Commissioner Of Income Tax-2 Appellantthrough: Mr. Rahul Chaudhary, Senior Standingcounsel v. Halliburton Export Inc

$~*IN THE HIGH COURT OF DELHI AT NEW DELHI3+ITA 363/2016 COMMISSIONER OF INCOME TAX-2 AppellantThrough: Mr. Rahul Chaudhary, Senior standingcounsel. versus HALLIBURTON EXPORT INC Respondent Through: Mr. Piyush Kaushik, Advocate. 5^ And ITA 365/2016 COMMISSIONER OF INCOME TAX-2 AppellantThrough: Mr. Rahul Chaudhary, Senior standingcounsel. versus HALLIBURTON EXPORT INC Respondent Through: Mr. Piyush Kaushik, Advocate. CORAM:JUSTICE S. MURALIDHARJUSTICE NAJMI WAZmi ORDER%11.07.2016 CM No. 23807/2016 (Exemption) in ITA 365/2016 1. Exemption allowed subject to all just exemptions. Signature Not Verified ITA Nos. 363 & 365 of 2016 ITA 363/2016 and ITA .^(iS/inK; 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( IT AT ) in ITA Nos. 6273/Del/2012 and 690/Del/2014 for the AssessmentYears ('AYs') 2009-10 and 2010-11. 3. The main question urged by the Revenue for consideration before theCourt is whether the consideration received by the Respondent Assessee onsale of pre-packaged software was 'royalty or 'fee for technical services'and was, therefore, not taxable as business income? 4. It is not in dispute that Article 12 (3) of the Double Taxation AvoidanceAgreement ('DTAA') between India and the United States of America(USA) is relevant for deciding the above issue. In the synopsis forming partof the memoranda of appeals, it is mentioned that the above question alsoforms the subject matter of the ITA No. 477 of 2014. That ITA pertained toAY 2008-09. The said ITA No. 477 of 2014 was dismissed by this Court byan order dated U' September 2014 which reads as under: "The issue raised in the present appeal is whether theconsideration received on sale of pre-packaged software is'royalty' or 'fee for technical services' and thus was not taxableas business income? In the present case. Double Taxation Avoidance Agreementbetween India and the United States of America is applicableand to construe 'royalty' conditions stipulated in the DTAAhave to be satisfied. The question raised, it is accepted, iscovered by the decision of this Court in ITA No. 1034 of 2009,DIT V. Infrasoft Limited decided on 22"^^ November 2013. In view of the aforesaid decision, the present appeal isdismissed. We note that the Revenue has not disputed that theissue IS covered by the aforesaid decision, but has stated that anappeal has been filed before the Supreme Court." 5. The short question considered by the Court in Director of Income Tax v. Infrasoft Limited (2014) 220 Taxman 273 (Dei) was whether the term'royalty' covered by Article 12 (3) of the DTAA would apply in the contextof sale of pre-packaged copyrighted software. The Court also examined theeffect of the subsequent amendment to Section 9(1) (vi) of the Income TaxAct, 1961 (Act). The Court came to the following conclusions in paras 87to 90 of the said order which read as under: 87. In order to qualify as royalty payment, it is necessary to establish In view of the aforesaid decision, the present appeal isdismissed. We note that the Revenue has not disputed that theissue IS covered by the aforesaid decision, but has stated that anappeal has been filed before the Supreme Court." 5. The short question considered by the Court in Director of Income Tax v. Infrasoft Limited (2014) 220 Taxman 273 (Dei) was whether the term'royalty' covered by Article 12 (3) of the DTAA would apply in the contextof sale of pre-packaged copyrighted software. The Court also examined theeffect of the subsequent amendment to Section 9(1) (vi) of the Income TaxAct, 1961 (Act). The Court came to the following conclusions in paras 87to 90 of the said order which read as under: 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or the of any rights (including granting anyicence) m respect of copyright of a literary, artistic or scientific workIn order to treat the consideration paid by the Licensee as royalty it isto be established that the licensee, by making such payment, obtainsall or of the of such work. Distinction hasany copyright rights literary to be made between the of a and aacquisition "copyright right" copynghted article". Copyright is distinct from the material object,copyrighted. Copyright is an intangible incorporeal right in the natureof a privilege, quite independent of any material substance, such as amanuscript. Just because one has the copyrighted article, it does notfollow that one has also the copyright in it. It does not amount tortansfer of all or licence in of any right including respect cppyright.Copyright or even right to use copyright is distinguishable from saleconsideration paid for "copyrighted" article. This sale consideration isfor purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. Therights transferred are specific o the nature of computerprograms. Copying the program onto the computer's hard driveor random access memory or making an archival copy is anessential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more thanenable the effective operation of the program by the user,should be disregarded in analyzing the character of thetransaction . for tax purposes. Payments in these types oftransactions would be dealt with as business income inaccordance with Article 7. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. Therights transferred are specific o the nature of computerprograms. Copying the program onto the computer's hard driveor random access memory or making an archival copy is anessential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more thanenable the effective operation of the program by the user,should be disregarded in analyzing the character of thetransaction . for tax purposes. Payments in these types oftransactions would be dealt with as business income inaccordance with Article 7. 89. There is a clear distinction between royalty paid on transferof copyright rights and consideration for transfer of copyrightedarticles. Right to use a copyrighted article or product with theowner retaining his copyright, is not the same thing astransferring or assigning rights in relation to the copyright. Theenjoyment of some or all the rights which the copyright ownerhas, is necessary to invoke the royalty definition. Viewed fromthis angle, a non-exclusive and non-transferable licenceenabling the use of a copyrighted product cannot be construedas an authority to enjoy any or all of the enumerated rightsingrained in Article 12 of DTAA. Where the purpose of thelicence or the transaction is only to restrict use of thecopyrighted product for internal business purpose, it would notbe legally correct to state that the copyright itself or right to usecopyright has been transferred to any extent. The parting ofintellectual property rights inherent in and attached to thesoftware product in favour of the licensee/customer is what iscontemplated by the Treaty. Merely authorizing or enabling acustomer to have the benefit of data or instructions containedtherein without any further right to deal with themindependently does not, amount to transfer of rights in relationto copyright or conferment of the right of using the copyright.The transfer of rights in or over copyright or the conferment ofthe right of use of copyright implies that the transferee/licenseeshould acquire rights either in entirety or partially co-extensivewith the owner/ transferor who divests himself of the rights hepossesses pro tanto. 90. The license granted to the licensee permitting him todownload the computer programme and storing it in thecomputer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted productfor his internal business purpose. The said process is necessaryto make the programme functional and to have access to it andis qualitatively different from the right contemplated by the saidparagraph because it is only integral to the use of copyrightedproduct. Apart from such incidental facility, the licensee has noright to deal with the product just as the owner would be in aposition to do." 6. This Court then concluded in para 94 that "the right to use a copyright in a programme is totally different fromthe right to use a programme embedded in a cassette or a CD whichmay be a software and the payment made for the same cannot be saidto be received as consideration for the use of or right to use of anycopyright to bring it within the definition of royalty as given in theDTAA. What the licensee has acquired is only a copy of the copyrightarticle whereas the copyright remains with the owner and theLicensees have acquired a computer programme for being used intheir business and no right is granted to them to utilize the copyrightof a computer programme and thus the payment for the same is not inthe nature of royalty." 7. Thereafter in para 95 the Court concluded as under: "95. We have not examined the effect of the subsequentamendment to Section 9 (1) (vi) of the Act and also whether theamount received for use of software would be royalty in termsthereof for the reason that the Assessee is covered by theDTAA, the provisions of which are more beneficial." 7. Thereafter in para 95 the Court concluded as under: "95. We have not examined the effect of the subsequentamendment to Section 9 (1) (vi) of the Act and also whether theamount received for use of software would be royalty in termsthereof for the reason that the Assessee is covered by theDTAA, the provisions of which 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 Directorof Income Tax v. Infrasoft Limited {supra) took note of thesubsequent amendment to Section 9 (1) (vi) of the Act as regards theterm 'royalty', it actually did not discuss the effect of the saidamendment. 9. Section 90 (3) of the Act makes it clear in the context of anagreement ('treaty') for avoidance of double taxation, that it is onlywhen the provisions of the Act are more beneficial to the Assessee theAct will prevail over the treaty. Conversely, where the provision ofthe treaty is more beneficial to the Assessee, the treaty would prevailover the Act. This legal position has been reiterated in Director ofIncome Tax v. Infrasoft Limited {supra) which was followed indismissing the Revenue's appeal in the Assessee's own case for AY2008-09 i.e. ITA No. 477 of 2014. 10. The Court is not persuaded to re-examine the above issue whichstands answered against the Revenue by the aforementioned order. 11. No substantial question of law arises. The appeals are dismissedwith no orders as to costs. S. MURALIDHAR, J JULY 11,2016 Rm NAJMIWAZIRI, J