TMI Blog2012 (2) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case and in law, the CIT(A) erred in holding that the assessing officer has wrongly held that the payment received by the assessee from resellers on sale of shrink wrap software is in the nature of Royalty which is liable for taxation in India within the meaning of Article 12(3) of the Indo-US DTAA. 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that since the taxes are to be deducted at source, the , the assessee is not liable to pay interest under section 234B of the Income-tax Act. 3. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer restored. 3. The issue raised by the Revenue in this appeal is identical to the issue raised by it in AY 03-04 and 05-06 before the Tribunal in ITA No.3095/mum/07 and ITA No.5097/mum/08 respectively. This Tribunal on identical facts has already taken a view that that the sums received by the Assessee in both the aforesaid A.Y.s for supply of software is not in the nature of royalty within the meaning of Article 12(3) of the DTAA between India and USA and was in the nature of business income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer that the software being sold by the assessee was a shrink wrap software being sold to customers for their personal use without transfer of any copyright, trade mark, or patent etc. In view of this payment received for supply of software was not royalty and was only business income. The assessee did not have a permanent establishment (PE) in India and therefore business income is not taxable as per Article-7 of the DTAA. 5. The Assessing Officer did not agree with the plea of the assessee. He held that the payment received by the assessee was in the nature of royalty and he accordingly brought the same to tax. On appeal by the assessee, learned CIT(A) held that the payment in question was not in the nature of royalty and was payment for purchase of copyrighted article. Addition made by the Assessing Officer was deleted by the learned CIT(A) giving rise to Ground No. 1 2 of the revenue before the Tribunal. 6. We have heard the rival submissions. The sample copy of the software distribution agreement filed before the lower authority shows that under section 6, thereof, the distributor has to obtain orders for the product and was free to fix price of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus, a transaction of sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act. 8. Thus computer software when it is put on to a media and sold has become goods like any other audio cassette or painting on canvas or a book. It is ceases to be transfer of intellectual property right. In fact, Bangalore Bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO, 92 ITD 366 (Bang) has also taken the view that in such a situation there is no acquisition of any right in software. Definition of royalty is given in section (9)(1) Explanation (2) of the Act and the definition of Royalty in Article 12(3) of the Indo-US DTAA shows that definition of royalty under DTAA is more restrictive than what is provided in section (9)(1) of the Act. Under the definition as contained in DTAA, there should be a transfer of copyright. Sale of software b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect. His submission was that even the distributor gets only a license and therefore there can be no sale of a copyrighted article as has been held in the earlier assessment years. The submissions of the learned D.R. are principally based on the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Samsung Electronics co. Ltd. ITA No.2808 of 2005 dated 15.10.2011, a copy of which has been filed before us. The Hon ble Karnataka High Court was dealing with a case where the question was as to whether the amounts paid to the foreign software suppliers were royalty. The Hon ble Court after considering the provisions of Sec.14 of the Copyright Act, 1957, definition of Royalty under Double Taxation Avoidance Agreement (DTAA), terms of use of shrink wrap software by the end user, distributor and sub-distributor, held as follows: 24. It is clear from the above said provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under Section 51 of the Act. However, if such copying of computer program is done by a lawful possessor of a copy of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work under Section 14 (1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy el the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copy right or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent - supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-resident supplier towards supply of shrink wrapped software or off-the-shelf software is not the price of the C.D, alone nor software alone nor the price of licence granted. This is a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the respondents to the nonresident Companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 of the Act and consequences would follow as held by the Hon ble Supreme Court while remanding these appeals to this Court. Accordingly. we answer the substantial, question of law in favour of the revenue and against the assessee by holding that on facts and circumstances of the case, the ITAT was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software Suppliers was not royalty and that the same did not give rise to any income taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following Order: All the appeals are allowed. The order passed by the Income Tax Appellate Tribunal, Bangalore Bench A impugned in these appeals is set aside and the order passed by the Commissioner of Income Tax (Appeals) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness connection in India and therefore the question of the Non resident having a permanent establishment in India did not arise for consideration at all. On the issue whether the payment to the non resident was of the nature of royalty which could be brought to tax in India, the Hon ble Delhi High Court held as follows: WHETHER THE INCOME FROM THE SUPPLY CONTRACT CAN BE TREATED AS 'ROYALTY' UNDER SECTION 9(1)(vi) OF THE ACT: 50. Section 9 (1) (i) of the Act which deals with the taxability of royalty income reads as under:- "Section 9 .INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (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, or through the transfer of a capital asset situate in India" 51. The submission of Mr. Prasaran, learned ASG was that software part of the equipment supply would attract royalty as copy right of the said software programme still vests with the assessee. Therefore, payments made for the licence to use the sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment under Section 51 of the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place, since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifically Article 13, para 3 of the DTAA (Article 12, para 3 of the Model Convention) which defines royalties to mean "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work". The ITAT, it was submitted, has not appreciated that the royalty is for the use or right to use any copyright. According to him, since title of the software continued to vest with the assessee as provided in clause 20.2 of the Supply Agreement and the assessee was free to grant nonexclusive licenses to other parties, it follow that there was no full time transfer of copyright but it was only a case of right to use the software, and thus payment for use of software is to be treated as royalty. He further argued that reference to OECD Commentary was not apposite as it could not be used to interpret the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical services rendered by a non-resident company, it must be deemed that there was a "business connection", and it attracts the provisions of Section 9(1)(vii) of the Income Tax Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfillment of the main contract entered intoprincipal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Therefore, no part of the payment therefore can be classified as payment towards royalty. 6. Before us the learned D.R. as well as the learned counsel for the Assessee referred to several decisions of the Tribunal rendered on identical issue. These decisions are not being considered as the two decisions of the Hon ble High court of Karnataka and Hon ble High Court of Delhi were rendered after those decisions rendered by the Tribunal and these two decisions are the decisions of High Court available as of now on the issue. Both the decisions have taken note of the terms of the agreement subject to which software was to be used by the customer. 7. It was the submission of the learned counsel for the Assessee that where two views are available on an issue one favourable to the Assessee and the one against the Assessee, the view which is favourable to the Assessee and does not support levy of tax on the Assessee should be preferred. The learned D.R. on the other hand submitted that the decision of the Hon ble Delhi High Court was rendered in the context of sale of equipment in which software was embedded and not a case of shrink wrap software as such and therefore that decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AAR were that the applicant, a Japanese company, engaged in the business of providing "Products lifecycle management" software solutions, applications and services, marketed licensed software products mostly through a distribution channel comprising value added resellers (VAR) who were independent third party resellers. To authorize a VAR to act as a reseller the applicant entered into a general VAR agreement. The terms of the agreement explicitly provided for the appointment of reseller/distributor of product on a non-exclusive basis for making the product available to the end-user within the territory for his internal use. The product was sold to the VAR for a consideration based on the standard list price less discount ; and the VAR in turn would sell the product to the end-users at a price independently determined by the VAR. The end-user would enter into the end-user licence agreement with the applicant and the VAR for the product supplied. The reseller did not hold any inventory of the software in India. The VAR was free to negotiate the price with the customer but the VAR paid to the applicant the standard price in force less agreed discount. The reseller (VAR) would get ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and forward that offer to the applicant; and it was the applicant that accepted or rejected that offer. In the absence of an independent right to conclude the sale or offer for sale, section 14(b)(ii) of the Copyright Act, 1957, could not be invoked to bring the case within the fold of article 12(3) of the DTAA or section 9(1)(vi) of the Income-tax Act, 1961. 10. In Para 60 of its judgment the Hon ble Delhi High Court has accepted the commentary on OECD Model Convention referred to in Dassault Systems KK (Supra), which is as follows: "Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a programme to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferring the computer programme to the transferee is not relevant. For example, it does not matter whether the transferee acquires a computer disk containing a copy of the programme or directly receives a copy on the hard disc of her computer via a modem connection. It is also of no relevance that there may be restrictions on the use to which the transferee can put the software." (Underlining by us for emphasis) 11. After referring to the aforesaid OECD Commentary, the AAR in its decision rendered in the case of Dassault Systems KK (supra) observed as follows: It has been contended on behalf of the Revenue that the right to reproduce the work in any material form including the storing of it in any medium by electronic means (vide section 14(a)(i) of the Copyright Act) must be deemed to have been conveyed to the end-user. It is pointed out that a CD without right of reproduction on the hard disc is of no value to the end-user and such a right should necessarily be transferred to make it workable. It appears to us that the contention is based on a misunderstanding of the scope of right in sub-clause (i) of section 14(a). As stated in Copinger's treatise on Copyright, "the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright is a negative right in the sense that it is a right prohibiting someone else to do an act, without authorization of the same, by the owner. It seems to us that reproduction and adaptation envisaged by section 14(a)(i) and (vi) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. Copyright being a negative right (in the sense explained in paragraph 9 supra), it would only be appropriate and proper to test it in terms of infringement. What has been excluded under section 52(aa) is not commercial exploitation, but only utilizing the copyrighted product for one's own use. The exclusion should be given due meaning and effect; otherwise, section 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one's own use. Even without such licence, the buyer of product cannot be said to have infringed the owner's copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer/licensee of product has acquired a copyright therein. (underlining by us for emphasis) 12. The above decision ..... X X X X Extracts X X X X X X X X Extracts X X X X
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