Consideration for use of software is not assessable as royalty under Article 12 of DTAA and s. 9(1)(vi)
(i) In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty.
(ii) The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.
(iii) There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable 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 Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. 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 in his favour.
DRP's stand that determination of ALP by the TPO is of no relevance in deciding the issue of suppressed sale by the assessee is not correct. Fact that products are sold below MRP does not mean the sales are suppressed
(i) The DRP held that the determination of ALP is of no relevance in deciding the issue of suppressed sale by the assessee and went on to estimate the value of suppressed sale on account of difference between the value of MRP declared to the custom authorities and MRP altered on the products sold to the Tianjin India. The legal fiction created by the Central Excise Act and the Customs Act provides a measure for levy of excise/custom duty which cannot be followed or imported to the Income Tax Act. In view of decision of Hon'ble Apex Court in the case of KTMS Mohd. 197 ITR 196 (SC) and Coca Cola Export Corporation 231 ITR 200 (SC) the meaning of MRP in Central Excise & Customs Act have been legislated with a different object to evaluate and calculate excise and custom duty which cannot be blindly imported for provisions of Income Tax Act. In ITC Ltd. vs CCE (2004) 7 SCC 591 it has been held that a legal fiction created for prescribing the measure for the purposes of levy of custom duty on the manufacturer and the deemed value of sales taking MRP as a benchmark cannot substitute the real value of the sales for the purpose of computing the taxable income under the provisions of the Act. The MRP may be the maximum price at which the retailer or a shop keeper ultimately sell the product to the consumers but the DR has not disputed the point that the assessee's branch office in India and assessee's 100% subsidiary company i.e. Tianjin India is not retailer or shop keeper who sell the product to the ultimate customer but they are second and third stage entity in the chain of multi level marketing of the Tianjin Group wherein the assessee through it branch office makes sales to its 100% owned subsidiary i.e. Tianjin India who further sells the product to the distributors/ franchisees/ shopkeepers and the price of this second and third level sales is always negotiable which cannot be equated with the MRP by any stretch of imagination.
(ii) In the case of Tianjin China i.e. headquarter or parent company, the TPO has held that no adverse inference is drawn in respect of international transaction undertaken by the assessee during the assessment year under consideration. The AO does not have any way out but to accept the value of the international transaction between the assessee and its Associated Enterprise in conformity with the value determined by the TPO for the post amendment section 92CA(iv) w.e.f. 1.6.2007. The TPO has held that the transfer pricing documentation which contains functional and economical analysis of the comparables of the assessee shows that no adverse inference may be drawn in respect of international transaction undertaken by the assessee with its branch office in India and from branch office to 100% owned subsidiary company Tianjin India. The TPO through order passed u/s 154 of the Act rectifying the DRP assessment order has held that the assessee paid Rs.31,10,33,139/- for the purchases made from its AE as against Rs. 35,29,83,970/- which is the ALP worked out in accordance with Rule 10B(1)(b) of the Act and the price paid by the assessee for purchases being lower than the ALP worked out therein, no adjustment on this account is being made. Thus, the AO/DRP is duty bound to pass an order in this regard in conformity with the value determined by the AO and the provisions of the Act do not allow this authority to take a different stand or view against the order of the TPO. The DRP has held that the determination of ALP by the TPO is of no relevance in deciding the issue of suppressed sale by the assessee. We also note that the sales shown by the assessee to Tianjin India has been accepted by the AO in the case of purchaser i.e. Tianjin India, hence, the sales made by the assessee cannot be disturbed by baseless estimation in the name of suppressed sales as wrongly alleged by the Revenue.
As per proviso to s. 153C, the date of receiving books of account or documents shall be considered the date of search. Therefore, under proviso to s. 153C and s. 153A(1)(b), in the case of person in whose case action is required u/s 153C, the AO is empowered to take action u/s 153C for the year in which the seized document is received by him and the preceding six years
As per Section 153A(1)(b), the Assessing Officer is empowered to assess or reassess the total income of the six assessment years immediately preceding the assessment year relevant to the assessment year in which search is conducted. Thus, in other words, he has to assess the search year and six preceding years. As per proviso to Section 153C, for the purpose of Section 153C, the date of receiving the books of account or documents shall be considered the date of search. Therefore, with the combined reading of proviso to Section 153C and Section 153A(1)(b), it is clear that in the case of the person in whose case action is required under Section 153C, the Assessing Officer is empowered to take action under Section 153C for the year in which the seized document is received by him and the preceding six years. In the case under appeal before us, as mentioned by the Assessing Officer in paragraph 2 of his order, the seized material was received on 12th March, 2009 from ACIT, Central Circle-17. Thus, the year in which seized material was seized is previous year 2008-09 relevant to AY 2009-10. The preceding six years would be AY 2008-09, 2007-08, 2006-07, 2005-06, 2004-05 and 2003-04. Therefore, after considering the facts of the assessee's case and combined reading of Section 153C as well as Section 153A, in our opinion, the issue of notice under Section 153C for AY 2001-02 & 2002- 03 is barred by limitation. Accordingly, we quash the same and consequentially, the assessment order passed in pursuance to the notice issued under Section 153C is also quashed.
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