Case of Authority for Advance Rulings, August 06, 2010 (case GeoQuest Systems B.V. Gevers Deynootweg Vs Director of Income-tax (International Taxation-I))
| President | P.V. Reddi, J. (Chairman), J. Khosla and V.K. Shridhar, Members |
| Resolution Date | August 06, 2010 |
Judgment:
P.V. Reddi, J. (Chairman), (New Delhi)
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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 page 4 of the application. We may refer to few of them:
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Geoframe Run Time which is the entry point for geologists wanting to run various geoframe modules.
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Geoframe Data Monitor which is used to access the functions and utilities for seismic map and interpretation functions.
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ISEX suit with all functionalities. It is described as a geoframe seismic interpretation module.
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ASAP (Automatic Surface Air Picking) which allows the tracking of one or more events within a seismic volume.
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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, Software Licence Terms and Conditions, "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 off-shore 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 dated 31st August, 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 Pvt. 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 dated 9.7.2010 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 delinked 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 (Intl. Taxation), Dehradun, in December 2007 for passing appropriate orders on the withholding of tax. The ADIT passed a provisional order on 6th February, 2008 to retain 10 per cent of the contract value and remit the balance to the applicant.
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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 Income-tax Act, 1961 ("the Act")?
ii. Whether income from supply of software would be taxable as royalty income under Section 9(1)(vi) of the Act or under Article 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 February, 2010 that the applicant does not need a ruling on the 1st question.
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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 Clause (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 Clause (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 Clause (4), the customer (ONGC) (ONGC) agrees not to copy or reproduce the software or any portion thereof for any other purpose. The previous clause 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.
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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...
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