Nariman Point, Mumbai 400 021 v. M/S. Colgate Palmolive Marketing Sdn Bhd

Digitallysigned bySMITASMITARAJNIKANTRAJNIKANTJOSHIJOSHIDate:2023.07.0117:16:51+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 171 OF 2018 Commissioner of Income Tax (IT)-217[th] Floor, AIR India Building,Nariman Point, Mumbai 400 021V/sM/s. Colgate Palmolive Marketing SDN BHDC/o S.R. Batliboi & Co., 14[th] Floor, The Ruby, Senapati Bapat Marg,Dadar (W), Mumbai 400 028. ]]]..Appellant]]]]..Respondent Mr. Suresh Kumar, for Appellant.Mr. Percy Pardiwalla, Sr. Advocate with Mr. Madhur Agrawal, Mr. JayZaveri, Ms.Rhea Prakash and Ms. Tavleen Saini i/b. Crawford Bayley &Co., for Respondent. CORAM: K. R. SHRIRAM & FIRDOSH P. POONIWALLA,JJ.DATED : 21[st] JUNE 2023 JUDGEMENT (Per FIRDOSH P. POONIWALLA J.) :- The present Appeal is filed by the Revenue challenging theOrder dated 25[th] January 2017 passed by the Income Tax AppellateTribunal (ITAT). Respondent is the Assessee under the provisions of theIncome Tax Act, 1961 (the Act) and the relevant Assessment Year is 1999-2000. 2The Assessee, i.e. Colgate Palmolive Marketing SDN BHD, isan entity incorporated in Malaysia and is engaged in the business ofmarketing, distribution and sale of household products, fabrics andpersonal care. Colgate Palmolive (India) Limited (CPI) entered into an Agreement dated 14[th] May, 1998 with the Assessee for use of theAssessee’s SAP system (the said Agreement). As per the said Agreement,the Assessee was to charge CPI for the use of the SAP system. CPI wasrequired to make payments towards consideration for the use of thesystem, consideration towards rendering services comprising of costs ofmaintenance, up-gradation of the system to keep it functional and fees fortraining personnel for using the SAP system. For the Financial Year 1998-99 (A. Y. 1999-2000), as per the said Agreement, CPI paid to the Assesseea sum of USD 11,80,500/- for the use of the SAP system and a furthersum of USD 3,85,000/- towards rendering services as mentioned above. 3The Assessee filed its Return of Income for Assessment Year1999-2000, on 29[th] December, 1999, declaring ‘Nil’ income. During thecourse of assessment proceedings, the Assessing Officer (AO), on verifyingthe Return of Income and financial statements, found that the Assesseehad received an amount of USD 3,85,000/- on account of renderingservices to CPI and further a sum of USD 11,80,500/- on account of use ofthe SAP system. The AO observed that the payments received on accountof the use of the SAP system were covered under the definition of‘Royalty’ as defined under Explanation 2 (iii) to Section 9 (1) (vi), andaccordingly taxed the same. Furthermore, the AO also observed that thepayments received on account of rendering services were in the nature of‘fees for technical services’. Accordingly, by an Order dated 22[nd] March2002, passed under Section 143(3) of the Act, the AO completed theassessment by taxing the said payments. 4Aggrieved by the said Order dated 22[nd] March 2002 of theAO, the Assessee filed an Appeal before the Commissioner of Income Tax (Appeals), Mumbai [CIT(A)]. The CIT(A), dismissed the Assessee’s Appealby an Order dated 16[th] December 2003. 5Aggrieved by the said Order dated 16[th] December 2003, theAssessee filed an Appeal before the Income Tax Appellate Tribunal (ITAT),being ITA No. 2129 of 2004. The grounds raised by the Assessee in thesaid Appeal, read as under:- “Ground 1 The Learned Commissioner of Income Tax(Appeals), XXXI, Mumbai [CIT(A)] erred in holdingthat the consideration received by the Appellant forthe use of the SAP system is subject to tax as royaltyunder the Income Tax Act,1961 (‘Act’), at the rate of20 percent on a gross basis. Ground 2 The Learned CIT(A) erred in holding that theconsideration received by the Appellant in respectof the services is subject to tax as ‘fees for technicalservices’ under the Act, at the rate of 20 percent ona gross basis. Ground 3 5Aggrieved by the said Order dated 16[th] December 2003, theAssessee filed an Appeal before the Income Tax Appellate Tribunal (ITAT),being ITA No. 2129 of 2004. The grounds raised by the Assessee in thesaid Appeal, read as under:- “Ground 1 The Learned Commissioner of Income Tax(Appeals), XXXI, Mumbai [CIT(A)] erred in holdingthat the consideration received by the Appellant forthe use of the SAP system is subject to tax as royaltyunder the Income Tax Act,1961 (‘Act’), at the rate of20 percent on a gross basis. Ground 2 The Learned CIT(A) erred in holding that theconsideration received by the Appellant in respectof the services is subject to tax as ‘fees for technicalservices’ under the Act, at the rate of 20 percent ona gross basis. Ground 3 The Learned CIT(A) erred in denying theoption granted to the Appellant under Section 90 ofthe Act, to be taxed under provisions of the Act orthe Double Tax Avoidance Agreement, as the casemay be, to the extent whichever is more beneficialto the Appellant. Ground 4 The Learned CIT(A) has erred in holding that thepayments received by the Appellant for the use ofthe system and for the rendering of services are notin the nature of reimbursement of expenses.” 6By an Order dated 25[th] January 2017, the ITAT allowed theAppeal of the Assessee. The said Order dated 25[th] January 2017 of the ITAT has been impugned by the Department in the present Appeal. Thefollowing questions of law were proposed in the Memo of Appeal:- “(a) Whether on the facts and in the circumstances of thecase and in law, the Hon’ble ITAT erred in deleting theorder of Ld. CIT(A) and holding that payment made tothe assessee by the Indian Company CPI for the use ofsoftware owned by the assessee is not “Royalty” bymaking an illusory distinction between copyright andcopyrighted articles as when a copyright article ispermitted or licensed to be used for a fee it involves notonly the physical or electronic manifestation of aprogramme but also the use of or the right to use thecopyright and moreover the Copyright Act or the IT Act orthe DTAA does not use the expression ‘copyright article’which could have been used if the intention was asclaimed, a view upheld by AAR, New Delhi in the cases ofCitrix & in EY Global Services Ltd., UK? (b)Whether on the facts and in the circumstances ofthe case and in law, the Hon’ble ITAT erred in notupholding the order of Ld. CIT(A) and stating that thepayment received from CPI is not equipment royalty,when the AO as well as the Ld CIT(A) has used the word“System” as entailing the process specifically customizedfor Colgate and its affiliates-as is in the agreementbetween CPM & CPI – and not mere physical equipmentas argued by Hon’ble ITAT? (c)Whether on the facts and in the circumstances ofthe case and in law, the Hon’ble ITAT erred in grantingIndia-Malaysia treaty benefits to Assessee when in its ownorder and assessee’s submission it is a clear fact that thecustomized SAP software is in possession of it US parentM/s. Colgate Palmolive, Piscataway, New Jersey and thusthe Assessee not being the beneficial owner is clearly notentitled to claim treaty benefits?” 7 7However, during the course of the hearing before us, Mr.Suresh Kumar, the learned Counsel for the Revenue, stated that, in thepresent Appeal, the Department was only proposing the followingquestion of law:- “ Whether the ITAT erred in holding thatconsideration received by the Assessee from CPI forthe use of the SAP system was not subject to tax as‘Royalty’ under the provisions of the Act?”. 8In the impugned Order dated 25[th] January 2017, the ITAT hasgiven various reasons for coming to the conclusion that the payment ofUSD 11,80,500/- made by CPI to the Assessee was not royalty under theprovisions of the Act and hence was not liable to be taxed. On Clause (iv a) of Explanation 2 to Section 9 (1)(vi) 7 7However, during the course of the hearing before us, Mr.Suresh Kumar, the learned Counsel for the Revenue, stated that, in thepresent Appeal, the Department was only proposing the followingquestion of law:- “ Whether the ITAT erred in holding thatconsideration received by the Assessee from CPI forthe use of the SAP system was not subject to tax as‘Royalty’ under the provisions of the Act?”. 8In the impugned Order dated 25[th] January 2017, the ITAT hasgiven various reasons for coming to the conclusion that the payment ofUSD 11,80,500/- made by CPI to the Assessee was not royalty under theprovisions of the Act and hence was not liable to be taxed. On Clause (iv a) of Explanation 2 to Section 9 (1)(vi) 9The first reason given by the ITAT is that the said paymentwould not amount to equipment royalty and therefore cannot be taxed asroyalty under the Act. 10Mr. Suresh Kumar challenged the said finding of the ITAT onvarious grounds. He submitted that, though, in view of the provisions ofSection 90(2) of the Act, the Assessee had an option to opt for taxationeither under the Act, or the DTAA, whichever is beneficial to him, howeverit was imperative to look into the meaning of royalty given in the Act andin the DTAA. Relying upon the provisions of Sections 5 and 9 of the Act,and the amendments made in Section 9 from time to time, he submittedthat, as far as taxation of income arising out of royalty is concerned, thesource rule would apply. In other words, the country where the actualeconomic nexus of the income lies has the right to tax income irrespectiveof the place of residence of the entity deriving the income. He furthersubmitted the definition of royalty provided in the explanations to Section9(1)(vi) is wide enough to cover industrial royalty as well as copyrightroyalty. He submitted that the DTAAs entered into by the Government 2-itxa-171-2018.doc with foreign countries, which are worded in similar manner asExplanation 2 to Section 9(1)(vi), encompass both industrial royalty andcopyright royalty. He further submitted that Finance Act 2000 substitutedthe old Explanation 3 with a new one and Finance Act 2001 insertedClause (iv a) to Explanation 2 to Section 9(1)(vi). He submitted thatthese amendments have widened the meaning of royalty. He submittedthat Explanations 4, 5 and 6 to Section 9(1)(vi) were brought into thestatute to clarify the meaning of royalty. He further submitted that thedefinition of royalty under the DTAA is more or less in pari materia withthe definition provided in the Act. For these reasons, he submitted thatthe payment made by CPI to the Assessee would amount to equipmentroyalty and therefore was liable to be taxed under the Act. 11In response, Mr. Pardiwalla submitted that the definition ofroyalty in Explanation 2 to Section 9(1)(vi) of the Act, as applicableduring the Assessment Year 1999-2000, did not contain the equipmentroyalty clause. He submitted that Clause (iv a) of Explanation 2 to Section9(1)(vi) was inserted by the Finance Act 2001 with effect from theAssessment Year 2002-2003. Therefore, there was no question of applyingthe equipment royalty clause under the Act in the present case. Hefurther submitted that, in the light of the provisions of Section 90 (2) ofthe Act, the Assessee was entitled to take the benefit of the morebeneficial provisions of the Act, instead of the DTAA, and therefore thesaid payment would never be considered as equipment royalty ascontended by the Department. Mr. Pardiwalla further submitted thattherefore the conclusions arrived at by the ITAT in this regard werecorrect. 12The ITAT held that it was undisputed that the meaning ofroyalty, as provided under Explanation 2 to Section 9(1)(vi) of the Act,initially did not include equipment royalty. Only by way of an amendmentmade to the said Explanation 2 by Finance Act 2001, Clause (iv a)providing for equipment royalty was inserted into the Act with effect from1[st] April 2002. Thus, till Assessment Year 2001-2002, Section 9(1)(vi) didnot provide for equipment royalty. The ITAT held that, since equipmentroyalty was not coming within the meaning of royalty as provided underSection 9(1)(vi) read with Explanation 2, the said payment could nothave been brought to tax under the Act for Assessment Year 1999-2000.The ITAT further referred to Section 90(2) of the Act which provides thatwhere the Central Government has entered into an agreement with theGovernment of any country outside India or specified territory outsideIndia, as the case may be, for granting relief of tax or avoidance of doubletaxation, then, in relation to the assessee to whom such an agreementapplies, the provisions of the Act would apply to the extent that they aremore beneficial to that assessee. Relying upon Section 90(2), the ITATheld that, since under the Act, for Assessment Year 1999-2000, equipmentroyalty was not provided for, the Assessee could take advantage of thisprovision which was more beneficial to it, instead of the terms of the IndoMalaysian Double Taxation Avoidance Agreement (DTAA), and thereforethe question, of the payment made by CPI to the Assessee beingequipment royalty, did not arise at all. 13In our view, the provisions of Section 90(2) of the Act arevery clear. By virtue of the provisions of Section 90(2), if between theprovisions of the DTAA and the Act, the provisions of the Act are morebeneficial to the Assessee, then the Assessee can opt for taxation under 2-itxa-171-2018.doc the Act, instead of the DTAA. In the present case, since, for theAssessment Year 1999-2000, the definition of royalty given in Explanation2 to Section 9(1)(vi) did not include equipment royalty as Clause (iv a)was inserted into the said Section by the Finance Act 2001 only witheffect from 1[st] April 2002, the Assessee was entitled to opt for taxationunder the provisions of the Act. It is undisputed that the provisions of theAct, as far as they are applicable to Assessment Year 1999-2000, did notprovide for equipment royalty. In these circumstances, in our view, theITAT was correct in holding that the said payment of USD 11,80,500/-made by CPI to the Assessee could not have been brought to tax under theAct as equipment royalty. Further, in our view, for the aforesaid reasons,the submissions made by Mr. Suresh Kumar in the context of equipmentroyalty are totally devoid of merit. On Clauses (i), (ii) and (iii) of Explanation 2 to Section 9(1)(vi) andExplanation 6 to Section 9(1)(vi) 14The next reason given by the ITAT is that the payment madeby CPI to the Assessee was not process royalty under Clause (iii) toExplanation 2 to Section 9(1)(vi). 15Mr. Suresh Kumar challenged the said finding of the ITAT bysubmitting that CPI had paid the amount to the Assessee for the transferof certain rights in respect of a process and for the use of a process. Hesubmitted that, for the definition of “process”, Explanation 6 is relevant.He submitted that the process as defined in Explanation 6 includedtransmission by satellite, cable or optic fibre or any other technology,which are applicable to the Assessee’s case. Mr. Suresh Kumar submittedthat, since payments made by CPI to the Assessee are in relation totransfer of certain rights in respect of a process or for use of any process,S.R.JOSHI8 of 21 the same are taxable under the provisions of Section 9 (1) (vi) of the Act. 15Mr. Suresh Kumar challenged the said finding of the ITAT bysubmitting that CPI had paid the amount to the Assessee for the transferof certain rights in respect of a process and for the use of a process. Hesubmitted that, for the definition of “process”, Explanation 6 is relevant.He submitted that the process as defined in Explanation 6 includedtransmission by satellite, cable or optic fibre or any other technology,which are applicable to the Assessee’s case. Mr. Suresh Kumar submittedthat, since payments made by CPI to the Assessee are in relation totransfer of certain rights in respect of a process or for use of any process,S.R.JOSHI8 of 21 the same are taxable under the provisions of Section 9 (1) (vi) of the Act. 16Mr. Pardiwalla supported the findings of the ITAT. Hesubmitted that Clause (iii) of Explanation 2 to Section 9(1)(vi) providesthat royalty means consideration for use of any patent, invention, model,design, secret formula or process or trademark or similar property. Hesubmitted that the payment made by CPI to the Assessee is for thepurpose of provision of standard facility which is accessed by the CPI forthe purpose of its business requirements and which is enabled by use ofthe SAP system. Therefore, such a payment cannot be regarded aspayment for use of a process or any other term used in Clause (iii) ofExplanation 2 to Section 9(1)(vi). Therefore, the payments made by CPIto the Assessee cannot be characterized as royalty under the Act. 17Further, Mr. Pardiwalla submitted that Explanation 6 toSection 9(1)(vi), inserted by the Finance Act 2012, with retrospectiveeffect from 1[st] June 1976, provides that the expression “process” includestransmission by satellite (including uplinking, amplification, conversionfor downlinking of any signal), cable, optic fibre or by any other similartechnology, whether or not such process is secret. He submitted that thisExplanation had no bearing on the Assessee’s case since payment made byCPI to the Assessee was not for transmission by satellite, but for access tothe SAP system. He submitted that merely because communicationchannels were used for input of data and generation of report would notmean that there is transmission by satellite. He submitted that what theexplanation seems to bring in is live transmission of programmes such aschannel feed and not SAP system, which is a standard facility provided bythe Assessee. 2-itxa-171-2018.doc 18The ITAT held that, if the language employed in Clause (iii) ofExplanation 2 to Section 9 (1) (vi) is properly analyzed, it can be seenthat there must a right to use of some of the categories of items asmentioned therein. The ITAT held that, in the present case, there wasnothing to suggest that CPI had obtained the right to use any of the thingsas mentioned in Clause (iii) for which it had made payment to theAssessee. On the contrary, it was evident that the payment made by CPIwas for the purpose of accessing the SAP system hosted by the Assesseeat its facilities for exchange of information/data. 19The ITAT has also considered what is the SAP system. Itrecorded that SAP is an Enterprise Resource Planning (ERP) systemdeveloped by SAP A. G., Germany. The expression SAP stands for“Systems Applications and Products” in data processing. It provides end toend solutions for financial, logistics, distributions, inventories etc. Allbusiness processes are executed in one SAP system and sharing commoninformation with everyone. 19The ITAT has also considered what is the SAP system. Itrecorded that SAP is an Enterprise Resource Planning (ERP) systemdeveloped by SAP A. G., Germany. The expression SAP stands for“Systems Applications and Products” in data processing. It provides end toend solutions for financial, logistics, distributions, inventories etc. Allbusiness processes are executed in one SAP system and sharing commoninformation with everyone. 20The ITAT further recorded that Colgate Palmolive, USA, on28[th] March 1994, entered into an End User Software License Agreementwith SAP America Inc., which was owning the rights over the software inUSA, and was competent to grant licenses of such software. Under theAgreement, SAP America Inc. granted license to Colgate Palmolive, USA.As per Clause 2 of the said License Agreement, the license to use thesoftware granted to Colgate Palmolive USA and its affiliates was nonexclusive, perpetual and non-transferable. It also provided that thelicense granted did not include the right for Colgate to distribute thesoftware to third parties or other legal entities other than Colgate 2-itxa-171-2018.doc affiliates. Colgate Palmolive, USA, in turn entered into an AgencyAgreement with the Assessee for providing services relating to informationtechnology (including costs of managing the data centre in TiscatawayUSA, communication line and development costs for new applications) toits subsidiary companies in Asia and South Pacific. The said AgencyAgreement provided that the agent would have no authority to act onbehalf of the principal for any purpose other than the purpose of invoicingand collecting from the subsidiaries for the services to be provided interms of the agreement. The Agency Agreement strictly prohibited theagent to represent, obligate, do business or enter into contract on behalfof the principal. 21The ITAT further recorded that, as far as the Assessee isconcerned, the role of the SAP system in its business is for materialprocurement, production, sales order processing and payroll processing.On the basis of the data fed into the system, stake holders at the divisionslevel can have visibility to the stock position across the countries in thedivision. With global manufacturing facilities supplying to many countries,online data available in SAP is very crucial in placing orders forprocurement. Financial records are consolidated using the reportingmodules and are made available within few days of the close of theperiod. The group companies in different countries can only processtransactions and have no access to modify any of the configurations. 22Based on the aforesaid, the ITAT came to the conclusion thatthe payment made by CPI is for the purpose of accessing the SAP systemhosted by the Assessee at its facilities for exchange of information / data. 23Further, in the context of process royalty, the ITAT furtherS.R.JOSHI11 of 21 held that Explanation 6 to Section 9(1)(vi) would have no bearing on theissue at hand as what is meant by the said Explanation is live transmissionof programmes such as channel feed and not SAP, which is used for inputof data and generation of outputs. Accordingly, the ITAT concluded, onfacts, that the payment received by the Assessee from CPI towards the useof the SAP system could not be treated as process royalty under theprovisions of the Act. 22Based on the aforesaid, the ITAT came to the conclusion thatthe payment made by CPI is for the purpose of accessing the SAP systemhosted by the Assessee at its facilities for exchange of information / data. 23Further, in the context of process royalty, the ITAT furtherS.R.JOSHI11 of 21 held that Explanation 6 to Section 9(1)(vi) would have no bearing on theissue at hand as what is meant by the said Explanation is live transmissionof programmes such as channel feed and not SAP, which is used for inputof data and generation of outputs. Accordingly, the ITAT concluded, onfacts, that the payment received by the Assessee from CPI towards the useof the SAP system could not be treated as process royalty under theprovisions of the Act. 24Clause (i) of Explanation 2 to Section 9(1)(vi) provides thatroyalty means consideration for the transfer of all or any rights (includingthe granting of a license) in respect of a patent, invention, model, design,secret formula or process or trademark or similar property. Therefore, forthe payment by CPI to the Assessee to amount to royalty it would benecessary that there should be transfer of any right in respect of a processor in any of the other things mentioned in clause (i). In the present case,as set out hereinabove, and as recorded by the ITAT, the Assessee onlyprovided access to the SAP system to CPI. There is no transfer of anyright in any process or in any of the other things mentioned in Clause (i)by the Assessee to CPI. Therefore, the present case does not fall withinthe said Clause (i). 25As far as Clause (ii) of Explanation 2 to Section (9)(1)(vi) isconcerned, the same would apply if there is imparting of any informationconcerning the working of, or the use of, a patent, invention, model,design, secret formula or process or trademark or similar property. Again,in the present case, the Assessee has not imparted any information to CPIconcerning the working of, or the use of, any process or any of the otherthings mentioned in Clause (ii). In these circumstances, Clause (ii) is alsonot applicable. 26Clause (iii) of Explanation 2 to Section 9(1)(vi) applies ifthere is any use of any patent, invention, model, design, secret formula orprocess or trademark or similar property. Again, in the present case, CPIis only accessing the SAP system of the Assessee and is not using anyprocess of the Assessee or any of the other things mentioned in Clause(iii). In these circumstances, Clause (iii) is also not applicable. 27Further, Explanation 6 to Section 9(1)(vi) clarifies that theexpression “process” includes and shall be deemed to have alwaysincluded transmission by satellite, cable, optic fibre or by any other similartechnology, whether or not such process is secret. As rightly submitted byMr. Pardiwalla, and as rightly held by the ITAT, Explanation 6 includeswithin the definition of process live transmission of programmes such aschannel feed and not access of the SAP system of the Assessee as done byCPI, which is a standard facility provided by the Assessee to CPI, and isused for input of data and generation of reports. In these circumstances,in our view, Explanation 6 also does not take the case of the Revenue anyfurther. 28For the aforesaid reasons, we are of the view that the ITAT iscorrect in holding, on facts, that the payment made by CPI to theAssessee for accessing the SAP system does not amount to process royaltyunder Section 9(1)(vi) of the Act. On Explanation 5 to Section 9(1)(vi) 29 29The ITAT has also held that the payment made by CPI to theAssessee would also not be covered by Explanation 5 to Section 9(1)(vi). 30Mr. Suresh Kumar has challenged the said finding of the ITATand has submitted that the payment made by CPI to the Assessee amountsto consideration in respect of any right, property or information. 28For the aforesaid reasons, we are of the view that the ITAT iscorrect in holding, on facts, that the payment made by CPI to theAssessee for accessing the SAP system does not amount to process royaltyunder Section 9(1)(vi) of the Act. On Explanation 5 to Section 9(1)(vi) 29 29The ITAT has also held that the payment made by CPI to theAssessee would also not be covered by Explanation 5 to Section 9(1)(vi). 30Mr. Suresh Kumar has challenged the said finding of the ITATand has submitted that the payment made by CPI to the Assessee amountsto consideration in respect of any right, property or information. 31Mr. Pardiwalla submitted that, as the SAP system was residentin Malaysia and USA, CPI merely accessed the system, and did not haveany control or possession thereof. Hence, payment made by CPI cannotbe regarded as payment for use of the system. He further submitted that,as the said amount was not taxable under the Act, there was no need toexamine the position under the DTAA. 32Explanation 5 reads as under : “Explanation 5 – For the removal of doubts, it is herebyclarified that the royalty includes and has always includedconsideration in respect of any right, property orinformation, whether or not – (a) the possession or control of such right, property or information is with the payer. (b) such right, property or information is used directly by the payer, (c) the location of such right, property or information is inIndia”. 33The ITAT has concluded, on the basis of the facts on record,that, since CPI had been granted a limited access to the SAP system byestablishing a communication line at its own cost for use of data availablein the SAP system, the payment made by CPI to the Assessee was notconsideration in respect of any right, property or information. 34In our view, the amount paid by CPI to the Assessee cannotbe considered as royalty under Explanation 5. In the present case, ascorrectly held by the ITAT, the facts on record show that CPI had been 2-itxa-171-2018.doc granted a limited access to the SAP system by establishing acommunication line at its own cost for use of data available in the SAPsystem. Hence, payment made by CPI cannot be regarded as payment foruse of the system and therefore cannot amount to royalty under the saidExplanation 5. On Clause (v) of Explanation 2 to section 9(1)(vi) and Explanation 4 toSection 9(1)(vi) 35The ITAT has also come to the conclusion that the saidpayment made by CPI to the Assessee cannot be considered as royaltyunder clause (v) to Explanation 2 to Section 9(1)(vi). 36Challenging the said finding of the ITAT, Mr. Suresh Kumar,relying upon Explanation 4, submitted that the software used can beembedded in the hardware, it can be shrink wrapped or it can be accessedelectronically. He submitted that, in the Assessee’s case, the software wasaccessed electronically and therefore the payment made towards user ofthe software is royalty. 37Further, Mr. Suresh Kumar submitted that neither the Act northe treaties have defined “copyright”. He submitted that Section 9nowhere mentions that the meaning of copyright would be as defined inthe Indian Copyright Act, 1957. It was further submitted that evenSection 14 of the Indian Copyright Act says that the meaning of copyrightgiven therein is only for the purpose of that Act. He submitted that,where the meaning of a particular word is to be taken from another Act,the legislature expressly indicates the same. He submitted that the claimof the Assessee has to be tested in the light of the definitions of ‘royalty’ inthe Act and DTAA without referring to the definition under the CopyrightAct, 1957. He further submitted that the test to find out whether payment 37Further, Mr. Suresh Kumar submitted that neither the Act northe treaties have defined “copyright”. He submitted that Section 9nowhere mentions that the meaning of copyright would be as defined inthe Indian Copyright Act, 1957. It was further submitted that evenSection 14 of the Indian Copyright Act says that the meaning of copyrightgiven therein is only for the purpose of that Act. He submitted that,where the meaning of a particular word is to be taken from another Act,the legislature expressly indicates the same. He submitted that the claimof the Assessee has to be tested in the light of the definitions of ‘royalty’ inthe Act and DTAA without referring to the definition under the CopyrightAct, 1957. He further submitted that the test to find out whether payment made for use of software is ‘royalty’ is whether the person making thepayment is able to commercially exploit the software just like the ownerof the software and earn profit by using the software. He submitted thatCPI, by making use of data and information obtained from SAP, had usedit in its business to make profit, hence, the payment was in the nature of‘royalty’ under clause (v) of Explanation 2. 38On the other hand, Mr. Pardiwalla referred to the judgment ofthe Hon’ble Supreme Court in the case of Engineering Analysis Centre ofExcellence Private Limited Vs. Commissioner of Income Tax and Anr.reported in (2022) 3 Supreme Court Cases 321. He submitted that thesaid judgment makes it very clear that for clause (v) to Explanation 2 toapply there has to be a transfer of all or any rights in relation to acopyright. That is a sine qua non for Explanation 2 to become applicable.The Hon’ble Supreme Court held that there must be transfer by way oflicense or otherwise of all or any of the rights mentioned in Section 14(b),read with Section 14 (a), of the Copyright Act, 1957. He submitted that,applying the ratio of the said judgment to the facts of the present case,there was no transfer of any right in respect of any copyright by theAssessee to CPI, and therefore clause (v) to Explanation 2 was notapplicable. 39Whilst considering the challenge on this ground, the ITAT firstnoted that this was a completely new facet introduced by the Revenuebefore it and therefore the ITAT could not adjudicate this issue as itrequired examination of fresh facts. However, since the Revenue hadraised the issue before the ITAT, for the sake of completeness, the ITATdealt with the same. 40The ITAT held that the Assessee had merely given access ofthe SAP system to CPI for a certain specific purpose. By allowing suchaccess, the Assessee had not transferred any right or license in respect ofany copyright nor was there any supply of or right to use of computersoftware. The ITAT recorded that nothing has been brought on record bythe Revenue to suggest that the Assessee had transferred any right orlicense in respect of any copyright or computer software. The ITAT furtherheld that there was no merit in the submission of the Revenue that thereis any transfer of right in respect of any copyright by the Assessee to CPI.In this regard, the ITAT noted that it was accepted by the CIT(A) that theAssessee had acquired computer hardware along with the customizedsoftware system for integrated computerized recording, summation andgeneration of reports of business transaction in supply chain. CPI waspermitted only to access the system by input of data and the reportgenerated was supplied to CPI. The ITAT held that thus the provisions ofclause (v) of Explanation 2 to Section 9(1)(vi) could not be applied tosuch a transaction. Further, the ITAT held that the right obtained by CPI isin respect of a copyrighted article and not a copyright because said rightsobtained by CPI is only for its own use and it cannot commercially exploitsuch rights. 41Clause (v) to Explanation 2 reads as under : 41Clause (v) to Explanation 2 reads as under : “(v) the transfer of all or any rights (including the grantingof a licence) in respect of any copyright, literary, artistic orscientific work including films or video tapes for use inconnection with television or tapes for use in connectionwith radio broadcasting.” 42 This clause has been interpreted by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra). Paragraphs 75, 83 and 84 of the said judgment read asunder:- “75. However, even where such transfer is “in respect of”copyright, the transfer of all or any rights in relation tocopyright is a sine qua non under Explanation 2 to Section9(1)(vi) of the Income Tax Act. In short, there must betransfer by way of licence or otherwise, of all or any of therights mentioned in Section 14(b) read with Section 14(a) ofthe Copyright Act. 83. However, when it comes to the expression “use of, or theright to use”, the same position would obtain underExplanation 2(v) of Section 9(1)(vi) of the Income Tax Act,inasmuch as, there must, under the licence granted or salemade, be a transfer of any of the rights contained in Sections14(a) or 14(b) of the Copyright Act, for Explanation 2(v) toapply. To this extent, there will be no difference in theposition between the definition of “royalties” in the DTAAsand the definition of “royalty” in explanation 2(v) of Section9(1)(vi) of the Income Tax Act. 84. Even if we were to consider the ambit of “royalty” onlyunder the Income Tax Act on the footing that none of theDTAAs apply to the facts of these cases, the definition of“royalty” that is contained in Explanation 2 to Section 9(1)(vi) of the Income Tax Act would make it clear that there hasto be a transfer of “all or any rights'' which includes the grantof a licence in respect of any copyright in a literary work. Theexpression “including the granting of a licence” in clause (v)of Explanation 2 to Section 9(1)(vi) of the Income Tax Act,would necessarily mean a licence in which transfer is made ofan interest in rights “in respect of” copyright, namely, thatthere is a parting with an interest in any of the rightsmentioned in Section 14(b) read with Section 14(a) of theCopyright Act. To this extent, there will be no differencebetween the position under the DTAA and Explanation 2 toSection 9(1)(vi) of the Income Tax Act.” 43 43From the said judgment of the Hon’ble Supreme Court it isvery clear that, for clause (v) to Explanation 2 to apply, it is necessarythat there must be a transfer of a right in respect of a copyright as 2-itxa-171-2018.doc mentioned in Section 14(b), read Section 14(a), of the Copyright Act,1957. If there is no transfer of any right in respect of any copyright of anyliterary or artistic or scientific work, then clause (v) to Explanation 2would not be applicable. In the present case, the facts on record clearlyshow that the Assessee has not transferred any right in respect of anycopyright of any literary or artistic or scientific work to CPI. As statedearlier, the Assessee has only given access of the SAP system to CPI. 44Further, even if Explanation 4 to Section 9(1)(vi) is takeninto consideration, the same provides that the transfer of all or any rightsin respect of any right, property or information includes, and has alwaysincluded, transfer of all or any right for use or right to use a computersoftware (including granting of a licence) irrespective of the mediumthrough which such right is transferred. For Explanation 4 to apply againthere has to be transfer of right to use a computer software. In thepresent case, the Assessee has not transferred to CPI the right to use anycomputer software. It has only allowed CPI to access the SAP system. Forthis reason, on facts, even Explanation 4 is not applicable. 45For the aforesaid reasons, we are of the view that, onfacts,the ITAT has correctly come to conclusion that clause (v) toExplanation 2 is not applicable in the present case. On Article 7 of the DTAA 45For the aforesaid reasons, we are of the view that, onfacts,the ITAT has correctly come to conclusion that clause (v) toExplanation 2 is not applicable in the present case. On Article 7 of the DTAA 46The last question that the ITAT considered is whether theconsideration received by the Assessee could at all be taxed in India. TheITAT concluded that, since the consideration received by the Assessee fromCPI towards the use of SAP system is not royalty in terms of DTAA, itwould a business profit under Article 7 of DTAA. S.R.JOSHI 47Mr. Suresh Kumar submitted that the payment received by theAssessee from CPI towards use of the SAP system was royalty and not abusiness profit and therefore taxable in India. We have alreadyconcluded, for the reasons given herein above, that the same is notroyalty. 48Mr. Pardiwalla supported the finding of the ITAT andsubmitted that, since the Assessee does not have a PermanentEstablishment in India, its business profit would not be taxable in India byvirtue of the provisions of Article 7 of the DTAA. 49The ITAT held that, under the terms of Article 7 of the DTAA,unless the enterprise of a Contracting State has a PermanentEstablishment in the other Contracting State, the business profit cannot bebrought to tax in the other Contracting State. Since the Assessee does nothave a Permanent Establishment in India, payment received by theAssessee from CPI towards use of the SAP system was not taxable in India. 50The ITAT is correct in its finding that, since the Assessee doesnot have a Permanent Establishment in India, income earned by it asbusiness profit would not be taxable in India by virtue of the provisions ofArticle 7 of the DTAA. Article 7 of the DTAA states that a tax resident ofMalaysia would be taxable in India if it carries on business through aPermanent Establishment in India. Further, the enterprises would betaxable only to the extent the profits are attributable to the PermanentEstablishment in India. Article 5 of the DTAA defines the PermanentEstablishment as inter alia a place of management, a branch, an office, afactory, a warehouse, aworkshop etc. Based on this definition, the ITAT has come to the conclusion that the Assessee does not have a PermanentEstablishment in India. As the Assessee does not have a PermanentEstablishment in India, by virtue of the provisions of Article 7 of theDTAA, the payment received by it from CPI, which would be businessprofit, is not taxable in India. 51In these circumstances, the entire subject matter of theAppeal is fact based, and, in our view, no substantial question of lawarises and the Order dated 25[th] January 2017 of the ITAT requires nointerference. 52For all the aforesaid reasons, the present Appeal is dismissed. (FIRDOSH P. POONIWALLA, J) (K.R.SHRIRAM, J)