IN THE HIGH COURT OF KARNATAKA AT...

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 9TH DAY OF JUNE, 2014

PRESENT

THE HON' BLE MR. JUSTICE N.KUMAR

AND

THE HON' BLE MR. JUSTICE B.MANOHAR

ITA.No.209/2008

c/w

ITA Nos.208/2008, 210/2008, 212/2008, 213/2008,

214/2008, 215/2008, 270/2009, 273/2009, 274/2009,

211/2008, 824/2009

ITA NO 209/2008

BETWEEN: 1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore, 2.The Income Tax Officer Ward-19(2) International Taxation Bangalore. ...Appellants

(By Sri.K.V.Aravind, Advocate)

2

AND: CGI Information Systems and Management Consultants Pvt Ltd 38/1, Naganathapura Singasandra Post Bangalore – 560 068. ...Respondent

(By Sri.K.S.Ramabhadran, Advocate)

ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 05-10-2007 passed in ITA No. 949/BNG/2005, for the Assessment Year 2003-2004, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 949/BNG/2005,dated 05-10-2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward 19(2), Bangalore.

ITA NO 208/2008

BETWEEN: 1. The Commissioner Of Income Tax C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(2), International Taxation, C.R.Building, Queens Road, Bangalore. …Appellants

(By Sri. K V Aravind, Advocate)

3

AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ...Respondent

(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)

ITA filed u/S.260-A of I.T.Act, 1961 arising out of

Order dated 05-10-2007 passed in ITA No. 948/BNG/2005, for the Assessment Year 2003-2004, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 948/BNG/2005, dated 05-10-2007 confirm the orders of the Appellate Commissioner and Assistant Commissioner of Income Tax Officer, Ward - 19(2), Bangalore. ITA.NO.210/2008

BETWEEN: 1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(2), International Taxation, C.R.Building, Queens Road, Bangalore. …Appellants


4

AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ... Respondent


ITA filed u/S.260-A of I.T. Act, 1961 arising out of

Order dated 05-10-2007 passed in ITA No. 950/BNG/2005, for the Assessment Year 2004-2005, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 950/BNG/2005,dated 05-10-2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward 19(2), Bangalore. ITA NO 212/2008

BETWEEN: 1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. ...Appellants


5




Order dated 12-10-2007 passed in ITA No. 412/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 412/BNG/2006,dated 12-10-2007 confirm the orders of the Appellate Commissioner. ITA NO 213/2008

BETWEEN 1. The Commissioner Of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. …Appellants


6




Order dated 12-10-2007 passed in ITA No. 413/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 413/BNG/2006, dated 12-10-2007 confirm the orders of the Appellate Commissioner. ITA.NO.214/2008

BETWEEN: 1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. …Appellants


7



ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 12-10-2007 passed in ITA No. 414/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 414/BNG/2006, dated 12-10-2007 confirm the orders of the Appellate Commissioner. ITA NO 215/2008

BETWEEN: 1. The Commissioner Of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. …Appellants


8

AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ... Respondent



Order dated 12-10-2007 passed in ITA No. 415/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 415/BNG/2006,dated 12-10-2007 confirm the orders of the Appellate Commissioner ITA NO 270/2009

BETWEEN: 1. The Director of Income Tax International Taxation, Rashtrothana Bhavan, No.14/3, 6th Floor, Nrupathunga Road, Bangalore-560 001. 2. The Income Tax Officer, Ward-19(1), International Taxation, Rashtrothana Bhavan, No.14/3, 6th Floor,

9

Nrupathunga Road, Bangalore. …Appellants

(By Sri. K V Aravind, Advocate) AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Electronic City Post, Bangalore-560 100. ...Respondent



Order dated 26-11-2008 passed in ITA.No.825/Bang/2008, for the Assessment year 2007-08, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.825/Bang/2008, dated 26-11-2008 and confirm the order passed by the Income Tax Officer,Ward-1(1), International Taxation, Bangalore, in the interest of justice and equity. ITA NO 273/2009

BETWEEN: 1. The Commissioner Of Income Tax International Taxation, Rashtrothana Bhavan, No.14/3 6th Floor, Nrupathunga Road, Bangalore.

10

2. The Income Tax Officer, Ward-19(1), International Taxation, Rashtrothana Bhavan, No.14/3 6th Floor, Nrupathunga Road, Bangalore. …Appellants

(By Sri. K V Aravind, Advocate) AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Electronic City Post, Bangalore-560 100. ...Respondent


ITA filed u/S.260-A of I.T. Act, 1961 arising out of

Order dated 26-11-2008 passed in ITA No.823/BNG/2008, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.823/BNG/2008, dated 26-11-2008, confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, Ward-19(1), Bangalore in the interest of justice and equity. ITA NO 274/2009

BETWEEN 1. The Director (Commissioner) of Income Tax International Taxation,

11

Rashtrothana Bhavan, No.14/3, 6th Floor, Nrupathunga Raod, Bangalore – 560 001. 2. The Income Tax Officer Ward-19(1), International Taxation, No.14/3, 6th Floor, Nrupathunga Road, Bangalore. ...Appellants

(By Sri.K V Aravind, Advocate) AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Electronic City Post, Bangalore. ...Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv and

Sri.K.S.Ramabhadran, Advocate)

ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 26-11-2008 passed in ITA.No.824/Bang/2008, for the Assessment year 2006-07, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.824/Bang/2008,dated 26-11-2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, Ward-19(1), Bangalore, in the interest of justice and equity.

12

ITA NO 211/2008

BETWEEN 1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer Ward-19(2) C.R.Building, Queens Road, Bangalore. ...Appellants

(By Sri.K.V.Aravind, Advocate) AND: CGI Information Systems and Management Consultants Pvt Ltd 38/1, Naganathapura Singasandra Post Bangalore – 560 068. ... Respondent

(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv)

ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 05-10-2007 passed in ITA No. 530/BNG/2006, for the Assessment Year 2005-2006, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 530/BNG/2006, dated 05-10-2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward 19(2), Bangalore.

13

ITA.NO.824/2009

BETWEEN 1. The Director of Income Tax International Taxation Rashtrothana Bhavan, Nrupathunga Road, Bangalore. 2. The Income Tax Officer, Ward – 19(1), International Taxation, Rashtrothana Bhavan, Nrupathunga Road, Bangalore. ...Appellants

(By Smt.K.V.Aravind, Advocate) AND: CGI Information Systems and Management Consultants P. Ltd. 38/1, Naganathapura Electronic City Post, Bangalore – 560 100. ...Respondent

(By Sri.G.Sarangan, Sr. Adv for Sri.Balram.R.Rao, Adv)


order dated 17-07-2009 passed in ITA.No.1376/Bang/2008, for the Assessment year 2007-08, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1376/Bang/2008, dated 17-07-2009 and confirming the order of the Appellate Commissioner and confirm the order

14

passed by the Income Tax Officer, Ward-19(1), International Taxation, Bangalore. These appeals coming on for Hearing this day, N. KUMAR J., delivered the following:

J U D G M E N T

All these appeals are by the revenue challenging the

order passed by the Income Tax Appellate Tribunal,

Bangalore Bench, holding that the assessee was not liable to

deduct tax under Section 195(1) of the Income Tax Act, 1961

(for short hereinafter referred to as ‘the Act’) from the

remittances made to a non-resident.

2. The substantial question of law that arises for

consideration in these appeals is as under:-

Whether the Tribunal was correct in

holding that the payments made by the

assessee for utilizing intranet facilities

provided by the non-resident assessee is not

liable to tax in India and no TDS need be made

as the provisions of Section 195(1) read with

15

9(1)(vi) and (vii) read with Article 12 of the

DTAA between India and Canada are not

applicable?

FACTS IN BRIEF

3. The assessee is engaged in the business of

design, development, implementation and support systems

for the Information Technology (IT) Sector. The assessee

entered into an agreement with CGI Group Inc., a company

incorporated in Canada for sharing costs by which the

Canada Company would procure licenses from Microsoft and

also the communication tool developed by CGI Group Inc.,

and the costs relating to that would be subsequently

invoiced on the assessee. Accordingly, invoice was raised on

the assessee by the Canada Company. While making the

remittance, the assessee deducted TDS at 20% under

Section 195(1) of the Act and also paid the same to

Government account. However, according to the assessee,

since it is a cost sharing agreement and payments were

made by the assesee for reimbursement of cost/expenses, no

16

income is embedded therein. Therefore, the assessee is not

liable to deduct tax under Section 195(1) of the Act. The

appeals were filed by the assessee before the CIT(A) under

Section 248 of the Act. The Appellate Authority sought for a

remand report from the Assessing Officer. The claim of the

assessee was that the payment was in the nature of

reimbursement of expenses. Hence, it was not liable to

deduct tax under Section 195(1) of the Act. Further, the

payments are not in the nature of royalty. The Appellate

Authority held that the payment made by the assessee to the

Canada Company cannot be considered as royalty as the

assessee was not liable to make deduction in respect of this

payment. However, it held the payment made by the

assessee is for rendering “any technical or consultancy

services” and, therefore, the assessee was liable to deduct

tax at source and dismissed the appeal.

4. Aggrieved by the said order, the assessee

preferred an appeal to the Tribunal. The Tribunal by a

17

lengthy order, after considering the rival contentions and

referring to various judgments held that, the payments made

by the assessee are reimbursement of expenses and no

income element is embedded therein; therefore, the

remittances cannot be considered as fees for technical

services. The assessee is liable to deduct tax under Section

195(1) of the Act only on the income embedded in the

remittance. Since there was no income element embedded in

the remittance, the assessee was not liable to deduct tax

from the remittance. It also affirmed the finding of the

Appellate Authority that the remittance made by the

assessee cannot be treated as royalty and Section 44D is

not applicable to the facts of this case. Therefore, the

appeals were allowed. The order passed by the Appellate

Authority as well as the original authority was set aside.

Aggrieved by this order, the revenue is in appeal.

5. The learned counsel for the revenue assailing

the impugned order contended that, the Tribunal has

18

proceeded on the assumption that, as the agreement

between the parties is a cost sharing agreement, the

remittance made by the assessee to the Canada Company is

towards such charges and no profit is embedded in the said

amount paid to the Canadian Company. Therefore, the said

amount was not chargeable to tax under the Act and

consequently, there is no liability on the part of the assessee

to deduct tax at source. He submits that though the

agreement is styled as “cost sharing agreement”, a reading of

the agreement shows that the Canadian Company had

granted a licence to use the facilities which exclusively

belongs to them and the consideration paid under the

agreement is for the right to use that right and, therefore, it

falls within Section 9(1) (vi) of the Act. It constitutes royalty

and the Tribunal has not properly appreciated the facts of

the case and the material placed on record. Therefore, the

order is liable to be set aside.

19

6. Per contra, the learned senior counsel appearing

for the assessee submitted that, no right in the intellectual

property is transferred under the agreement nor any licence

is granted under the agreement. As is clear from the

agreement, the Canadian Company developed a tool

providing Eportal-intranet facility. It was available only to

the members of the Group. The other members of the Group

agreed to share the cost of the said tool. Therefore,

the assessee agreed to share the cost of the tool. No profit is

embedded in the said payment as is clear from the clauses in

the agreement. Clause 4.4. provides that the term ‘cost’

incurred does not include any mark up and is limited to the

actual cost. Therefore, the Tribunal was justified in holding

that it is neither a payment towards royalty nor payment

towards technical services.

7. In the light of what is stated above and the rival

contentions, it is necessary for us to look in to the terms of

the agreement entered into between the parties, understand

20

the intention of the parties and then find out the nature of

transaction. Based on that factual finding, we have to decide

whether it falls within the definition of royalty as provided

under Section 9(1)(vi) or technical services as provided under

Section 9(1)(vii) of the Act. Only if the income is chargeable

to tax under the Act under the aforesaid provisions, the

liability of the assessee to deduct at source would arise. A

copy of the cost sharing agreement is made available to us,

which reads as under:-

COST SHARING AGREEMENT This agreement is made by and between CGI

Information Systems and Management

Consultants Private Limited (CGI-India), a

Company incorporated under the Indian

Companies Act having its Registered Office at

38/1, Naganathapura, Singasandra Post,

Bangalore – 560 034 and CGI Group Inc. a

company incorporated under the provisions of the

laws of Quebec and having its registered office at

1130 Sherbrooke Street West, 4th Floor, Montreal,

Quebec, H3A 2MB8.

21

1. CGI Group Inc. has developed an internal

telecommunication and communication tool,

which is accessible only to the members of

CGI worldwide. This is historically known

as CGI Information Technology

Infrastructure. CGI Group Inc. is the

absolute owner of the CGI Information

technology Infrastructure facility and holds

the Intellectual Property rights (IPR) for the

same but no licenses are transferred to

CGI- India. This is purely a communication

related facility and includes the following:

• Network facility

• Collaborative facility

• Security facility

• Eportal-intranet facility

2. CGI-India is providing Information

Technology Solutions to companies within

the CGI Group and other global customers.

3. As the communication tool developed by

CGI Group Inc. is for mutual benefit, the

parties propose to enter into a cost sharing

agreement by which certain costs as

22

mutually agreed upon, is shared between

them.

4. CGI Group Inc. allows CGI-India to use the

above facilities subject to the following

terms and conditions

4.1 CGI Group Inc. allows CGI-India to

use the above facilities as an

operational guidance for its day-

today business.

4.2 For using the above facilities, CGI

Group Inc. shall allocate the cost in

respect of the facilities on an agreed

basis.

4.3 CGI Group Inc. shall allocate the cost

to CGI-India on the basis of number

of employees of CGI-India based on

the following formula:

Cost incurred *Number of employees

of CGI-India

--------------------------------------------------------

Total number of employees of CGI

Group Worldwide

23

4.4 The term ‘cost’ incurred under clause

4.3 does not include any mark up

and is limited to the actual cost.

4.5 CGI-India shall not have any right to

the Intellectual Property rights (IPR)

nor have any right to sell or license or

lease or in any manner “transfer the

right assigned therein” to other

parties.

5. Any right in respect of CGI information

Technology Infrastructure, or whatsoever in

respect of any invention, improvements and

other intellectual property rights in respect

of CGI Information Technology

Infrastructure or products shall vest with

CGI Group Inc.

6. Disclosure of information.

6.1 CGI-India agrees to hold all such

information in confidence to CGI

Group Inc. and not to disclose such

information to any other person or

organization without the prior written

consent of CGI Group Inc.

24

6.2 All materials received from CGI

Group Inc. under this Agreement

shall be and remain the property of

CGI Group Inc. and shall be returned

to CGI Group Inc. upon termination of

this agreement.

7. This Agreement is effective 1st October

2001 and shall remain in effect unless

terminated by either party as otherwise

provided in this Agreement. Termination of

this Agreement shall not relieve either party

to any obligations, which may have

accrued prior to such termination.

8. All payments under this agreement are

subject to statutory levies, if any.

9. Any notices permitted or required to be

given under this Agreement shall be

deemed given upon delivery, if delivered by

hand or sent by facsimile followed by

registered or certified mail, return receipt

requested, to the parties at the address as

mentioned in this agreement or other

address if the same is notified to the

respective parties.

25

10. The provisions of this agreement shall be

construed in accordance with the laws of

province of Quebec and applicable laws of

Canada and the parties agree to attorn to

the jurisdiction of the Courts of Quebec,

Canada.

11. CGI-India shall deduct Withholding Tax

(WHT) as applicable under India Income

Tax Laws.

For CGI information systems and Management Consultants Private Limited Sd/- Name: Santosh Bhargava Title: Sr. Vice President Date: 24th March 2003

For CGI Group Inc Sd/- Name: Jacques Roy Title: S.V.P. Finance & Treasury Date: 14th March 2003

8. A reading of the aforesaid agreement shows that

the Canadaian Company has developed an internal

telecommunication and communication tool at their cost. It

could be accessed only to the members of CGI worldwide.

26

This is historically known as CGI Information Technology

Infrastructure. This Canadian Company is the absolute

owner of the CGI Information Technology Infrastructure

facility. It holds the Intellectual Property rights (IPR) in its

name. The Canadian Company has not granted any licenses

to the assessee. The tool which they have developed is purely

a communication related facility and includes, network

facility; Collaborative facility, Security facility and Eportal-

intranet facility. The assessee is providing Information

Technology Solutions to companies within the CGI Group

and other global customers.. The tool developed by the

Canadian Company is purely for mutual benefit. Therefore,

the assessee entered into a cost sharing agreement by which

certain costs as mutually agreed upon, is shared between

them.

9. Clause (4) of the agreement categorically states

that, the Canadian Company allows the assessee to use the

above facilities subject to the terms and conditions

27

mentioned therein. Therefore, the Canadian Company has

permitted the assesee to use the tool which they have

developed. The said tool is required by the assessee as an

operational guidance for its day-today business. For using

the said facilities, the assessee has allocated the cost in

respect of the facilities on an agreed basis as mentioned in

clause 4.3. It is made clear the term ‘cost’ incurred under

clause 4.3 does not include any mark up and is limited to

the actual cost. In other words, no profit or income is

embedded in this cost.

10. Clause 4.5 is of utmost importance. It declares

the assessee shall not have any right to the Intellectual

Property rights. In other words, though the assessee pays

the cost stipulated in the agreement for using the facility it

does not confer any right in the intellectual property rights.

In other words though the agreement is styled as ‘cost

sharing agreement’, and the cost is paid, the assesee would

not get any right in the said tool to any extent whatsoever.

28

Further, the said clause makes it clear the assessee will not

have any right to sell or license or lease the facility which is

made available by the Canadian Company to the assessee.

That clause does not stop there. It further says “or in any

manner transfer the right assigned therein to other parties”.

It means under the agreement some right is assigned to the

assessee. However, the assessee has no right to sell, licence

or lease that right. Therefore, it is clear from this agreement,

though the word used is “Canadian Company allows the

assesee to use the facilities for its day-today operational

guidance” it has assigned some interest which the Canadian

Company possess in the said tool. Therefore, the argument

that it is a cost sharing agreement, under this agreement

nothing is transferred to the assessee, there is no profit

margin and, therefore, the amount paid by the assessee to

the Candian Company cannot be construed as royalty or for

technical services rendered is ex facie incorrect. Therefore,

what follows is, the Candian Company is the absolute owner

of the intellectual property. It is making available the said

29

facility to its group Company. For allowing them to use this

facility the Group Company like the assessee has to pay

cost. Though they have paid cost and some right in that is

assigned to them, they cannot sell, license or lease that

right.

11. It is in this background, we have to find out

whether the right which is transferred or conferred on the

assessee under the cost sharing agreement falls within the

definition of ‘royalty’ or ‘technical services’ in order to

chargeable to tax under the Act.

12. In order to appreciate the argument of the

assessee that no licence is granted and amounts paid under

the cost sharing agreement do not constitute licence fee, it is

necessary to understand what is ‘licence’. This Court had

an occasion to consider the said question in the case of THE

COMMISSIONER OF INCOME TAX vs M/S SYNOPSIS

INTERNATIONAL OLD LIMITED [ITA Nos. 11 TO 15/2008

30

& 17/2008] decided on 3.8.2010. At para 40 what is a

‘licence’ has been explained as under:-

“40. A licence is a grant of authority to do a

particular thing. It enables a person to do lawfully

what he could not otherwise lawfully do. A

licence does not, in law, confer a right. It only

prevents that from being unlawful which, but for

the licence, would be unlawful. It amounts to a

consent or permission by an owner of copyright

that another person should do an act which, but

for that licence, would involve an infringement of

the copyright of licensor. A licence gives no more

than the right to do the thing actually licensed to

be done. It transfers an interest to a limited

extent, whereby the licensee acquires an

equitable right only in the copyrighted article.”

It was further held as under:-

“43. A licence is a permission to do

something that would otherwise be unlawful.

The question arises, therefore, as to what legal

permission is granted by a software licence. The

answer is, briefly, that in some cases the licence

31

will be a permission to use confidential

information, and in virtually in all cases it will be

a permission to copy a copyright work. If the

software has been kept secret by the producer, or

only supplied on conditions of confidentiality and

has not been published too widely, then the

software licence will be akin to a licence of

confidential information or know-how. The owner

or licensor of a copy right, has a right to grant

permission to use the software or a computer

programme, in respect of which they have a copy

right, without transferring the right in copy right.

It is one of the rights of a copy right owner or

licensor. Without such right being transferred,

the end user has no right to use the software or

computer programme. If he uses it, it amounts to

infringement of copy right. For transfer of such

right if consideration is paid, it is not a

consideration for transfer of a copy right but for

use of intellectual property embedded in the copy

right, and therefore it is for transfer of one of

those rights of the owner of the copy right. It is

not a right in copy right but it is in respect of a

copy right. When a copy righted article is sold

also, the end user gets the right to use the

32

intellectual property embedded in the copy right

and not a right in the copy right as such.

Therefore the mode adopted or the terminology

given is not decisive to decide the nature of

transfer. Ultimately, it is the substance which

has to be looked into.”

13. In the background of the aforesaid legal position,

if we look at Cost Sharing Agreement, it is clear that without

entering into an agreement, the assessee was not permitted

or allowed to use the facility which exclusively belongs to the

Canadian Company. The cost is paid for use of the said

facility. By use of such facility, a right is conferred on the

assessee. But a restriction is put on the assessee to sell or

license or lease or in any manner transfer the right so

conferred. The assessee was given the right to use the said

facility for its purposes on payment of cost stipulated

therein. Therefore, the terminology of the said agreement

would not conclusively decide the nature of transaction

between the parties. Once we read the entire agreement as a

whole, it is clear that the Canadian Company under the said

33

agreement has permitted or allowed the assessee to use the

facilities which they have developed at considerable cost to

be paid. Merely because the agreement provides that the

term ‘Cost’ does not include any mark-up and is limited to

the actual cost, it makes no difference in the eye of law. But

one thing that clearly emerges from the said agreement is

that in developing the facility or tool, it is the Canadian

Company which has invested the entire money. Prior to the

development of the said facility, there was no agreement

between the Canadian Company and the assessee for

sharing the cost of development of the said tool. Further,

the agreement expressly states that the Canadian Company

is the absolute owner of the CGI Information Technology

Infrastructure facility and they hold the intellectual property

rights. It has not transferred any licenses to the CGI- India

i.e. the assessee. Therefore, even after payment of cost, the

said product used would absolutely vests with the Canadian

Company. If really, the agreement was to share the cost of

developing the facility, the assessee also would become a co-

34

owner. That is not the intention between the parties. The

assessee under no circumstances, would get any title to any

extent in the facility developed by the Canadian Company

and the right conferred is only for its user. Therefore, it is

nothing but a license though it is styled as the Cost Share

Agreement.

14. Section 9 provides for the income deemed to

accrue or arise in India. It reads as under:

“9(1) The following incomes shall be deemed to

accrue or arise in India-

(i) all income accruing or arising, whether directly

or indirectly, through or from any business

connection in India, or through or from any

property in India, or through or from any asset or

source of income in India 4 or through the transfer

of a capital asset situate in India.

(vi) income by way of royalty payable by-

(a) the Government; or

35

(b) a person who is a resident, except where the

royalty is payable in respect of any right,

property or information used or services utilised

for the purposes of a business or profession

carried on by such person outside India or for the

purposes of making or earning any income from

any source outside India; or

(c) a person who is a non- resident, where the

royalty is payable in respect of any right,

property or information used or services utilised

for the purposes of a business or profession

carried on by such person in India or for the

purposes of making or earning any income from

any source in India: Provided that nothing

contained in this clause shall apply in relation to

so much of the income by way of royalty as

consists of lump sum consideration for the

transfer outside India of, or the imparting of

information outside India in respect of, any data,

documentation, drawing or specification relating

to any patent, invention, model, de sign, secret

formula or process or trade mark or similar

property, if such income is payable in pursuance

36

of an agreement made before the 1st day of April,

1976 , and the agreement is approved by the

Central Government:

Explanation 2.- For the purposes of this clause,

"royalty" means consideration (including any

lump sum consideration but excluding any

consideration which would be the income of the

recipient chargeable under the head" Capital

gains") for-

(i) the transfer of all or any rights (including the

granting of a licence) in respect of a patent,

invention, model, design, secret formula or

process or trade mark or similar property;

(ii) the imparting of any information concerning

the working of, or the use of, a patent, invention,

model, design, secret formula or process or trade

mark or similar property;

(iii) the use of any patent, invention, model,

design, secret formula or process or trade mark or

similar property;

37

(iv) the imparting of any information concerning

technical, industrial, commercial or scientific

knowledge, experience or skill;

(vi) the rendering of any services in connection

with the activities referred to in sub-clauses (i) to

(iv), (iva) and (v)

Explanation 4 – For the removal of doubts, it is

hereby clarified that the transfer of all or any

rights in respect of any right, properly or

information includes and has always included

transfer of all or any right for use or right to use a

computer software (including granting of a

licence) irrespective of the medium through which

such right is transferred.

Explanation 5 – For the removal of doubts, it is

hereby clarified that the royalty includes and has

always included consideration in respect of any

right, property or information, whether or not –

(a) the possession or control of such right,

property or information is with the prayer;

(b) such right, property or information is used

directly by the payer;

38

(c) the location of such right property or

information is in India.

Explanation 6. – For the removal of doubts, it is

hereby clarified that the expression “process”

includes and shall be deemed to have always

included transmission by satellite (including up-

linking, amplification, conversion for down-

linking of nay signal), cable, optic fibre or by any

other similar technology, whether or not such

process is secret;]

15. Explanations 4, 5 and 6 were inserted by the

Finance Act, 2012, which came into retrospective effect from

1-6-1976.

16. The facility which is provided by the Canadian

Company used by the assessee is the intranet facility.

Therefore, it is necessary for us to understand what

“Intranet” facility means. An intranet is a computer network

that uses Internet Protocol technology to share information,

39

operational systems, or computing services within an

organization. This term is used in contrast to extranet, a

network between organizations, and instead refers to a

network within an organization. Sometimes, the term refers

only to the organization's internal website, but may be a

more extensive part of the organization's information

technology infrastructure, and may be composed of multiple

local area networks. The objective is to organize each

individual's desktop with minimal cost, time and effort to be

more productive, cost efficient, timely, and competitive.

17. An intranet may host multiple private websites

and constitute an important component and focal point of

internal communication and collaboration. Any of the well

known Internet protocols may be found in an intranet, such

as HTTP (web services), SMTP (e-mail), and FTP (file transfer

protocol). Internet technologies are often deployed to provide

modern interfaces to legacy information systems hosting

corporate data. An intranet can be understood as a private

40

analog of the Internet, or as a private extension of the

Internet confined to an organization. The first intranet

websites and home pages were published in 1991, and began

to appear in non-educational organizations in 1994.

Intranets are sometimes contrasted to extranets. While

intranets are generally restricted to employees of the

organization, extranets may also be accessed by customers,

suppliers, or other approved parties. Extranets extend a

private network onto the Internet with special provisions for

authentication, authorization and accounting.

18. Explanation-4 inserted by the Finance Act, 2012

has puts at rest all the controversies and doubts. It

expressly states that transfer of all or any rights in respect of

any right, property or information includes and has always

included transfer of all or any right for use or right to use a

computer software including granting of a licence

irrespective of the medium through which such right is

transferred. Therefore, the terms of Cost Sharing Agreement

41

explicitly mention that the Canadian Company has

developed internal telecommunication and communication

tool which is accessible only to the members of CGI

worldwide. Therefore it is an intranet facility. Further it

declares that the Canadian Company holds the intellectual

property rights in the said CGI Information Technology

Infrastructure facility. It has allowed the assessee to use the

said facility subject to the terms and conditions stipulated in

the said agreement. Clauses 4.2 and 4.3 deal with the

payment of cost to be paid for using the said facility. Clause

4.4 declares that the cost does not include any mark up and

is limited to the actual cost. Further, Clause 4.5 declares

the permission granted to the assessee to use the facility on

payment of cost does not extend to confer on the assessee

any right to sell or licence or lease or in any manner

“transfer the right assigned therein to other parties”.

Therefore, it is clear that some right is assigned to the

assessee under the agreement on payment of cost. That

right is a right to use the facility notwithstanding the fact

42

that the cost is paid. Clause 5 declares the rights of such

facility vest with the Canadian Company only. Therefore, it

is clear that the cost is paid for using the computer software.

When the assessee is allowed to use the said facility, it is

nothing but a license to use the said facility. If really the

cost paid represents the assessee’s share of cost for

developing the internal telecommunication and

communication tool, on such payment, the Canadian

Company can never claim to be the absolute owner of the

said intellectual property. If CGI group companies were to

pay costs for using the said facility, then the title of the said

facility i.e. intellectual property should equally vest

proportionate to the cost share by this group companies.

That is not the intention behind this agreement. Therefore,

we have no hesitation to hold that this Cost Sharing

Agreement is only a device to avoid payment of tax as

contemplated under the aforesaid provision. It is nothing

but a royalty. Therefore, the order passed by the Tribunal is

erroneous and requires to be set aside.

43

19. Learned Senior Counsel for the assessee

contended that reimbursement is permissible in law. The

agreement is nothing but an agreement for reimbursing the

cost of development of internal telecommunication and

communication tool. In support of this contention relied

upon several judgments. When we looked into the Cost

Sharing Agreement, there is no whisper about

reimbursement of cost. On the contrary, under the

agreement, the assessee has agreed to share the cost. In

that view of the matter, the question of considering the case

of the assessee for reimbursement of cost would not arise.

Accordingly that argument of the learned Senior Counsel in

our opinion, does not arise for consideration in the facts of

this particular case.

20. The case of the Canadian Company is that it has

obtained the intellectual property right by way of license

from Microsoft and license fee is paid. After acquisition of

the said property by licence, that facility was permitted to be

44

used by its group members, one of which is the assessee. In

law, it makes no difference, whether Canadian Company

acquired intellectual property either by way of lease or it

independently developed the same. The question for

consideration in this case is whether what is paid by the

assessee to the Canadian Company represents royalty

payable for the licence granted to use the said facility or is it

a cost of acquisition of the said intellectual property rights.

Similarly in one of the cases, what is provided by the

Canadian Company to the assessee was not intranet facility

and it is only leased line charges. The same reasoning holds

good even in respect of the said facility made available to the

assessee.

21. It was also contended that this Court has

already held in the case of CIT v/s RANKA AND RANKA

reported in 352 ITR 0121 that Instruction No.3/2011 dated

9-2-2011 is retrospective in operation and equally applied to

the proceedings pending even prior to 9-2-2011

45

notwithstanding the fact that Circular expressly states that

it is only prospective and therefore, on that basis, relief has

to be granted in the case where tax liability is less than

Rs.10.00 lakhs. We do not find any substance in the said

contention. The question of extending the benefit of

Instruction No.3 would arise only in cases where the tax

liability is admitted and the tax payable is less than Rs.10.00

lakhs. It has no application to the case, where the very

liability is disputed. Therefore, in this case, we have held

that the assessee is liable to pay tax. In fact, the assessee

had paid the tax and therefore, in the facts and

circumstances, we are satisfied that the said judgment has

no application to the facts of the cases where the tax liability

is less than Rs.10.00 lakhs. It is placed on record that the

assessee had no doubt paid the tax, after, deducting the tax

at source as contemplated under Section 195(1) of the Act

after making payment to the Canadian Company. It is after

making the payment, the assessee wanted to test the legality

and preferred an appeal before the CIT(A) under Section 248

46

of the Income Tax Act. When we have held that the tax

liability exists and the assessee had already discharged the

tax liability by paying the money within the time stipulated,

the question of Revenue proceeding against the assessee for

recovery of the tax would not arise.

22. Hence, we pass the following

order:-

(a) Appeals are allowed.

(b) Impugned orders passed by the Tribunal are set

aside.

(c) The orders passed by the Assessing Authority

are restored.

(d) No costs.

Sd/-

JUDGE

Sd/- JUDGE

Ckl/mpk/-*

Date post:	08-Apr-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

IN THE HIGH COURT OF KARNATAKA AT...

Documents