Case nº A.A.R. No. 835 of 2009 of Authority for Advance Rulings, September 28, 2011 (case Millennium IT Software Ltd. Vs The Director of Income-Tax (International Taxation))

PresidentP.K. Balasubramanyan, J. (Chairman) and V.K. Shridhar, Member
Resolution DateSeptember 28, 2011


V.K. Shridhar, Member

  1. The applicant has entered into a Software License and Maintenance Agreement (SLMA) with Indian Commodity and Exchange Limited (ICEL) on 27.3.2009. Under the agreement the applicant has allowed ICEL to use the software product called 'Licensed Programme' owned by it. The Licensed Programme shall be developed and installed into the computer machines designated by ICEL as envisaged in the Implementation Plan. As use of the Licensed Programme would require training, the applicant is to deploy its personnel to the designated site to train the employees of ICEL. After the installation is over and the software is given a line cutover, the applicant is required to provide at its own cost, maintenance and support services, via a help desk which will operate 24x7 through telephone, e-mail and facsimile number to fix or bypass programme errors. For installation and implementation of the Licensed Programme, applicant shall be paid Rs. 4 crore. The software became live on 20.8.2009. The license to use the Licensed Programme is for 4 years and thereafter its renewal is left to the discretion of ICEL.

  2. The applicant submits that after the installation and implementation of the Licensed Programme, the Agreement provides for payment of 'License Maintenance Fee' from 1.1.2010 till 31.12.2014. The mode of the payment is such that a fixed amount of Rs. 50 lacs per quarter is payable plus an additional fee based on the utilization of the Licensed Programme by ICEL, so much so that the total amount payable would not exceed Rs. 150 lacs per quarter. There is further provision in SLMA for fee escalation upto 12% to accommodate inflation and operational cost.

  3. Referring to the SLMA, the applicant submits that:

    i) The Licensed Programme is developed by it at its development centre in Sri Lanka.

    ii) It is the author, inventor, copyright owner of the Licensed Programme.

    iii) It has the authority to license the Licensed Programme as copyrighted article.

    iv) It has granted ICEL a right to use the Licensed Programme for its business operations.

    v) The rights granted under the SLMA are: non exclusive, non transferable, non assignable, indivisible.

    vi) It has granted right to make copies of the Licensed Programme to be installed on equipments only at designated sites of ICEL. Each copy shall carry copyright, trademark and other notices relating to proprietary rights of the applicant.

    vii) ICEL cannot sell, distribute or disclose the Licensed Programme or associated documents to any third party.

    viii) No. intellectual property right or license is granted to ICEL. Use of source code and reverse engineering of the Licensed Programme is strictly prohibited.

    ix) The tenure of the license granted to ICEL is initially for 4 years. Thereafter, the renewal of the license is at the discretion of ICEL.

    x) The payment prior to License Maintenance Fees on 1.1.2010 is towards goods. Thereafter, it is a business income taxable in India, if PE continues.

  4. The applicant submits that the 'Implementation fee' and 'Licence and Maintenance fee' are not chargeable to tax as per Income-tax Act, 1961(Act) or under DTAA with Sri Lanka. The providing of maintenance service to ICEL would not create a Permanent Establishment (PE) in India. As the payments are not liable to tax in India, ICEL is not required to withhold any tax under Section 195 of the Act and would not be obliged to file a tax return in India. To support the above proposition, the applicant has placed reliance on the following judgements - Tata Consultancy Services [2004] 141 Taxman 132 (SC), Dassault Systems K. K, AAR/821/2009, Infrasoft Ltd. [2009] 28 SOT 179, Sonata Information Technology 103 ITD 324.

  5. Following questions were raised for a ruling by this Authority:

  6. Whether, on the facts and in the circumstances of the case, MILLENNIUM IT (Software) Limited ("The Applicant") is/will be non-taxable in India under the Income-tax Act, 1961, with respect to Implementation and license & maintenance fees ("Fees") paid by ICEL to Applicant company under the said agreement?

  7. Whether, on the facts and in the circumstances of the case, the applicant is/will be non-taxable under the DTAA entered into between the Government of India and the Government of Sri Lanka?

  8. Whether, on the facts and in the circumstances of the case, the applicant providing maintenance service to ICEL could not be treated as having a Permanent Establishment ("PE") in India.

  9. Without prejudice of above, whether on the facts and in the circumstances of the case, if the Applicant is not taxable in India for the fees paid by ICEL, would later be required to withhold tax Under Section 195 of the Income Tax Act, 1961 on the fees, and if ICEL has deducted withholding tax, will the applicant be entitled to get refund back?

  10. Assuming that the applicant has No. other taxable income in India, whether on the facts and in the circumstances of the case, the applicant will be absolved from filing a tax return in India under the provisions of the Income Tax Act with respect to the fees?

  11. The Learned DIT (Intl.Tax.) in her report submits that the payments to the applicant are taxable as 'Royalties' under the Act and under the DTAA with Sri Lanka. The applicant has granted a license to use the software developed by it. Software is not goods or tangible property but intangible intellectual property. It is a 'Process' and covered under Clauses (i) and (iii) of Explanation 2 to Section 9, which defines Royalty under the Act. Alternately, the software is a property similar to patent, invention, design secret formula, process etc. The payment for acquisition of software under license is Royalty in view of CBDT's Circular No. 621 of 19.12.1991. The intention of the legislation in bringing about the subsequent amendments to the second proviso to Section 9(1)(vi), Section 115A(1A) and 80HHE is clear in this regard. The meaning of the term Royalty in the DTAA with Sri Lanka is the same as in the domestic law. Referring to the Spl. Bench decision of ITAT in the case of Siemens Aktiengsellsohafts [1987] 22 ITD 87, learned DIT submits that for the purposes of interpretation of the term 'royalty' under DTAA, one has to go by its general meaning and not by the definition given under Explanation 2 to Section 9(1)(vi). According to the learned ITAT, a term of legal protection has No. conclusive impact in determining whether payment is 'royalty' or not, nor the nature and mode of payment whether lump sum, single, or periodic. The payment for use of a property whether the property is protected under statute or not, is 'royalty'. The ownership of the property remains with the developer and only a limited right is given to the user. It is then submitted that the updating of software, removal of programme errors and maintaining performance standards under the maintenance services amount to supply of software. The onsite training to employees and maintenance service to ICEL could be treated as PE of the applicant in India, if the conditions under Article 5 of the DTAA are satisfied. In any case, the payments to the applicant are taxable in India and ICEL is required to withhold tax under Section 195 of the Act. The applicant is liable to file a return of its income in India. For these propositions, reference has been made to the decisions in the cases of Tata Consultancy Services, [2004] 141 Taxman 132 (SC) Airport Authority of India, AAR No. 755-6, Davy Ashmore India Ltd., 190ITR 626; Citizen Watch Company 148 ITR 774 and New Skies Satellites ITA No. 5384-87/2004 dated 19.10.2009.

  12. The learned Representative appearing on behalf of the revenue submits that the term Permanent Establishment (PE) under Article 5 of the DTAA with Sri Lanka shall include especially:

    The furnishing of services, including consultancy services, by an enterprise through employees or other personnel, where activities of that nature continue within the country for a period or periods aggregating more than 183 days within any 12 month period

    It is argued that the applicant has undertaken a software development project to suit the requirement of ICEL. When the applicant's employees are in close association and coordination with the employees of the contractor in the development and customization of the software, the term, 'other personnel' will include such personnel. The entire period starting from the day the project started till the acceptance of the customized software with which ICEL...

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