you can save money and maximize your employees’ time. If your organization has a need that’s specific enough to warrant custom software, designing a solution is an excellent idea. Custom software development cons: If implementing a custom software solution was inexpensive and easy, everyone would do it. Unfortunately, costs and risks make designing a custom software solution challenging. Costs: The cost of off-the-shelf software applications ranges from a few dollars to a few thousand dollars. Many standard business applications have relatively low monthly subscription costs or one-time fees. However, designing customized software requires significant financial resources. The commissioning business must cover all costs associated with the development process. Some custom solutions can reach five figures or more.(emphasis supplied) (source- https://www.businessnewsdaily.com/5175-custom- software-development.html) 7. The various clauses of the contracts which establish unambiguously that the software is a customized software. Some of them are reproduced below: (i) At point 4 of Page no. 19 of paper book-1 states clearly that CSG UK rendered professional services/training to its customers in India during the subject year and the professional services rendered by CSG UK entails analysis, configuration, customization, integration, implementation and deployment of billing solutions of CSG UK. (ii) The Billing and customer care software used is a specialized one having usage to manage and automate the billing ITA No.264/Del/2008 CSG International Ltd. 16 process specific to the telecom industry. It can clearly be not applied to any other industry or organization. (iii) At work order 001 (Exihibit B) [Page No 65 of Paper Book 1] provisions for staffs with the skills of software testing, software development etc are mentioned. It states as under: “ CSG will staff this project with the appropriate compliment of management, business and technical professionals......One or more staff with the following skills sets may be involved in the project: Project Manager, Program Manager, Project lead, Software Tester, Technical Consultant, Software Developer and Trainer.” Had it been an off the shelf/shrink wrap software it would not have necessitated deployment of skilled staff/team/ manager/trainer etc for handling the software. (iv) At work order 001 (Exihibit B) [Page No 71 of Paper Book 1] (v) “The Hardware must be ordered, delivered and installed prior to installation of the CSG products. Defined requirements are required prior to any customization/configuration.”(emphasis supplied) The above statement is an extremely important statement in the work order as it categorically states that the customer should specify if any customization is required. This entails that configuration / customization suiting the needs of the customer was being catered to. The assessee cannot deny that they were not offering any customization. The argument of the assessee that it was a shrink wrap software holds no water and above arguments clearly states that the CSG products are customized according to the requirement of customer. (v) A very important aspect of shrink wrap software is that it is a very inexpensive/cheap product, however the customized software is ITA No.264/Del/2008 CSG International Ltd. 17 an expensive software. This fact is ubiquitous and known to one and all. Had the concerned software been an off the shelf software, the assessee would not have charged such heavy sums running into crores of rupees/Dollars. In view of above discussion it is abundantly clear that the software catered to by the assessee is a customized software and not a shrink wrap one as it is exclusively developed for the organization to suit its business requirement and that it is very expensive which is a logical corollary to the customized software. So this fact also excludes the case of the assessee from the applicability of the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. dated 02.03.2021. 8. In which category out of the four categories does the assessee’s case falls? In para 4 of the decision in case of Engineering Analysis, the Hon’ble Court gives the four categories of cases to which this decision is applicable. The category of cases are explained with examples in para 44(i) to 44(iv) of the said judgment. None of these four models allow sub-licensing of software. An analysis on these models and the category of cases covered in the decision is further given in paras 45 to 47 of the Hon’ble Apex court’s decision. The findings of the Hon’ble Supreme Court in paras 168 to 169 are with respect to the categories of cases mentioned above. (i) The assessee has not specified clearly as to under which category out of the four categories cited in the Hon’ble SC order its case is covered. Ld. AR during the course of hearing however stated that the in which the case of the assessee may fall would possibly be Category two, which wherein issue related to software sale by Non-resident Software manufacturer to Indian Distributer/End user is dealt with. In the last hearing before Hon’ble Authority, the Ld AR was trying to establish Ericson & Motorola [Limited licensor of CSG] ITA No.264/Del/2008 CSG International Ltd. 18 as an Indian Distributors and trying to cover the matter with the case of Engineering Analysis. (ii) The same may not be accepted due to following reasons: - That the Para 01 of the software license contracts between CSG and Ericson dated 25.03.2002 read as under, “...acting as Prime Contractor, may acquire from CSG software products as specified in this agreement in connection with certain related activities in the east zone in India (“India East”) in India for Bharat Sanchar Nigam Limited......” - Similar contract was executed with Motorola also. - It is seen from the above that both above were granted with a limited license rights to use CSG software products and also granted with sub license rights (Sub contracting license) with exclusive specified customer i.e. BSNL. Nowhere, in the contract or else where it was mentioned that the Ericson and Motorola are acting as independent Indian Distributors of CSG, nor are they indulging into sales of CSG products. Now, any attempt to redefine them as distributors after pronouncement of the SC judgment may not be accepted. Therefore, the assessee has not been able to establish conclusively as to under which category out of the four categories cited in the Hon’ble SC order it’s case is covered. Hence the assessee cannot be said to have covered by the decision of the Hon’ble Supreme Court. 9. Sub-licensing Agreement to BSNL Thirdly and very importantly, the agreement of the assessee with Erricson India Pvt. Ltd. has a sub-license clause, vide which Erricson sublicensed the billing and customer care software to BSNL. It is pertinent to invite attention of the Hon’ble Bench on the findings of Ld. CIT(A) on pg 11, para7.1 of the order and pg. 15, para 7.1.3 and para 7.15 at pg 23 of the order where in it has been ITA No.264/Del/2008 CSG International Ltd. 19 brought out by Ld. CIT(A) while citing the clauses of the software licensing agreement that rights of granting license were transferred to customers which also included Right to sub-license software consideration under agreement with EIL and MIL and these rights were transferred for heavy amounts of consideration which was in respect of use of or right to use the software(property) It never meant absolute transfer of property. 10. The four model agreements as per the decision of Hon’ble Supreme Court allow only for single use of software on one computer. They do not permit the licensee to copy, modify, reverse engineer, decompile, disassemble or otherwise attempt to discover the source code or algorithm of the software. They only allow taking back up copy which is necessary for running the program. These facts are also recorded in paragraphs 45 and 46 of the judgment and based on these facts it has been held in para 47 as under: “47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act ·speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software.” Thus SC has held that if the license transfers an interest in all or any of the rights contained in section 14(b) read with section 14(a), of the Copyright Act, it would amount to use of right in copyright and hence royalty. ITA No.264/Del/2008 CSG International Ltd. 20 11. In this regard, your kind attention is also drawn to the para 5 of assessment order of AY 2003-04 at page No. 5-6, wherein the case of CSG was categories in Article 14 (b) of Indian Copyright Act, 1957 and reproduced below: “The assessee also seems to have overlooked the provision of India copyright Act, 1957 which clearly bring out the fact that M/s CSG UK Is earning 'royalty' by virtue of granting of a copyright. Article 14(b)(2) of the Indian Copyright Act, 1957 defines the scope of ‘copyright’ in the case of a computer program: 14. Meaning of copyright - For the purposes of this Act, 'copyright" means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts In respect of a work or any substantial part thereof, namely :- b) In the case of computer programme- i)............................................................ ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply In respect of computer programmes where the programme Itself is not the essential object of the rental. Clearly, as per Clauses 4, 5, 6 of the software licensing agreement, M/s Ericsson has the right to sublicense this software to a third party Le. M/s Bharat Sanchar Nigam Limited. The fact that the third party has been identified In the contract Itself or that only one copy can be sublicensed does not help the assessee's case. The right to sublicense may be exercised only once but it does not alter the fact that the recipient of the software has the right to commercially exploit it. Hence, one can safely Infer that M/s CSG International, UK has authorized M/s Ericsson India Pvt. Ltd. to give on commercial rental the software licensed to It by the former.” ITA No.264/Del/2008 CSG International Ltd. 21 12. Thus as per the judgment of the SC and factual position as assessed by AO, if the owner of the software parts with any of the rights that are listed in section 14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof, it would be a case of parting with right in copyright and would then amount to royalty. 13. In view of the detailed discussion at above, it can be subsumed that assessee is engaged in providing customized software products not a Shrink Wrap one and as his case falls under section 14(b) of Copyright Act and not covered by any of the categories of cases as defined by the Hon’ble SC in Engineering Analysis Case, the consideration so received is liable to treated as Royalty income.” 14. We have gone through the issue in detail. Perused the material on record. 15. The issue of royalty or not on software has been examined by the Hon’ble High Court in case of Nokia Networks OY. Where in it was held that supply of software is not ‘royalty’ despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as “royalty”, the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG (310 ITR 320) (Bombay), it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act. ITA No.264/Del/2008 CSG International Ltd. 22 16. The Hon’ble Apex Court dealt with four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. (iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end- users. (iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users. 17. In the instant case, before us, falls under the first two categories. The Hon’ble Apex Court after examination of the entire conundrum held that “45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non- exclusive, non-transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end- ITA No.264/Del/2008 CSG International Ltd. 23 user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non- resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all. 46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. 47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is ITA No.264/Del/2008 CSG International Ltd. 24 expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence.” 18. The Hon’ble Apex Court held that a non-exclusive, non- transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. 19. The right to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the context of non- exclusive EULAs, not being so. At this juncture, we have ITA No.264/Del/2008 CSG International Ltd. 25 examined the written submission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user right only. The buyer has no right to re-sale the product and it still remained a copyrighted article which the buyer cannot alter modified, reproduced i.e. own will unless authorized. And such authorization has been given to re-supply to BSNL for their use, at the same time, keeping the all other rights with the assessee. 20. Holding thus, the Hon’ble Supreme Court decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for royalty for the use of copyright in the computer software considering the definition of royalty under the DTAAs. Hence, keeping in view the judgment of Hon’ble Apex Court, we hereby allow the appeal of the assessee on merits. 21. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 01/08/2022. Sd/- Sd/- (Saktijit Dey) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 01/08/2022 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR