TMI Blog2010 (6) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... PER BENCH : This appeal filed by the assessee is directed against the order dated 22nd October, 2008 of the CIT(A)-XXXIII, Mumbai. Facts of the case, in brief, are that the assessee, Goodlass Nerolac Paints Ltd., vide its application u/s.195(2) of the act dated 11th February, 2002 requested the Assessing Officer to issue certificate determining the sum chargeable to tax and tax to be deducted at source under the provisions of section 195 of the Income-tax Act, 1961 in respect of fee for computer software of US$ 43,000 to the non-resident M/s. IXOS Software Asia Pvt. Ltd., Singapore. The assessee vide its letter dated 11th February, 2002 submitted its contention before the Assessing Officer as under: 1. All the aforesaid locations are connected to each other by an online real time accounting system. Everyday a huge volume of data is generated and stored on the main server situated at head office. This adversely affects the processing speed of the accounting system. 2. To overcome the above problem, we are planning to buy a software which will regularly transfer the data from main server to an auxiliary server in a compressed form and will retrieve the data in uncompre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act, 1961 as they are more beneficial and the said payment will not be taxable in India. Thus, the question of deduction of tax at source u/s. 915 will not arise. 12. Assuming without admitting that the payment is taxable in India as per provisions of section 9(1)(vi) and tax is required to be deducted at source u/s. 195 of the Act. In such case, as the matter is included in the industrial policy of the Government of India and our terms of import are in accordance with the industrial policy, e3xemption u/s. 10(6A) should be allowed for tax payable on payment to be made to M/s. IXOS Software Asia Pte. Ltd. 13. In view of above, we request you to kindly determine the sum chargeable to tax and tax to be deducted at source under provision of section 195 of the Act. However, the Assessing Officer did not accept the contention of the assessee. He noted that the assessee itself is doubtful about its claim that the payment to be made to M/s. IXOS Software Asia Pte. Ltd. is commercial income in accordance with Article 7 of the Treaty between India and Singapore. He observed that this claim of the assessee has no basis. The Assessing Officer thereafter analysed the licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial profits of the Singapore company and is not liable to tax under Article 7 of the Indo-Singapore DTAA. However, the CIT(A) was not convinced with the arguments advanced by the assessee. He noted that as pointed out by the Assessing Officer, Articles 2, 3(1)(a), 3(1)(b), 3.3, 4.1, 4.2. 45., 4.7, 4.8, 9, 14.3 and schedule I of the agreement makes it very clear that the assessee is only given licence to use the software and it is not owning any software. He noted that the licence to use the software is for 50 operational users, i.e., 50 users can use the software. They can store the software in the computer. Therefore, copying the software in the computer is given for 50 users. Moreover the intellectual property of the author of a software is protected through a copyright. The intellectual property owner can exploit the intellectual property by allowing any person to copy the software for a fee. He observed that when they permit the customers to use the software through a licence, it is nothing but granting a right to copy the software programme of the computer in the computer. The payment is made for only getting such a right and without that right, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght, therefore, the transaction cannot be considered as a sale of a copyrighted article. Similarly, he noted that if it is a sale of the product then the right to further transfer the article also passes to the purchaser simultaneously. But in the instant case no such right is given. Therefore, by no stretch of imagination it can be said that the consideration is for sale of a copyrighted article. The learned CIT(A) further observed that the software is a secrete process or formula. He discussed as to how a software works in a series of instruments/operations to achieve the defined result. He noted that what the Singapore company granted to the assessee is only a right to use the software i.e., the right to use the secret process and obtain the results. Relying on a couple of decisions, he was of the view that the payment made by the assessee is for the use of the secret process owned by the Singapore company and, therefore, the payment is a royalty . For this proposition, he relied on the decision of the AAR in the case of P.No.30 of 1999 reported in 238 ITR 296. Distinguishing the various decisions cited before him, he held that the payment to be made by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised a bill for USD 62,500 @ USD 1250 for 50 users. After giving a discount of USD 19,500, the investment as per the sales order is USD 43,000. Referring to page 15 of the Paper Book, she drew the attention of the Bench to the photograph of the IXOX-eCon Server which is a secured and cost effective solution for the SAP data archiving need. Referring to pages 26 to 50 of the Paper Book, she drew the attention of the Bench to various clauses of the software agreement between the assessee and the Singapore company. Referring to page 31 of the Paper Book she drew the attention of the Bench to the definition of the licence fee which means the fees specified in schedule I payable by the customer to the Singapore company for the use of the licensed software. Similarly, the licensed software means the software which is in Schedule I consisting of a set of instructions or statements for making readable medium and for enhancement, modifications, new versions or new release of that software or part thereof. Referring to page 33 of the Paper Book she drew the attention of the Bench to clauses 2 and 3 of the agreement which defines grant of licence, delivery and installation of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eas in the case of copyright sale or in case of restricted sale an agreement is necessary. Therefore, it is not an ordinary sale as claimed by the learned counsel for the assessee. Referring to the software agreement, a copy of which is placed at Paper Book pages 27-53 the learned DR drew the attention of the Bench to various clauses. Referring to clause c of the recitals, he submitted that the Singapore company has offered to grant the assessee a non-transferable and non-exclusive licence to use the computer software and has offered to provide the assessee with support services and consulting services in respect of the computer software. Referring to page 32 of the Paper Book he submitted that the term of the licence is only for a period of 25 years. Referring to page 43 of the Paper Book, he submitted that the assessee is only having a right to use the software and there is no ownership vested in the assessee and even beyond the period of 25 years the assessee has no right to use the software. Referring to the decision reported in 172 Taxman 284, he submitted that this is not a case of sale and only a royalty agreement. He accordingly supported the order of the CIT(A) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as used in this Article means payments of any kind received as a consideration for the use of, or the right to use : (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information ; .. .. .. . .. 17. We find that the Hon ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh as reported in 271 ITR 401, while deciding a sales-tax matter, has held as under (short notes): The term goods , for the purposes of sales tax, cannot be given a narrow meaning. Properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc., are goods for the purpose of sales tax. The test to ascertain whether a property is goods for the purposes of sales tax is snot whether the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decisions relied upon by the learned DR are distinguishable on facts of the case. 19. From the aforesaid discussion, we find that the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed that the definition of royalty in the DTAA, which has been quoted above. The primary condition for bringing within the definition of royalty in DTAA is that the payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc., Right to use of a copyright is totally different from right to use the programme embedded in a cassette or CD or it may be a software. 20.In this case, the assessee had acquired a ready made off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called software . Looking to the circumstances of the case and considering the fact that the definition of royalty as provided in the treaties does snot app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was filed during the course of hearing, after considering the decision of AAR as relied upon by the CIT(A) at paras 17.1 and 17.2 of his order, has held as under : 17.1 Passing on a right to use the facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be constructed as an authority to enjoy any or all the enumerated rights ingrained in a copyright. Where the purpose of the licence or the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property inherent in and attached to the software product in favour of the licencee/customer is what is contemplate ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
