Commissioner of Income Tax-2 v. Halliburton Export Inc

2. The challenge in these appeals by the Revenue is to the common order dated 23"" October 2015 passed by the Income Tax Appellate Tribunal (ITAT)in ITA Nos.6273/Del/2012 and 690/Del/2014 for the Assessment Years('AYs')2009-10 and 2010-11.

3. The main question urged by the Revenue for consideration before the Courtis whether the consideration received by the Respondent Assessee on sale of pre-packaged software was 'royalty or 'fee for technical services' and was,therefore,nottaxable as businessincome?

4. It is not in dispute that Article 12(3)ofthe Double Taxation Avoidance Agreement ('DTAA') between India and the United States of America (USA)is relevantfor deciding the above issue.In the synopsisforming part ofthe memoranda ofappeals,it is mentioned that the above question also formsthe subject matter oftheITA No.477of2014.ThatITA pertained to AY2008-09.The saidITA No.477of2014 was dismissed by this Courtby an order dated U'September2014 which reads as under: "The issue raised in the present appeal is whether the consideration received on sale of pre-packaged software is 'royalty' or'fee for technical services' and thus was nottaxable as business income? In the present case. Double Taxation Avoidance Agreement between India and the United States of America is applicable and to construe 'royalty' conditions stipulated in the DTAA have to be satisfied. The question raised, it is accepted, is covered by the decision ofthis Courtin ITA No. 1034 of2009, DITV.InfrasoftLimited decided on 22"^^ November2013. ITA Nos.363&365of2016 2of[6] In view of the aforesaid decision, the present appeal is dismissed. We note that the Revenue has not disputed that the issue IS covered bythe aforesaid decision,buthas stated thatan appeal has been filed beforethe Supreme Court."

5. Theshortquestion considered bythe CourtinDirectorofIncome Tax v. Infrasoft Limited (2014) 220 Taxman 273(Dei) was whether the term 'royalty'covered by Article 12(3)oftheDTAA would applyinthe context ofsale ofpre-packaged copyrighted software.The Courtalso examined the effectofthe subsequentamendmentto Section9(1)(vi)oftheIncomeTax Act,1961(Act).The Courtcameto thefollowing conclusionsin paras87 to90ofthe said order which read as under:

87. In orderto qualify asroyaltypayment,itisnecessaryto establish thatthere istransferofall oranyrights(includingthe granting ofany icence)m respectofcopyrightofaliterary,artistic orscientific work In ordertotreatthe consideration paid bytheLicensee asroyalty itis to be established thatthe licensee, by making such payment,obtains all orany ofthe copyrightrights ofsuch literary work.Distinction has to be made between the acquisition of a "copyright right" and a copynghted article". Copyright is distinct from the material object, copyrighted.Copyrightis an intangible incorporeal rightin the nature of a privilege,quite independent ofany material substance,such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to rtansfer ofall or any right including licence in respect ofcppyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for"copyrighted"article. This sale consideration is forpurchase ofgoodsand is notroyalty.

88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific o the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in ITA Nos.363&365of2016 t ' Page3of[6] relation to these acts ofcopying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction.for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.

89. There is a clear distinction between royalty paid on transfer ofcopyrightrights and consideration fortransfer ofcopyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment ofsome or all the rights which the copyright owner has,is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use ofa copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated 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 correctto state thatthe copyright itselfor rightto use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour ofthe licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer ofrights in relation to copyright or conferment ofthe right ofusing the copyright. The transfer ofrights in or over copyright or the conferment of the right ofuse ofcopyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himselfofthe rights he possessespro tanto.

90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility ITA Nos.363&365of2016 Page4of[6] extended to the licensee to make use ofthe copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively differentfrom the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility,the licensee has no right to deal with the productjust as the owner would be in a position to do."

6. This Courtthen concluded in para94that "the right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment 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.Whatthe licensee has acquired is only a copy ofthe copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright ofa computer programme and thus the paymentfor the same is not in the nature ofroyalty."

7. Thereafter in para95the Court concluded as under: "95. We have not examined the effect of the subsequent amendmentto Section 9(1)(vi)ofthe Act and also whether the amount received for use ofsoftware would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA,the provisions ofwhich are more beneficial."

8. It is sought to be urged by Mr. Rahul Chaudhary, learned Senior standing counsel for the Revenue,that although the Court in Director of Income Tax v. Infrasoft Limited {supra) took note of the subsequent amendment to Section 9(1)(vi)ofthe Act as regards the term 'royalty', it actually did not discuss the effect of the said amendment. ITA Nos.363&365of2016 Page5of[6]

9. Section 90 (3) of the Act makes it clear in the context of an agreement ('treaty') for avoidance of double taxation, that it is only when the provisions ofthe Act are more beneficial to the Assessee the Act will prevail over the treaty. Conversely, where the provision of the treaty is more beneficial to the Assessee,the treaty would prevail over the Act. This legal position has been reiterated in Director of Income Tax v. Infrasoft Limited {supra) which was followed in dismissing the Revenue's appeal in the Assessee's own case for AY 2008-09 i.e.ITA No.477 of2014.

10. The Court is not persuaded to re-examine the above issue which stands answered againstthe Revenue bythe aforementioned order.

11. No substantial question oflaw arises. The appeals are dismissed with no orders as to costs.

S.MURALIDHAR,J JULY 11,2016 Rm NAJMIWAZIRI,J ITA Nos.363&365of2016 Page6of[6]