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CASE LAW

2017-TII-04-ITAT-MUM-INTL

QAD EUROPE BV Vs DDIT: MUMBAI ITAT (Dated: December 21, 2016)

Income tax - Section 9(1)(vi) - India-Netherland DTAA - Articles 7 & 12.

Keywords - business income - PE - royalty - sale of ERP software & transfer of copyright

The assessee is a company incorporated in Netherlands and a wholly owned subsidiary of Qad Inc., USA. The parent company acted as a distributor of ERP software products only in USA and Latin American countries, whereas the other Qad group companies worldwide, including the assessee company, undertook marketing responsibilities for countries other than USA and Latin American countries. During the relevent years, the assessee company purchased software from Qad Inc. and resold the same to multinational companies outside USA and Latin American countries. In the meanwhile, the Qad Inc. entered into a multinational software product licence agreement with M/s Unilever N.V., Netherlands, for sale of licensed product, i.e. ERP software either directly or through its subsidiaries to M/s Unilever N.V. for a consideration to be received either from UNV or through any of its subsidiaries, as the case may be. In pursuance to the said Master Agreement, the assessee entered into another agreement with M/s Hindustan Lever Ltd, which is an Indian subsidiary of UNV for the sale of ERP software. Now, in pursuance to the agreement entered into with HLL, ERP software was sold by the assessee company to HLL. Consequently, income arsing from the said transaction was treated as business income by the assessee, and in absence of any PE in India, the same was not offered to tax in India. However, as per the AO, the payment received by assessee on account of sale of ERP software product to HLL amounted to payment of 'Royalty' by HLL to assessee and, therefore, it was held as taxable in India in the hands of assessee u/s 9(1)(vi).

On appeal, the ITAT held that,

Whether payments received by a Netherland company from sale of ERP software to Indian entity, will be treated as 'royalty' under Indo Netherland DTAA, if the software agreement between the dous restricted commercial expolitation of the software - NO: ITAT

+ It is seen that the Bombay High Court in the case of Mahyco Mosanto Biotech (India) (P) Ltd., wherein identical issue was involved, has analysed the issue in detail and observed that in absence of transfer of rights to authorise doing of certain acts as mentioned in sections 2, 13 & 14 of the Copyright Act, it cannot be said that there was transfer of copyright. Similarly, identical issue also came up before the co-ordinate bench of ITAT in the case of DDIT vs Reliance Industries Ltd., wherein the bench analysed the provisions of copyright and discussed in detail its applicability to determine whether there would be any transfer of copyright at the time of sale of software, and held that the internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. Therefore, in view of these judgments it was vehemently argued that the payment on sale of software shall not fall within the definition of 'Royalty', as per DTAA. Turning back to the facts of this case, it is noted that the rights and obligations of the parties, i.e. the assessee and its customer, viz. HLL flow from the Master Agreement. Now, upon analysing and comparing various provisions of the Copyright Act with the relevant clauses of the master agreement, it is noted that the said agreement does not permit HLL to carry out any alteration or conversion of any nature, so as to fall within the definition of 'adaptation' as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of HLL in India and no right was given to HLL for commercial exploitation of the same. It is also noted that the terms of the agreement do not allow or authorise HLL to do any of the acts covered by the definition of 'copyright'. Under these circumstances, the payment made by HLL cannot be construed as payment made towards 'use' of copyright particularly when the provisions of Indian Income-tax Act and DTAA are read together with the provisions of the Copyright Act, 1957;

Whether consideration paid for 'use of computer software' and not 'copyright of the computer software', would fall within the ambit of 'Royalty' defined under Article 12(4) of India Netherland DTAA - NO: ITAT

+ Further, it is also noted that DTAAs of few countries make a specific mention that payment made for software would be included within the definition of 'Royalty'. Reference can be made to the DTAA with Malayasia, Romania, Kazakhistan and Morocco. However India Netherlands DTAA does not include software while defining 'Royalty'. Under these circumstances, it would be difficult to characterise the payment received by the assessee on account of sale of software as payment received on account of 'Royalty'. It is further noted by us that identical issue came up before the Delhi Bench of the Tribunal in the case of Datamine International Ltd Vs Addnl DIT, wherein various contentions were raised by the Revenue to argue that payment received on account of sale of software would amount to 'Royalty' for various reasons. The Bench discussed all arguments and held that the payment made on account of software shall not fall within the definition of ''Royalty''. Further, the definition of 'royalty' does not include the word 'computer programme' or 'software'. It has been held by the bench after making analysis in detail that the payment is made for the customer for using the software as such and not the 'process' involved in it. It is further noted that since the definition given in Article 12(4) of the DTAA does not contain any consideration for the use or right to use in 'computer programme' or 'software', the same cannot be imported into it. Further, as discussed above also, the perusal of clauses of the Master Agreement demonstrate that the customer, viz. HLL has paid the consideration for 'use of computer software' and not 'copyright of the computer software'. But, the DTAA treats consideration for the use of copyright of a laboratory or artistic work, etc. as 'Royalty', there can be no question of including consideration for the use of a laboratory or artistic work, etc within the ambit of 'Royalty' defined in Article 12(4) of the DTAA;

Whether an assessee would be entitled to the provisions which are more beneficial to him out of the provisions of Indian Income-tax Act and the DTAA, in view of provisions contained in section 90(2) - YES: ITAT

Whether it is permissible to refer to the provisions of the I-T Act to decide the taxability of an income in the hands of a non-resident in India, when the same is expressly estopped under the respective DTAA - NO: ITAT

+ It was also argued by the Revenue that provisions of section 9(1)(vi) should be applied, and if these are so applied, then the sale of software shall be covered under Explanation 4 to section 9(1)(vi), and, therefore, the same should be brought to tax as such. In this regard also, it is noticed that no corresponding amendment has been made in the provisions of the DTAA. Under these circumstances, the assessee would be entitled to the provisions, which are more beneficial to the assessee out of the provisions of Indian Income-tax Act and DTAA between India and the Netherlands, in view of provisions contained in section 90(2). It is already held that as per the provisions of India Netherlands DTAA, the amount received by the assessee on account of sale of software would not fall within the definition of 'Royalty' as provided in Article 12(4) of the DTAA. Under these circumstances, it will not be legally permissible for us to refer to the provisions of the Act to decide the taxability of this amount in the hands of the assessee in India. Thus, in our considered view, based upon the facts and circumstances of the case and legal position as discussed above, the impugned amount received by the assessee is in the nature of business profits assessable under Article 7 of India Netherlands DTAA and would not be taxable as 'Royalty' under Article 12 of the DTAA.

Assessee's appeal partly allowed