AAR : Whether the income arising to the applicant from offshore supply of the software under the terms of the agreement with the buyer would be said to accrue or arise or deemed to accrue or arise in India under the provisions of the IT Act, 1961 (“the Act”) ?

Authority For Advance Rulings

Geoquest Systems B.V., In Re

Section 9(1)(vi), 90, 115A(1A), DTAA between India & Netherlands, Art. 12.4, DTAA between India & Netherlands, Art. 12.5

P.V. Reddi, J., Chairman; J. Khosla & V.K. Shridhar, Members

AAR No. 774 of 2008

6th August, 2010

Counsel appeared :

N. Venkatraman with Saffique, Achin Goyal, Raju Kumar, Vaibhav Luthra & Ms. Namrata Juneja, for the Applicant : Ashish Kumar, for the CIT concerned

Ruling

P.V. Reddi, J., Chairman :

The applicant is a company incorporated in the Netherlands. It is engaged in the business of supplying special purpose computer software to be used in the exploration and production of mineral oils. The applicant describes it as off-the-shelf software in the sense that the software is not prepared to suit the special requirements of a customer on the basis of the order placed by the customer. The details of the software supplied are furnished at p. 4 of the application. We may refer to few of them : Geoframe Run Time which is the entry point for geologists wanting to run various Geoframe modules. Geoframe Data Monitor which is used to access the functions and utilities for seismic map and interpretation functions. ISEX suit with all functionalities. It is described as a geoframe seismic interpretation module. ASAP (automatic surface air picking) which allows the tracking of one or more events within a seismic volume. Variance Cube which highlights the faults and subtle stratigraphic features from seismic volumes.

1.1 The applicant has stated that the software was sent by air. The airway bill mentions ONGC to be the consignee of the software packages and the bill of entry shows the importer as ONGC. Under the terms of the agreement, namely, SLTC, “customer shall own and have title to the tangible media in which the software is delivered. Title to the media shall pass to customer in the country of origin”. The consideration for such offshore supplies of software was received by the applicant outside India in US dollars.

1.2 The applicant was awarded the contract by ONGC to supply the said software under the letter of award dt.

31st Aug., 2007. This purchase order was issued by ONGC after the price negotiation. The first item in the purchase order is the supply of Geoquest software licence. The cost is specified as US $ 951,818. The second item is the installation and commissioning of the software. It is mentioned that this work will be carried out by Schlumberger Solutions (P) Ltd. (SSPL) which is an affiliate entity of the applicant. The total cost thereof including service-tax is 11,224 US dollars. The said amount had to be paid by ONGC directly to SSPL after successful installation and commissioning. The third item is training and post-warranty annual maintenance contract (AMC). It will have to be provided by SSPL on behalf of the applicant. It has been clarified by the applicant vide its written submissions dt. 9th July, 2010 that no AMC was awarded by ONGC to the applicant or SSPL in pursuance of the contract under consideration. However, a centralized AMC was entered into between ONGC and SSPL for 3 years for maintenance, support and upgradation of various software applications. Here, it needs to be mentioned that as per the original bid document, the applicant quoted the cost of installation and commissioning and training charges on the premise that all these works would be carried out by the applicant itself. The training charges stipulated was US $ 125,000 for 50 days.

1.3 The applicant has filed a copy of the contract between ONGC and SSPL to establish that the training part has been de-linked from the applicant’s scope of work and entrusted to SSPL. The contract contemplates rendering services in the nature of upgradation, maintenance and support of the software, which covers not only the software supplied by the applicant but also other types of software.

1.4 The ONGC made an application to the Asstt. Director of IT (International Taxation), Dehradun, in December, 2007 for passing appropriate orders on the withholding of tax. The Asstt. Director of IT passed a provisional order on 6th Feb., 2008 to retain 10 per cent of the contract value and remit the balance to the applicant.

2. The following questions are framed by the applicant for seeking advance ruling :

“(i) Whether the income arising to the applicant from offshore supply of the software under the terms of the agreement with the buyer would be said to accrue or arise or deemed to accrue or arise in India under the provisions of the IT Act, 1961 (“the Act”) ?

(ii) Whether income from supply of software would be taxable as royalty income under s. 9(1)(vi) of the Act or under art. 12 of the Double Taxation Avoidance Agreement between India and the Netherlands (hereinafter referred to as “DTAA”) ?

2.1 The applicant’s senior counsel had stated on 10th Feb., 2010 that the applicant does not need a ruling on the

1st question.

3. Now, we may briefly refer to the terms of contract between the applicant and the ONGC which is styled as “software licence terms and conditions” (SLTC). The opening clause says that the applicant grants to the customer (ONGC) a exclusive, non-transferable licence to use software and its associated proprietary information. As already noticed, under cl. (1) of STLC, it is specified that the title in relation to the software package supplied shall pass on to ONGC at the applicant location (country of origin outside India). The other stipulation in cl. (1) is that the applicant or its licensor shall at all times retain title to all intellectual property rights including the modifications and updates. Clause (2) lays down that on termination of license as per the terms of the agreement, the customer shall discontinue all uses of the software and return the software and proprietary information to the applicant including all copies. Clause (3) is also important. It provides that the applicant grants to the customer (ONGC) a right only to use the software and its associate proprietary information and the term “use” shall be limited to the processing of information and the process of copying, recording or transcribing software. It does not include modifying software in any manner, creation of derivative version thereof, the reverse assembling, compiling or engineering or distributing it to other parties or making it available for ‘use’ directly or indirectly by another person, any such utilization of software being expressly prohibited. Under cl. (4), the customer (ONGC) agrees not to copy or reproduce the software or any portion thereof for any other purpose. The previous cl. 3.3 makes it clear that the licensed use of the software shall be restricted to the processing or interpretation by customer of geo-science, reservoir and production related data owned or licensed by customer in connection with oil, gas and other natural resource development ventures where customer is active as operator or partner.

4. On the facts stated by the applicant, supported by the documents annexed, there can be no doubt that the software packages were supplied by the applicant from outside India i.e., the Netherlands, and the consideration was also received outside India in US dollars. The documents show that the importer/consignee of goods was ONGC. The applicant’s assertion that it does not have business presence in India at the relevant point of time cannot also be doubted especially in view of the fact that the items relating to installation and commissioning and training were deleted from the scope of work/contract at the time of final awarding of contract. This is borne out by the letter of award and the agreement. As the transfer of title to ONGC in respect of the software packages (“media”) took place outside the Indian territory and the applicant cannot be said to have any PE in India, the only crucial question that needs to be considered is whether the income arising from the offshore supply of the software would be taxable as ‘royalty’ income under s. 9(1)(vi) of the Act or under art. 12 of the DTAA between India and the Netherlands. This is the only question which according to the applicant needs to be resolved in the present case. If the fee received by applicant is in the nature of royalty, it is taxable in India both under the IT Act as well as the tax treaty.

4.1 The relevant sub-clause in Expln. 2 to s. 9(1)(vi) which defines ‘royalty’ reads as under : Explanation 2 : For the purpose of this clause ‘royalty’ means consideration (including any lump sum consideration but excluding any consideration ………. under the head ‘Capital gains)’ for— ……………… (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or” Article 12(4) of the DTAA (tax treaty) defines ‘royalty’ as under : “4 : The term ‘royalty’ as used in this article means payments of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.” The core question on which the submissions of the applicant and the Revenue centred is whether the consideration received by the applicant from ONGC under the agreement (SLTC) is for conferring on the customer any rights in respect of the copyright or a right to use the copyright attached to the software supplied and licensed by the applicant. Whereas the applicant contends that no rights in or over the copyright of the product has been granted to the customer, the contention of the Revenue is that such rights have been conveyed to the customer. In other words, it is the contention of the Revenue that what was granted under the license agreement was the right to use software together with copyright therein. On behalf of the applicant, the distinction between transfer of copyright in a product and the transfer of copyrighted product has been stressed. This very issue has been considered by this Authority in two recent rulings i.e., FactSet Research Systems Inc., In re (2009) 225 CTR (AAR) 49 : (2009) 25 DTR (AAR) 146 : (2009) 317

ITR 169 (AAR) and Dassault Systems K.K., In re (2010) 229 CTR (AAR) 105 : (2010) 34 DTR (AAR) 218 : (2010) 322 ITR 125 (AAR). The latter case is more directly in point and the various aspects concerning copyright were comprehensively dealt with. It would be appropriate to extract relevant passages in both the rulings.

In the case of FactSet (supra), this Authority took the view that it is permissible to take into account the definition of copyright in the Indian Copyright Act. It was observed in paras 18, thus : “18. The expression ‘copyright’ is not defined in the IT Act. It must be understood in accordance with the law governing copyright in India, viz., the Copyright Act, 1957. In State of Madras vs. Gannon Dunkerley & Co. AIR 1958 SC 560 : 9 STC 353, the Supreme Court held that the expression ‘sale of goods’ in entry 48 of List II (VII Schedule) to the Government of India Act is a nomen juris and shall be construed in its legal sense. The legal sense can only be what it has in the law relating to sale of goods and, therefore, the said expression shall bear the same meaning as it has in the Indian Sale of Goods Act. Looking at the treaty, we have art. 2(2) which clarifies how the undefined terms shall be understood. In substance, it says that an undefined term shall have the meaning which it has under the taxation law of the State concerned. When the term is not defined in the taxation law (IT Act), the definition in the law governing the subject-matter ought to be adopted, more so when there is no basic difference between the statutory definition and the ordinary legal concept. Sec. 16 of the Copyright Act lays down that no person shall be entitled to copyright or any similar right in any work otherwise than under and in accordance with the provisions of this Act or any other law in force.”

After referring to the above passage the Authority observed thus in Dassault Systems case (supra) : “There is no good reason to think that under the IT Act, the concept of copyright has to be understood differently from that evolved under the law of the land. The reference of the Revenue’s representative to the provisions in s. 115A(1A) and the Expln. 3 to cl. (vi) of sub-s. (1) of s. 9 is in a different context and cannot control the meaning to be given to ‘copyright’. From the said provision, it cannot be concluded that the supply of computer software necessarily carries with it the copyright owned by the producer of software.” It may be stated that the Revenue itself in its comments extensively referred to and explained the provisions in the Copyright Act, 1957.

7. In Dassault case (supra), this Authority adverted and discussed the contention of the applicant that what was transferred to the end-user was copyrighted software containing computer programme but not the copyright therein and accepted the contention of the applicant therein. We would like to refer the passages in the ruling in Dassault case (supra) in extenso : “14.1…….…The applicant grants to VAR a non-exclusive, non-transferable license to market and distribute the products for the internal use of any end-user within the territory. Such license shall also include a non-exclusive, non-transferable right to set, invoice and collect license fee due by the end-user pursuant to the EULA as long as VAR remains a party to such EULA (cl. 3.1.1). VAR acknowledges that except for demonstration purposes, it has no right to develop any product or derivative work from products and it has no right to engage in reverse engineering of any products for which demonstration license has been granted (cls. 3.4.1 and 3.4.2). VAR further acknowledges that the agreement does not grant VAR any right or license to the products or the proprietary rights therein or to the source code for the products (cl. 3.4.3). Clause 8.1 which bears the heading ‘ownership of products’ declares that the applicant and its licensor shall retain all rights, title and interest in products throughout the world including patent, copyright and trade secret rights. 15…….The licensee has no right to sub-license and moreover the licensed programmes can only be operated by licensee for internal use. It is specifically stated that license keys or license tokens do not themselves grant the legal right to use the licensed programme. Clause 2.2 lays down the ‘restrictions’. The licensee is not authorized to use the licensed programme to develop software applications for use by or distribution to any third party or to perform or offer any type of services relating to licensed programmes including consulting, training, outsourcing, customization or development for any third party…..Licensee may make the necessary number of copies of the licensed programme for installation and one copy for back-up per machine in support of licensee’s authorized use. 17………Can it be said that the one-time payment based on standard price minus discount paid by VAR to the applicant is in the nature of royalty ? It depends on the question whether any rights that the applicant granted to the licensee/end-user include the right of using the copyright. Alternatively, going by the language of IT Act, the question is whether any right in respect of copyright has been transferred. It is here the distinction between the use of copyrighted article and the use of copyright has been stressed. The copyright which is a species of intellectual property rights belongs to the owner or its assignee if any. The ownership thereof carries with it a bundle of rights which are by and large directed towards commercial exploitation of this intangible property right. Those rights attached to copyright are enumerated in s. 14 of the Copyright Act, 1957. If any of these rights are parted with in favour of another so that the other person can enjoy that right in the same manner in which the owner can, it can then be said that those specific rights concerning the use of copyright have been conferred on him. In the instant case, the end-user is not given the authority to do any of the acts contemplated in sub-cls. (i) to (vii) of cl. (a) of s. 14, not to speak of the exclusive right to do the said acts. In fact, the restrictions placed on the end-user and the VAR which have been referred to earlier coupled with a declaration that the intellectual property rights in the licensed programmes will remain exclusively with the applicant (or its licensors) and the non-exclusive and non- transferable character of licence are all meant to ensure that none of the rights vesting in the applicant as copyright-holder can be claimed or enjoyed by the licensee and that they will remain intact and are preserved. The entire tenor of the agreement and the various stipulations contained therein make it clear that no rights in derogation of the applicant’s exclusive rights in relation to the copyright have been conferred on the licensee i.e., the end-user or VAR. The core of the transaction is to authorize the end-user to have access to and make use of the licensed software products over which the applicant has exclusive copyright, without giving any scope for dealing with them any further. 17.1……..Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in a copyright. Where the purpose of the licence or the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property rights inherent in and attached to the software product in favour of the licencee/ customer is what is contemplated by the definition clause in the Act as well as the treaty. As observed earlier, those rights are incorporated in s. 14. 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, in our view, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. However, where, for example, the owner of copyright over a literary work grants an exclusive license to make out copies and distribute them within a specified territory, the grantee will practically step into the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. As the right attached to copyright is conveyed to such licensee, he has the authority to commercially deal with it. In case of infringement of copyright, he can maintain a suit to prevent it. Different considerations will arise if the grant is non-exclusive that to confined to the user purely for in-house or internal purpose. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights-either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. That is what, in our view, follows from the language employed in the definition of ‘royalty’ read with the provisions of Copyright Act, viz., s. 14 and other complementary provisions.

17.2 We may refer to one more aspect here. In the definition of royalty under the Act, the phrase ‘including the granting of a licence’ is found. That does not mean that even a non-exclusive licence permitting user for in-house purpose would be covered by that expression. Any and every licence is not what is contemplated. It should take colour from the preceding expression ‘transfer of rights in respect of copyright’. Apparently, grant of ‘licence’ has been referred to in the definition to dispel the possible controversy a licence-whatever be its nature, can be characterized as transfer.

18. It has been contended on behalf of the Revenue that the right to reproduce the work in any material from including the storing of it in any medium by electronic means [vide s. 14(a) (i) of the Copyright Act] must be deemed to have been conveyed to the end-user. It is pointed out that a CD without right of reproduction on the hard disc is of no value to the end-user and such a right should necessarily be transferred to make it workable. It appears to us that the contention is based on a misunderstanding of the scope of right in sub-cl. (i) of s. 14(a). As stated in Copinger’s Treatise on Copyright, ‘the exclusive right to prevent copying or reproduction of a work is the most fundamental and historically oldest right of a copyright owner’. We do not think that such a right has been passed on to the end-user by permitting him to download the computer programme and storing it in the computer for his own use. The copying/reproduction or storage is only incidental to the facility extended to the customer to make use of the copyrighted product for his internal business purpose. As admitted by the Revenue’s representative, that process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. Apart from such incidental facility, the customer has no right to deal with the product just as the owner would be in a position to do. Insofar as the licensed material reproduced or stored is confined to the four corners of its business establishment, that too on a non-exclusive basis, the right referred to in sub-cl. (i) of s.

14(a) would be wholly out of place. Otherwise, in respect of even off the shelf software available in the market, it can be very well said that the right of reproduction which is a facet of copyright vested with the owner is passed on to the customer. Such an inference leads to unintended and irrational results. We may in this context refer to s.

52 (aa) of Copyright Act (extracted supra) which makes it clear that ‘the making of copies or adaptation’ of a computer programme by the lawful possessor of a copy of such program, from such copy (i) in order to utilize the computer programme, for the purpose for which it was supplied or (ii) to make back-up copies purely as a temporary protection against loss, destruction, or damage in order to utilize the computer programme for the purpose of which it was supplied’ will not constitute infringement of copyright. Consequently, customization or adaptation, irrespective of the degree, will not constitute ‘infringement’ as long as it is to ensure the utilization of the computer programme for the purpose for which it was supplied. Once there is no infringement, it is not possible to hold that there is transfer or licensing of ‘copyright’ as defined in Copyright Act and as understood in common law. This is because, as pointed out earlier, copyright is a negative right in the sense that it is a right prohibiting someone else to do an act, without authorization of the same, by the owner.

18.1 It seems to us that reproduction and adaptation envisaged by s. 14(a)(xi) and (vi) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. Copyright being a negative right (in the sense explained in para 9 supra), it would only be appropriate and proper to test it in terms of infringement. What has been excluded under s. 52(aa) is not commercial exploitation, but only utilizing the copyrighted product for one’s own use. The exclusion should be given due meaning and effect; otherwise, s. 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one’s own use. Even without such licence, the buyer of product cannot be said to have infringed the owner’s copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer/licensee of product has acquired a copyright therein.”

8. The following observations in FactSet case (supra) are also apposite :

“25. Even examining from the standpoint of treaty, we do not think that ‘the use of or right to use any copyright of a literary or scientific work’ is involved in the subscriber getting access to the database for his own internal purpose. It is like offering a facility of viewing and taking copies for its own use without conferring any other rights available to a copyright holder. The expression ‘use’ (of copyright) is not used in a generic and general sense of having access to a copyrighted work. The emphasis is on the ‘use of copyright or the right to use it’. In other words, if any of the exclusive rights which the owner of copyright (the applicant) has in the database are made over to the customer/subscriber so that he could enjoy such rights either permanently or for a fixed duration of time and make a business out of it, then, it would fall within the ambit of the phrase ‘use or right to use the copyright’. What rights of exclusive nature attached to the ownership of copyright have been passed on to the subscriber at least partially ?

Is the licensee conferred with the right of reproduction and distribution of the reproduced work to its own clientele ?

Can it be publicly exhibited or its contents be communicated to the public ? Is the applicant given the right to adapt or alter the ‘work’ for the purpose of marketing it ?

The answer is obviously-no. The underlying copyright behind the database cannot be said to have been conveyed to the licensee who makes use of the copyrighted product.”

9. The crucial clauses in the agreement concerning Dassault Systems (supra) are substantially similar to the clauses in the agreement relevant to the present case. In Dassault case (supra), the product was to be hosted on a server located outside India and the end-user in India will electronically download the same by accessing the weblink directly on its computer system. In the applicant’s case, the title to the tangible media containing the software has been delivered to the customer in the country of origin. Though the facts vary to this extent, the principles laid down equally apply to the instant case. The clauses relating to the grant of non-exclusive, non- transferable licence to use software, the limitation as to user, viz. that it shall be limited to the processing of information and the process of copying, recording, transcribing software coupled with the restriction on modifying the software, creating derivative versions, reverse assembling, compiling and engineering or distributing it to other parties or making it available for any use, directly or indirectly, by another are almost the same as in Dassault case (supra). There is also a specific provision in both the agreements that intellectual property rights would always remain with the owner of the product or the licensor. Such restrictions placed on the user of software and the fact that the licensee/ customer had no right to interfere with source code and that the licensed product cannot be commercially exploited by the licensee/customer are inconsistent with the inference that the rights in respect of copyright or the right to use the copyright of the computer programme have been conveyed to the customer. Further, there is nothing in the agreement to suggest that the underlying technical knowledge in developing the software has been transferred. Notwithstanding the grant of authority to use the licence (on non-exclusive and non-transferable basis), the copyright imbedded in the software remains with the owner intact.

The Revenue has sought to place reliance on the proviso to s. 9(1)(vi) and sub-s. (1A) of s. 115A in order to contend that the Act contemplated charging of ‘royalty’ for authorization to use computer software as such and it is not necessary that the copyright therein should be specifically transferred. We are not impressed by this argument. The expression ‘computer software’ has been defined by Expln. 3 to s. 9(1)(vi) for the purpose of the second proviso to the said clause. The computer software is defined to mean any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. Under the second proviso the income by way of ‘royalty’ consisting of lump sum payment made by a resident for the transfer of all or any rights (including the grant of licence) in respect of the computer software by a non-resident manufacturer along with a computer based equipment under a scheme approved as per the 1986 policy on computer software export, software development and training, is excluded from the purview of ‘royalty’ clause. It does not, however, mean that wherever computer software is transferred on outright sale basis or is leased or licensed, it would become royalty income. Whether or not the income is in the nature of royalty has to be judged with reference to the exhaustive definition in Expln. 2. In this context, sub-cl. (v) of Expln. 2 which has been referred to by both sides becomes relevant. It is in the light of the language of that clause one has to see whether the income in question ought to be treated as ‘royalty’. The transfer of rights envisaged by sub-cl. (v) should be in respect of the ‘copyright’ among others. Mere transfer of computer software de hors any copyright associated with it does not fall within the ambit of the said cl. (v). That is what has been held in the two rulings referred to earlier. Then, coming to s. 115A, it prescribes the rate of tax applicable to a foreign company on the income by way of ‘royalty’ or ‘fees for technical services’. Sub-s. (1A) to the extent relevant reads as under : “Where the royalty is in consideration for the transfer of all or any rights (including the granting of a licence) in respect of copyright in any book to an Indian concern or in respect of any computer software to a person resident in India……….” This provision, prima facie, cannot be interpreted to mean that the transfer of any rights could only be in respect of the computer software without reference to copyright. It is reasonable to interpret the word ‘copyright’ to qualify not only the ‘book’ but also the ‘computer software’. If the transfer of computer software, per se was contemplated to fall within the definition of ‘royalty’, it should have been stated so in the definition clause contained in Expln. 2 to s. 9(1)(vi). Clause (v) as noticed earlier speaks of “transfer of all or any rights’ in respect of any copyright”. Thus, whether copyright has been transferred or not is the line of inquiry which should precede the application of cl. (v). It is, however, not necessary to consider the implications of s. 115A in detail, having regard to the clear provision in tax treaty. It is well-settled that an assessee can seek the benefit of tax treaty (DTAA) irrespective of the provisions in domestic law. The relevant clause in the DTAA between India and the Netherlands is reproduced below :

“4. The term ‘royalties’ as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience.” Conferment of the right of usage of copyright vested in the owner is what is contemplated by art.

12.4. The provision is similar to that in the OECD Model Convention which has been interpreted by the OECD Committee on fiscal affairs—an expert body. In para 13.1 it is stated thus : “Payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyrights) will represent a royalty where the consideration is for granting of rights to use the programme in a manner that would, without such licence constitute an infringement of copyright. Examples of such arrangements include licences to reproduce and distribute to the public software incorporating the copyrighted programme, or to modify and publicly display the product.” Though this interpretation is not conclusive, it can be taken into account as throwing light on the scope of the relevant article. In fact, what is stated in the OECD Commentary accords with the views expressed by this Authority in the earlier rulings referred to supra.

12. The learned Departmental Representative, in the course of last hearing, made an endeavour to bring the income within the scope of ‘fees for technical services’ seeking support from the ruling of this Authority in the case of Airports Authority of India, In re (AAR No. 819 of 2009) [reported at (2010) 230 CTR (AAR) 417 : (2010) 36 DTR (AAR) 323—Ed.]. Relying on the same decision, it was contended that cl. (ii) of Expln. 2 to s.

9(1)(vi) would come into play. The contention of the learned Departmental Representative on this aspect is summarized as follows : The software appliances supplied and licensed by the applicant are highly specialized in nature. Mere supply of media containing software does not serve any purpose. The domain knowledge and expertise has to be imparted to the customer. The integration of various sophisticated items of software supplied by the applicant need to be integrated together at the customer’s place for the purpose of making them functional. Hence, in the bid documents installation and commissioning and extensive training is contemplated. In fact, 80 per cent of cost was to be paid to the applicant on despatch of software and the remaining 20 per cent only after successful commissioning. The training charges are as high as 1,25,000 USD. In these circumstances, it can be reasonably said that the essential nature of the contract is providing technical services and imparting technical knowledge and expertise possessed by the applicant to the customer (ONGC) so as to enable the customer to operate the integrated system on its own in the future. The case of the applicant falls within the ratio of the ruling in Airports Authority of India, In re (2010) 230 CTR (AAR) 417 : (2010) 36 DTR (AAR) 323 : (2010) 323 ITR 211 (AAR).

13. The expression ‘fees for technical services’ has been defined in art. 12.5. of DTAA as follows : “5. For the purposes of this article, ‘fees for technical services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services— (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 4 of this article is received; or (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.”

We are unable to see how the contract in question for providing special purpose software to ONGC could be categorized as fees for technical services. Though at the time of tender and submission of bid it was contemplated that the scope of work should also extend to installation and commissioning and training of ONGC’s personnel, at the time of finalization of the contract, these two items were excluded from the applicant’s scope of work. In the letter of award for supply of Geoquest software licenses, it is specifically stated that the installation and commissioning of the software at ONGC premises in India will be carried out by Schlumberger Services-an affiliate entity of the applicant. Further, even the training and post-warranty annual maintenance contract was to be provided by the said company but not the applicant. The payment will be made to that company directly by ONGC. It is therefore clear that the applicant has not undertaken any technical services and made available to ONGC its technical knowledge and expertise. The fact that 20 per cent payment was to be made only after successful commissioning does not really alter the nature of the contract. We have to see the predominant nature of the contract between the parties. Once the software is supplied by the applicant and it is found to be operational on commissioning, the applicant’s primary responsibility is discharged. It is not a case where, as in the case of Airports Authority of India (supra), the software required site-specific modifications/adaptations. In Airports Authority case (supra), it was observed that the software was part of the package of setting up upgraded automation system and it had no value unless the supplier shares the technical knowledge, information and experience with the user and suitably equipped the personnel of Airports Authority of India to handle the system by themselves. In this context, it was observed by this Authority : “We are of the view that the said payments fall within the purview of art. 12 and therefore we reaffirm the conclusion reached by this Authority, though for different reasons. First, it must be noted that the contract is for automation upgrade of the existing automation system of the 3rd runway, Delhi. ‘Automation system’ means the software system delivered to the AAI under the contract. Raytheon grants the AAI ‘licence on non-transferrable, non-exclusive, royalty-free basis to use the executable software code and technical documentation for use in the automation system in Delhi’ (vide cl. 10.4). The responsibilities of Raytheon are specified in cl. 3.1 as follows……………’ Then, Raytheon is bound to provide the necessary information to operate, maintain and repair the system delivered under the contract (cl. 10.1). The installation is done after suitably modifying and adapting the software on physical verification and the study of various factors on ground. A site acceptance test is finally done and the procedure therefor is contained in a document. After trial testing, a systems manual is provided. Software as such has no value to AAI unless Raytheon in close collaboration with AAI make the system functional at all times without the presence of Raytheon’s technicians. The software of the automation system is the mechanism through which the information and inputs concerning various technical aspects based on the expertise and experience of Raytheon are made available to the AAI personnel which in turn equips them with the necessary technical skills and operational efficiency. By means of various technical services provided by Raytheon’s personnel and the sharing of their technical knowledge and experiences with AAI personnel at the time of integration with the existing system and the site acceptance test and the technical manuals and data furnished for putting the system to effective use, Raytheon is making available to AAI its technical knowledge and skills. In ultimate analysis, the recipient of service is enabled to apply the technology. Viewed from another angle, the transfer of a technical plan is also involved in devising and activating the upgraded automation system. In this context we may refer to example 5 of the MoU concerning fees for included services appended to US-India Tax Treaty.”

14. It may be noted that in AAI case (supra), customization of software was involved and moreover the software had to be modified and adapted as per the requirements at the site. None of these features are present in the instant case. There is also no sharing of informations and experience which might attract the last limb of the royalty definition in art. 12.4. Further, it cannot be said that the applicant had transferred any technical plan to ONGC. In fact, at the initial stages of the arguments, the sole emphasis was on the question whether there was transfer of any rights in respect of copyright belonging to the owner/licensor. However, after the AAI ruling, the Revenue’s emphasis shifted from royalty to fees for technical services. The facts in AAI case (supra) i.e., the scope of work and incidents of contract and the present case materially differ. We have, therefore, no hesitation in rejecting the contention of the Revenue on this aspect.

15. In the light of the foregoing discussion, we answer question No. 2 in the negative by holding that the amount payable under SLTC contract to the applicant does not amount to ‘royalty’ within the meaning of art. 12.4 of DTAA (tax treaty) between India and the Netherlands, nor can it be treated as ‘fees for technical services’, as contended by the Revenue.

[Citation : 327 ITR 1]

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