6.
[2017] 86 taxmann.com 62 (Delhi – Trib.)
Black Duck Software Inc vs. DCIT
A.Y.: 2012-13 Date of Order: 11th September, 2017
FACTS
The Taxpayer was an
American company. It provided software products and services at enterprise
scale. During the year under consideration, the Taxpayer entered into a ‘Master
License and Subscription Agreement’ with two entities in India for sale of
software. According to the Taxpayer, it received the payment for copyrighted
product and not for use of copyright. The Taxpayer further submitted that it
did not have any Permanent Establishment (“PE”) in India. Therefore, receipts
from sale of software were not taxable as business income in terms of Article 7
of India-USA DTAA.
The Assessing Officer
(“AO”) concluded that receipts of the Taxpayer from licensing of software were
taxable as royalty u/s. 9(1)(vi) of the Act. He further held that even in terms
of Article 12(3) of India-USA DTAA, the payment received was in the nature of
royalty.
HELD
– The Taxpayer had contended that since it did
not have any PE in India, receipts from sale of software will not be taxed as
business income in terms of article 7 of India-USA DTAA. However, the Revenue
had not rebutted this.
– From perusal of the terms of ‘Master License
and Subscription Agreement’, it was apparent that:
• the
Taxpayer had granted a non-exclusive, non-transferable, non-perpetual license
for the specified subscription period;
• the
customer did not have right to retain or use the programme after termination of
applicable subscription period;
• the
customer was not permitted any access or use of the programme for any user
other than the user licenses paid by the customer;
• while
the customer was permitted to make reasonable number of copies of the programme
for inactive back up, disaster recovery, failover or archival purposes, it was
not permitted to rent, lease, assign, transfer, sub-license, display or
otherwise distribute or make the programme available to any third party;
• the
customer was prohibited to modify, disassemble, decompile or otherwise reverse
engineer the programme or to permit any third party to do so.
– Thus, the Taxpayer had retained all the
rights in the software which comprised copyright and the customer did not have
any right to exploit the copyright in the software.
– The payment received by the Taxpayer was for
copyrighted software product and not for grant of right to use any copyright in
the software.
– Definition of ‘copyright’ in section 14 is an
exhaustive definition and refers to bundle of rights. In respect of computer
programming, copyright mainly consists of rights as given in clause (b). If any
of the said rights are not given, there is no copyright in the computer
programme or software. None of the rights granted under ‘Master License and
Subscription Agreement’ are in the nature of the aforementioned rights,
– Since the software was to be run at an
enterprise level, in the Supplement Agreement, there was a stipulation of unlimited
number of users, but all the users were to be only from within the
organisation. Further, since the software was to be used only on one server in
India, the contention of the revenue that access was granted to all servers was
not correct.
– Accordingly, the payment received by the
Taxpayer was not in the nature of ‘royalty’ under Article 12(3) of India-USA
DTAA. Therefore, question of taxability did not arise. Indeed, if the receipts
cannot be taxed under India – USA
DTAA as royalty, they cannot be taxed u/s. 9(1)(vi).
