TMI Blog2011 (11) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... . SYAL, AND SHRI N.V. VASUDEVAN, JJ. Represented by: Shri Sunil Lala and Devang Shah for the Appellant. Shri G. Guruswami for the Respondent. ORDER Shri R.S. Syal, AM - This appeal by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals) on 23.03.2010 in relation to the assessment year 2007-2008. 2. The only issue raised through various ground is against the treatment to the proceeds from the sale of software as royalty income. Briefly stated the factual matrix of the case is that the assessee, a non-resident, filed its return declaring total income of Rs. 1.76 crore. In a footnote to the return of income, it was stated as under:- "During the previous year, Novell has sold software to NIPL for resale. The said income is taxable in the hands of Novell as a business income. Since, Novell does not have any permanent establishment as per Article 5 of the India - USA treaty, income arising from such sale of software amounting to Rs. 58,29,858/- is not chargeable to tax in India as per Article 7 of the India-USA Tax treaty." 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re amount of Rs. 2.34 crore as royalty income and charged tax accordingly. The learned CIT(A) echoed the assessment order on this issue except for holding that the amount collected from various Indian parties towards the sale of "intellectual value" was to be assessed as royalty whereas the amount collected for CD case, Compact discs and DVDs etc. as business receipts not taxable to India in view of the assessee not having any permanent establishment in India. The assessee is aggrieved against the finding given by the learned CIT(A) qua the treatment of amount collected from Indian parties towards "intellectual value" to be assessed as royalty. 4. We have heard the rival submissions and perused the relevant material on record. The only question which falls for our consideration in the present appeal is to decide as to whether the sum of Rs. 58.29 lakh is royalty or business profits. If it is held as business profits, then the assessee cannot be charged to tax on this amount because of it having no permanent establishment in India as claimed by the assessee and the categorical finding returned by the learned CIT(A) in his order. If however the said amount is held as royalty income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake any cinematograph film or sound recording in respect of the work (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.] " [Emphasis Supplied] 7. Sec. 2(y) of the Copyright Act defines "work" as any of the following namely:- (i) a literary, dramatic, musical or artistic work; (ii) a cinematograph film; (iii) a record. Section 2(o), defines a 'literary work' as including computer programmes, tables and compilations including computer databases. Sec. 2(ffc) defines a computer programme as a set of instructions expressed in words, codes, schemes or in any other form including a machine readable medium, capable of causing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . From different clauses of this Agreement A, it divulges that the assessee holds intellectual property rights in the software. It simply granted license to NIPL to duplicate, distribute and market the Duplicated Products without any modification to the intellectual property of the assessee in the form of software. Further NIPL is liable to pay royalty to the assessee at the rate of 35% of its net revenues from offering Duplicated Products to the end users in the specified territories. This sum amounted to Rs. 1.76 crore, which was duly offered by the assessee as royalty income in its return. 9. Now let us examine the second agreement, the proceeds flowing from which have become the bone of contention. A copy of this agreement called Novell Distributor Agreement (hereinafter called "Agreement B") is available at pages 76 to 92 of the paper book. The preamble of this agreement is as under:- "Novell develops, manufactures and sells computer software products. Distributor is in the business of distributing computer software products. This Agreement authorizes Distributor to acquire from Novell the computer software products identified as eligible in Exhibit A and to market them th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usive right to do certain specified acts in respect of its work such as 'to reproduce the work in any material form' including the storing of it in any medium by electronic means or 'to issue copies of the work' to the public etc. It is thus seen that in essence "copyright" means "the right to copy" the work which may be in the nature of intellectual property like patent, trademark, trade secret etc. Reproduction of the work or to issue copies of the work in the context of computer programmes is akin to making copies of it. Thus copyright of a computer programme means the exclusive right to reproduce it in any material form or copy it. When we read section 9(1)(vi) in the setting of royalty from copyright of computer programmes, it becomes manifest that the consideration paid assumes the character of royalty if it is for reproducing the same in any material form or issuing copies of it etc. As per agreement A, the assessee authorized NIPL to duplicate its computer software programme, which is the same thing as reproducing it in any material form or issuing copies of it. The duplicated products so made by NIPL were as a result of grant of exclusive right by the assessee to reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts from the assessee, neither the end users nor NIPL acquired any copyright over the computer software of the assessee. Since the consideration of Rs. 58.29 lakh in question is sale price of the copyrighted product and not a consideration for transfer of copyright in the software of the assessee, in our considered opinion, the authorities below were not justified in treating it as royalty income. 14. The learned Departmental Representative has placed strong reliance on the ruling given by the Authority for Advance Rulings, New Delhi in Millennium IT Software Ltd., In re [2011] 338 ITR 391. It was argued that in this case it has been held in para 41 that : "When that right of user is given, the right to use the copyright is also given. On the terms of the Income-tax Act, read in the light of the Copyright Act, the right granted for use of a copyrighted article for consideration, would also be royalty since going by the relevant definition, the grant of right to use the copyrighted article would also be a licence by the owner of the copyright, though limited in nature, limited to the use of the other contracting party alone, without entitling the grantee to further exploit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by ICEL to the applicant .'. It is thus amply borne out that the facts of the instant case are materially different from those considered by the Authority for Advance Ruling in the case of Millennium IT Software Ltd. (supra). Neither it is the case of the AO/CIT(A) nor any material has been brought to our notice by the ld. DR to disclose that the end users of the Novell Products were entitled to copy it and use it wherever needed. When the right to copy a product is assigned, the payment obviously assumes the character of royalty. But if it is consideration only for the use of a copyrighted product divorced from the right to copy the same, it, by no stretch of Imagination, can be construed as royalty for the obvious reason that the right to copy, which is sine qua non of copyright, is lacking. 15. It is observed that the assessee is a resident of USA. In that view of the matter, it would be apposite to consider the DTAA. The Assessing Officer has also considered Article 12 of the treaty which deals with Royalties and fees for included services. Clause 3 of Article 12 defines royalties as under:- "3. The term "royalties" as used in this article means: (a) payments of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration "for the use of, or the right to use any copyright" of a computer software but is a consideration for acquisition of the computer software meant for the exclusive use of the end users, it cannot be brought within the ambit of Article 12(3). 17. It would be relevant to note at this juncture that the authorities below appear to have been swayed by the nomenclature of 'Intellectual value' given in the invoices raised by the assessee on NIPL. It is an elementary principle, which is fairly settled that in order to construe an agreement, one has to look at the essence of it rather than its form. No party can get rid of the consequences merely for describing a particular item in a particular form though in essence and in substance it may be a different transaction. Going by the same logic, if an item of expenditure is given the name of an asset, it shall remain expenditure and will not find its place in the balance sheet. Similarly if an item of income is given the name of liability, it shall not shed its character of income merely for the reason that the assessee described it as liability. There is no dearth of judgments laying down this proposition. The Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, it is chargeable to tax u/s 9(1)(vi) in his hands despite his status of non-resident. Once a payment made by an Indian to a non-resident is chargeable to tax in his hands, it becomes the duty of the Indian payer to deduct tax at source in terms of section 195. If the payer fails to deduct tax at source, the mandate of section 40(a)(i) is attracted and as such the payer suffers disallowance of the amount paid in its assessment. Clause (i) of section 40(a) specifically provides that any royalty etc. chargeable under this Act, which is payable outside India or in India to a non-resident, not being a company or a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed u/s 200(1), shall be disallowed. Thus it follows that if royalty is paid by an assessee to a non-resident which is chargeable to tax in the hands of such non-resident, it is the duty of the payer to deduct tax at source. In case of his failure to deduct tax at source, the amount paid, suffers disallowance u/s 40(a)(i). Coming back to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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