Case law synopsis: Pune ITAT follows Delhi High Court
not Karnataka High Court on the issue of whether software payments are covered
under the definition of royalty (Allianz SE vs. Asstt. DIT)
Facts of the case:
The
appellant M/s Allianz AG is a company incorporated inGermany and is engaged in
the business of providing insurance and other financial servicesworldwide. The appellant
owns 26% of the shareholding in Bajaj Allianz Life Insurance Co Ltd and Bajaj
Alliance General Insurance Co. Ltd.in India (‘Indian affiliates’).
The appellant
entered into separate Opus Software License Agreements with its Indian affiliates
whereby the latter companies were granted the right to use the Opus software.
Opus
software is an insurance business software solution,based on Global Insurance
Operating Solution (‘GIOS software’) which has been developed by CGI Group
(Europe) Ltd (‘CGI’). GIOS software is used by the insurance companies worldwide
and its copyright is owned by CGI. The AllianzSE Group acquired the user rights
of GIOS software from CGI and extended the functionality of certain modules of
GOIS to suit the business requirements of its Group, referred to as ‘Opus
Software’.
The
Indian affiliates have been granted simple, non-exclusive and non-transferrable
right to use the Opus Software. Further, the Indian affiliates were authorized
to produce back-up copies only for archiving purposes. Furthermore, under the
terms of the License agreementthe users were specifically prohibited from changing,
translating or decompiling of the software and renting, leasing or selling of
software or putting it up for someone’s disposal free of charge.
Revenue’s contentions:
· As per the revenue, the aforesaid
license charges fall under Article 12 of the Double Taxation Avoidance
Agreement (‘DTAA’) between India Germany and accordingly the same are liable to
be taxed as royalty at the rate of 10%.
· Revenue contended that since it is only
the right to use the software which has been transferred, the same is liable to
be treated as royalty within the meaning of 9(1)(vi) of the Income Tax Act
(‘the Act’) read with Explanation thereof.
·
Revenue further submitted that the
Indian affiliates that have utilized the Opus software for the purposes of
their respective businesses, which constitutes commercial exploitation of the
software. Therefore, consideration paid for the same should be categorized as a
royalty payment.
·
Revenue relied on the following
judgements in support of its assertion: AAR in the case of IMT Labs (India) P Ltd and the Hon’bleKarnataka High Court in the
case of CIT v. Samson Electronics Co.
Ltd 320 ITR 209 (Kar).
Appellant’s contentions:
·
The license charges have been received
only for granting the right to use Opus software for the internal business
purposes and it does not entail the grant of any copyright.
·
The payments made to the appellant for
the use of the Opus software, which is a copyrighted article and is not for awarding
of any copyright therein, therefore not in the nature of royalty payments.
·
The appellant relied upon the following
judgements in support of its claim: (i) Motorola
Inc. v. DCIT (95 ITD 269) (SB), (ii) Samsung
Electronics Co. Ltd. vs. ITO (93 TTJ 658) (Bang. Trib.), (iii) DCIT vs. Metapath Software International Ltd. 9
SOT 305 (Del. Trib.)
The Pune Bench decided:
· ITAT placed reliance on the ruling of
the Special Bench in Motorola Inc and observed:“In fact, in so far as the factual aspect is concerned, the Assessing
Officer has clearly stated that the copyright of software vests only with the
CGI Group and therefore, even from that standpoint, there can be no divergence
from the assessee’s point that what has been transacted in the license
agreement is only the grant of user right in the copyrighted software and not
the use of copyright itself. Therefore, having regard to the factual position
and the judgment of the Hon’ble Delhi High Court, wherein the decision of the
Special Bench in the case of Motorola Inc. (supra) has since been approved, the
view of the assessee has to be upheld.”
· ITAT further noted that though revenue
relied upon the judgements of Karnataka HC in Samsung Electronics Co Ltd and
AAR in IMT Labs India P Ltd, where a contrary view was taken to the effect that
consideration for grant of right to use software was taxable as royalty,
however, on this issue, Pune ITAT relied upon the judgement: Solid Works Corporation’s case [TS-76-ITAT-2012(Mum)],
where Mumbai bench of ITAT held that when two views were available from different
HCs, the view which was favourable to the assessee should be preferred
including a non-resident assesse, as per Article 24 of the DTAAbetween India
and USA which provides for non-discrimination.
Our comments:
The
mentioned judgement does provide relief to the appellant with the last fact
finding authority i.e. ITAT when the facts of the case are on a strong footing
and commensurate with the current legal position pertaining to royalty
payments. However, the position of law post the passing of proposed budgetary
changes suggested in Finance Bill 2012 needs to be seen, whereby it is proposed
to retrospectively amend Sec. 9(1)(vi) from June 01, 1976 to the effect that
consideration for transfer of user right in software would be covered within
the definition of royalty.
Trust the same would be useful to you:
Happy Reading
Gaurav Garg/ Parul Mittal
JGarg Economic Advisors Pvt. Ltd.
New Delhi, India
(E) gaurav@jgarg.com ; parul@jgarg.com
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