TMI Blog2010 (10) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... software products - It clearly provides that product is protected by copyright and the other intellectual property laws and treaties, and that Microsoft (or its suppliers of software code, if any) own the title, copyright and other intellectual property rights in the product - user is paying for getting a copy of the software and not certain limited rights in software, which rests with the copyright owner of the software programme - There is nothing either in the Income tax Act or Indo-US DTAA that once a case falls in one of the clauses of Explanation 2 of section 9(1)(vi) it cannot be considered in any other clause - Held that: Microsoft computer programmes are inventions and the payment made for the use or the right to use the same would amount to royalty - In the result, the appeals filed by Microsoft Corporation and Gracemac are dismissed and the appeals filed by MRSC are allowed - ITA NOS. 1392 to1395(Del)/2005 &1331 to 1336/2008 - - - Dated:- 26-10-2010 - RAJPAL YADAV, K.D. RANJAN, JJ. N. Venkataraman, Rajan Vohra, Salil Kapoor, Mohd. Shafiq, Sushant Mehta and Ms. Manju for the Appellant. S.G. Srivastava and L.M. Pandey for the Respondent. ORDER K.D. Ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gracemac, USA @ 35%/40% of net sales consideration received by MRSC from Indian distributors in India under Section 9(1)(vi)(c) of the Act and Article 12(7)(b) of the Indo- US Double Taxation Avoidance Agreement (DTAA) on the ground that Gracemac s source of royalty is MO which distributes Microsoft software products in India through MRSC and accordingly, Gracemac is getting royalty out of the licensing of Microsoft software products carried out in India. The assessing officer also held that the royalty received from MO is taxable under Article 12(7)(b) of the India US DTAA as the payment to Gracemac is based on the number of users of intellectual property rights in India. Ld CIT(A), however enhanced the assessment by bringing the entire consideration received by MRSC from Indian distributors on the contention that MRSC and MO are legal fa ade. To this extent, the same revenue is being taxed in case of MRSC and Gracemac for the Assessment Years 1999-00 to 20001-02 and this according to assessee has resulted in double taxation for these Assessment Years. 6. For sake of convenience as identical issue is involved in these cases, we will take up appeal filed by assessee in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng royalty payments received in respect of system software supplied along with computer hardware signifies that by implication, consideration for use of software products in all scenario except where the specific exemption has been granted, will be liable to tax as royalty income under section 9(1)(vi) of the Act; 6. Erred in law in concluding that the provisions of section 115A of the Act, characterizes the income from sale of software (deemed to be income of Appellant) as royalty under the Act without appreciating that section 115A of the Act applies to royalty payments as defined under section 9(1)(vi) of the Act and in the instant case, as the revenue does not amount to royalty under the provisions of section 9(1)(vi) of the Act, there is no basis to rely on the provisions of section 115A of the Act; 7. Failed to appreciate that the sale of software is sale of Copyrighted Article and not Copyright in Microsoft software and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of the India US tax treaty in the absence of a Permanent Establishment of the Appellant in India; 8. Failed to comprehend the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties within the meaning of Explanation 2 to section 9(1)(vi) of the Act as well as under Article 12 of Double Taxation Avoidance Agreement between India and US. 8. The facts of the case stated in brief are that upto 31.12.1998 Microsoft Corporation (MS Corp) had directly entered into agreements with various Indian Distributors for sale of Microsoft products being off the shelf 7 shrink wrapped software, on principal to principal basis. The Indian Distributors, in turn, sold these Microsoft products to re-sellers/consumers. The above business model was changed w.e.f. 1.1.1999, whereby the Microsoft products were sold by Microsoft Regional Sales Corporation [MRSC], USA, to Indian distributors, through its branch office in Singapore. The business model w.e.f. 1.1.1999 onwards in case of MRSC and Gracemac is as follows :- (i) Microsoft Corporation entered into agreement on 1/01/1999 with Gracemac Corporation, USA, a hundred per cent subsidiary, to grant an exclusive license in exchange of all shares to manufacture in the retail territory the MS retail software products including all updates as developed from time to time and to distribute such MS retail software products manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MRSC in Singapore. MRSC, in turn, has entered into agreements with various distributors in various countries including India. The distributors have a right to distribute the copies of software in their respective countries. (v) The Microsoft software copies are delivered by MRSC to the Indian Distributors Ex-warehouse in Singapore. The distributor sells the products to the re-sellers in India which, in turn, sells them to the end users. (vi) The Microsoft Corp. entered into agreement with end users to use the software products licenced to them as per terms of agreement. 9. The modus operandi of distribution models for supply of software to Indian distributors is as under:- (a) The first model known as Fully Packaged Product (FPP) model is meant for small customers. In this model, MO, Singapore, produces the copy of software program by embedding the software in a media and sells the media containing the software through the supply chain i.e. MRSC and distributors in India to the end users. (b) The other category of sale of products is called the Volume Purchased Products (VPP) model, which is for large customers like corporate customers. In this model, instead of sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty out of licensing of software carried out in India. The assessing officer referring to provisions of Article 12(3) of Indo-US treaty has noted that royalty and fee for included services shall be deem to arise in a contracting State when payer is a resident of that State. The assessing officer was of the view that the payment was for the right to use the copyright in the programme i.e. the software and not for manufacturing of tangible products. According to the assessing officer there was no dispute to the fact that as per Article 12(2) the royalty was to be taxed in India if it was arising in India. Since the payment of royalty was directly related to source in India and, therefore, the assessing officer treated the sale as taxable in India. As regards the contention of the assessee that commercial exploitation of right to manufacture the software was outside i.e. in Singapore, was rejected on the ground that in case of volume licences one hard disc is sent in India to customer and is granted a number of licences depending upon his requirement and he makes copies of the software in India and loads it on its computers. Therefore, the payment is related to grant of licence a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said that he has acquired the copyright or the right to use copyright in software supplied. The end user had simply used the right to use a copyrighted article. It was also submitted that MRSC derives only sales revenue from the independent distributors and not licensing revenue. The products are delivered by MRSC to Indian distributors outside India and not taxable in India. The Revenues received by MRSC may be taxed as business profit under Article 7 of the tax treaty in the event MRSC carried on business in India through a permanent establishment [PE] in India. Since MRSC did not have PE in India its income was not taxable under Article 7 of the tax treaty. However, the assessing officer treated the payment received by MRSC by Indian distributors as royalty within the meaning of section 9(1)(vi) of the Act. 11. On appeal ld. CIT (Appeals) upheld the stand taken by the assessing officer by observing as under:- (a) that the consideration received by the assessees in appeal is for right to use copyright in computer software as defined under section 14 of Copyright Act, 1957. (b) that the computer software can also be covered under other Intellectual Property Rights (IPR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of constitutional Bench of Hon ble Supreme Court in the case of Padmasundara Rao v. State of Tamil Nadu, [2002] 255 ITR 147 wherein at page 155 it has been held that in order to avoid absurdity, provisions should be so read which results into bringing out of the correct intention of the legislation and produce a rational construction. 13. It has further been contended by ld counsel for the assessee that the contention of the ld CIT(A) that software programme should be considered as patent or invention also does not hold good. Since computer software/programme has been granted protection under Indian Copyright Act, 1957, in order to determine the taxability of the assessee pursuant to sale of computer programme to end user under provisions of Explanation 2 to section 9(1)(vi), reliance should be placed only on the Indian Copyright Act, 1957 and not under any other category of intellectual property right laws. Ld counsel for the assessee placed reliance on the decision of Bangalore Bench in the case of Sonata Information Technology Ltd. v. Addl. CIT [2006] 103 ITD 324 for the proposition that since computer programme has been defined under the Copyright Act, 1957, it is incorrect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng either a Fully Packaged Products, (FPP) or a Volume Purchase Products (VPP) has only purchased copyrighted articles and has not acquired any copyright. Consequently the sale proceeds cannot be subjected to royalty. He also placed reliance on the following judgments wherein it has been held that computer software is product/goods and therefore a sale of copyrighted article gives rise to business income Motorola Inc. (supra) Infrasoft Ltd. v. Asstt. CIT [2009] 28 SOT 179 (Delhi) Lucent Technologies International Inc. v. Dy. CIT [2009] 120 TTJ 429) (Delhi) Lotus Development Asia Pacific Ltd. Corpn. [IT Appeal Nos. 564 to 566 (Delhi) of 2005] Sonata Information Technology Ltd. v. Dy. CIT [2006] 7 SOT 465(Mum.) Sonata Software Ltd. v. ITO (Intl. Taxation) [2006] 6 SOT 700 (Bang) Samsung Electronics Co. Ltd. v. ITO [2005] 93 TTJ 658 (Bang) Hewlett Packard (India) (P.) Ltd. v. ITO (International Taxation) [2006] 5 SOT 660 (Bang.) Dy. CIT v. Metpath Software International Ltd. [2006] 9 SOT 305 (Delhi) 16. Further ld CIT(A) has held that the assessee have received consideration under the software license agreement for transfer of some rights including the granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IR 2007 Delhi 226 wherein High Court while concluding that Copyright is a negative right has held that the object of copyright law is to prevent copying of physical material and form in the field of literature and art. It is essentially a negative right given to the author, in the sense that the Act does not confer the owner with a right to publish its work, but the right to prevent third parties from doing that which the owner is solely allowed to do under the Act. Accordingly, since the end user can only use the copy/copies of software for internal use, there is no right in copyright in software is granted to end user. 17. In short, it has been submitted that copyright is a negative right and also a bundle of rights. It deals with the right against third parties or consumers or end users. Consequently, if a statute, through a provision of law, makes it clear that the performance of any of the enumerated activities under section 52 of the Copyright Act will not constitute an infringement of a copyright, it would only mean that the third parties or customers or end users do not need a copyright to perform the enumerated activity. The force of law, through a statutory provision, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsiderations stemming from legislative history must not be allowed to override the plain words of a statute. A proviso cannot be construed an enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect. Further, if the language of the enacting part of the statute is plain and unambiguous and does not contain the provisions which are said to occur in it, one cannot derive those provisions by implication from a proviso. In other words, it is well settled principle that if the language of the enacting part of the statute is plain and unambiguous and does not contain the provisions which are set to occur in it, one cannot derive those provisions by implication based on the proviso. In fact, wherever needed and whenever intended, the Parliament has employed the expression computer software in various places vide sections 10A and 80HHE of the Income Tax Act, 1961. The parliament could have made the intention clear by explicitly referring the term computer software in clause (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961 if intended. 20. He has further submitted that the Govt. of India, between 1996 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictions and limitations imposed by a copyright owner in a book published and sold at a time when a buyer buys the book for his use. In the case of a book, the conditions and limitations form part of the published book. In the case of a copyrighted article in the nature of computer programme/software, the EULA may form part of the product or may be given as a separate printed document, along with the sale of the products. 23. Further, clause 19 of the EULA makes clear distinction between owning the copyright and selling copyrighted articles. It clearly provides that product is protected by copyright and the other intellectual property laws and treaties, and that Microsoft (or its suppliers of software code, if any) own the title, copyright and other intellectual property rights in the product. The expression the product is licensed not sold is nothing but a standard clause in the EULA and cannot vitiate or alter the status of the transaction which had happened through an entire supply-distribution channel at an arms length. Clause 19 reasserts that copyright is never sold or handed over and the end user at no point of time should assume owning any copyright. Further the term A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer / CIT(A) that the transaction should be examined under every sub-clause of Explanation 2 to section 9 (1) (vi) of the Income Tax Act, 1961 to see whether the transaction could be assessed as royalty, submits that the Assessing Officer / CIT(A) has not provided any credible basis in support of his contention and has not placed on record as to which of the sub-clauses could be invoked against the assessees to tax the impugned transaction as royalty. Even where it is accepted for argument sake that the transaction involved in the present appeals is that of licensing of the software programme to end user and only in a situation where any IPR (being copyright) is given to the end user, the transaction can be considered as falling in the definition of royalty. Computer software qualifies as a copyrighted article and the granting of license in a product does not itself qualify the transaction as amounting to royalty. 27. Referring to the contention of the ld CIT(A) that software programme should be considered as patent or invention, ld counsel for the assessee submits that such an argument does not hold good. Since computer software/ programme has been granted prote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter Software is conspicuous by its absence in Article 12(3) of the treaty. There is a list of other countries namely Armenia, Hungary, Ireland, Portugal, Slovenia, Sudan, Uganda, UAE where tax treaties with India were entered or revised in recent years without incorporating the expression Computer Software in the definition of royalty . Thus there is no expressed / implied intention / policy of India to include computer software in the definition of royalty. 30. On merits it has been submitted that for the years under appeal i.e. AY 1999-00 to 2004-05, Gracemac Corporation was assessed for the royalty income received from MO which is based on 35%-40% of the revenue received from Indian distributors on the ground that the royalty received from MO is arising out of a source in India. However, for the same years, it was subsequently held that the assessee (Gracemac) should be liable to be taxed for 100% of the revenue received by MRSC from sale of software and therefore the assessee s income was enhanced from 35%-40% to 100%. The learned CIT(A) has in the case of Gracemac examined in detail the structure followed by MS Corp for distribution of its software products in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITR 31 wherein it was held that when a Sovereign State recognizes the legal existence of an entity by issuing a tax residency certificate it is obligatory for any other Sovereign State including India to recognize the same and it is not open to Revenue to declare these entities as fa ade without any basis. This judgment support the proposition that MO and MRSC which are incorporated under the laws of Singapore and US having the tax residency certificate issued by authorities of their respective countries cannot be considered as fictitious entities without any legal basis. It is pertinent to note here that Revenue has never contended that the sale of software programme sold through a distribution channel have not been undertaken at arm s length price nor has challenged that transaction is a principal-principal relationship. It seems that Revenue itself is taking contradictory view to justify the taxability of Gracemac and MRSC without any valid justification for the same. 32. Revenue has argued that without prejudice to its main contention regarding taxability of payments made by end user for use the software programme as royalty, payment made by MO (35%/40%) to Gracemac is deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to do so from India, in which case by virtue of the expression use in India would get the domain power to tax. The fact pattern clearly shows that in the assessee s case, the use of copyright is the right to copy the master copy (sublicensed by the assessee to MO). This right to copy the master copy is exercised by MO in Singapore and hence, copyright is not used in India. Consequently, Article 12(7)(b) is not attracted. 34. At the outset ld counsel for the Revenue Sh. G.C. Shrivastava has submitted that the thrust of assessee s argument is that it is a sale of copyrighted article and not the transfer of any rights in the copyright and hence the income would not fall within the meaning of royalty under the Income tax Act, 1961 or the Double Taxation Avoidance Treaty (DTAA) between India and USA. He has further submitted that the issue has to be decided in terms of the provisions of the IT Act, 1961 and under Indo-US DTAA and not under the Indian Copyright Act. The purpose of the two enactments is different - one taxes incomes and the other protects rights of the authors. Therefore, any reference to Indian Copyright Act, 1957 has to be made for the limited purpose of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its that the moot point for consideration is what the end-user is paying for? Is the payment for the material on which the programme is written or is it for the programme, which is an intellectual property? The payment is definitely for obtaining the right to copy the programme on to the hard disk and to use it. What is being used is not the CD but the programme contained in the CD, which is protected by copyright and right to copy the programme has to be exercised before it can be put to use. The nomenclature given to a transaction or to a right or a property is not decisive of the nature of the transaction or of the rights or of the property. Whether we call it a copyrighted article or a copy right, it makes no difference so long as the consideration paid or payable by the licensee is in respect of exercising the rights in a copyright. He placed reliance on the decision of Hon ble Gujarat High Court in the case of CIT v. Ahmedabad Mfg. Calico Printing Co. [1983] 139 ITR 806. 37. Ld AR for the Revenue continues his submissions by saying that the Income tax Act, 1961 maintains a clear distinction between an article and computer software. The provisions contained in Section 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 3(K) of Indian Patent Act which provides that computer programme per se or algorithms are not patentable inventions. However, as held in the case of Microsoft by US courts, some of the softwares may not be computer programmes per se but may be the original inventions and hence patentable. 41. Ld Counsel for the Revenue has further submitted that assuming for a while that computer programmes are not patentable, still these would fall in the category of inventions. There can be overlap between copyright and patent but it does not mean that both are mutually exclusive. A property may be protected both as a copyright and as a patent. In fact MS Softwares enjoy this dual protection. MS Software is also a process to achieve a certain result. Process is defined in the context of Section 9(1)(vi) to mean a series of steps to achieve a certain result. These programmes are designed to provide a certain result to the end-user. The end-user gets the right to use the process contained in the programme to achieve a desired result. The CIT (A) has relied upon the order of his predecessor in this regard. The assessee has given the right to use the patent, invention or process (each as altern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise in India in respect of a computer software which is an integral part of a hardware supplied under a defined policy of the Govt. There is no reference to copyright in the proviso but only to rights in respect of computer software. A proviso can carve out exception out of a subject matter covered in the main section. The argument of the ld. counsel for the assessee that the proviso cannot create a charge is well taken. However, in this case, there is nothing to suggest that computer software is one such intellectual property as is not covered in the Explanation. It is only by a strenuous argument of the assessee viz, that right of reproduction of one single copy in the case of FPP or of a number of copies in the case of VPP for personal or noncommercial use is not a copyright. This argument of the ld counsel for the assessee is obviously against the plain and literal meaning of the words used in Section 14(a)(i) of the Indian Copyright Act. A meaning is sought to be given to the Explanation 2 that the computer software is not covered within its scope. Such an argument suffers from different fallacies (i) the second proviso is redundant (ii) Parliament enacted the Proviso in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activity to sell or give on commercial rental a copy of the computer programme within copyright. The meaning of the word reproduction used in section 14(a)(i) is explained in Govt. of India Publication Handbook of Copyright Law to mean the right to make one or more copies . There is no contemplation that reproduction will arise only if mass copies are produced or only if these are produced for sale or commercial exploitation. The arguments to that effect do not get any support from the language employed in the enactment. It is a settled rule of interpretation that in finding out the meaning of the section, the provision should be read in its plain grammatical meaning. Nothing more is to be read. There is no room for any such intendment. Thus there being no ambiguity in the language employed in the provisions of section 14 if the Copyright Act, import of such qualifications or limitations to the rights contemplated therein is wholly unnecessary and unjustified. 45. He has further submitted that treaties are not legislative enactments. These do not flow as acts of Parliament. Being an executive function, the words and phrases used in the treaty are obviously the outcome of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be advanced that Parliament prescribed rate of tax for an item of income not covered in the charging section (9)(1)(vi). 47. Referring to the arguments raised by ld Counsel for the assessee that EULA is signed between the end-user and Microsoft and not with the assessee, ld. Counsel for the Revenue Sh. G.C. Srivastava has submitted that Microsoft has entered into an agreement with the assessee to grant exclusive right to licence the computer softwares to customers in India and elsewhere. The said agreement, however, stipulates that while granting the license, the assessee will use the standard format and log etc. as made available by the Microsoft. Thus the terms of the agreement bind the assessee to execute the agreement with the customers in the name of Microsoft yet for all intent or purpose the right to grant license rests with the assessee and not with Microsoft. In that event the license fee received by the assessee would also not belong to Microsoft. It would only arise to assessee. The learned counsel for the assessee referred to the chart showing distribution model and sought to argue that source of none of the activities in the chain like manufacturing or marketing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of income from royalty u/s 9(1)(vi)(b), it accrues in India if the royalty is payable by a resident except where such payment is in respect of a right or property or information used or services utilized for the purposes of business outside India or for earning income outside India. Under section (9)(1)(vi)(c) the income from royalty will also be deemed to arise in India if it is paid by a non-resident, if the right to property is used for business in India or for earning of any income from any source in India. Thus, the taxability of royalty income is directly linked to the payer and the place of utilization of the right or property. It is not in dispute that the assessing officer taxed income from royalty in respect of rights which are transferred to Indian licensees and which are being used for earning income from sources in India. He has further submitted that the assessee transferred manufacturing, distribution and licensing rights for large account customers to Microsoft Operations for which they received royalty at the 40% of the net selling price to Indian end users. The AO taxed this amount of royalty on gross basis as provided for in section 115A of the Act an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are necessarily exercised in such a situation. The argument that consideration is paid for each number of copy made is totally irrelevant. It is a settled proposition of law that mode of payment and the basis of payment of consideration will not determine the nature of royalty income. He has further submitted that in the case of OEM, Microsoft Corporation had offered income from royalty to tax in India in earlier years. The moot point for consideration is not whether the licenser puts the copy of the software on the hardware and sells the hardware or not. The issue to be decided is whether the assessee has transferred any rights in the copyright as defined in Section 14 and whether has received any consideration for the same. Both such necessary ingredients are satisfied in the case of the assessee. There is no exclusivity in granting the rights to OEMs as Microsoft had granted such rights to several such manufacturers and still the income was returned as one from royalty. In fact, in the periods thereafter, a new entity of the group which is assigning such rights to OEMs in India is returning income from royalty on that basis. It is, therefore, not open to argue by drawings an art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orth in the agreement . Reliance on the OECD commentary or on the IRS regulations in support of the proposition that it is a sale of copyrighted article is not valid in view of India s reservations on the OECD commentary. Reservations on the commentary imply that the views given in the commentary are not the views of Govt. of India. These reservations assume importance for the fact that OECD seeks to bring the changes in concepts of taxation by bringing changes in the commentary and not in the text of the Articles which can be done only by bilateral negotiations. The commentaries thus become ambulatory. It is not the case that when India signed the treaty with USA such views existed in the OECD commentary or that both contracting states had agreed to such a view. In that event, reservations would not be needed but when a contracting state feels that the revised view in the commentary is not in tune with their stated original position with different contracting states, it does offer its reservation to the commentary There is neither any contradiction nor any change in the stand of Govt. of India. Though. India is not a member of OECD, yet it has chosen to state its position to remov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been submitted that the Hon ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 (SC), has held that a decision of a court takes its colour from the questions involved in the case in which it is rendered and while applying the decision, the courts must carefully try to ascertain the true principles laid down by the decision and not to pick out words or sentences from the judgment, divorced from the context, to support the reasoning. It is in the above backdrop that CIT (A) has discussed the principles of sub-silentio and per in curium in his order as regards the binding nature of the decisions. The decision of a coordinate Bench or a Special Bench will not have a binding precedence unless the Bench comes to the conclusion that if the new facts brought out in the present case or the new legal submissions (not raised before or considered by earlier Benches) were before those Benches, the decisions would still not have been different. It has further been submitted that some of very vital facts and legal submissions as were not raised and/or considered by coordinate Benches in the other decisions are: (a) The clauses in the agreements, which clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The argument of the learned counsel that these were the observations of the concurring judge, Hon ble Justice Sinha, makes no difference to the point at issue. The AAR had the occasion to examine the decision in the context of Explanation 2 in the case of (Airports Authority of India In re [2008] 304 ITR 216 (AAR - New Delhi) and it has been held that the said decision will have no applicability in deciding the taxability of royalty income u/s 9(i)(vi) of the Act. The ld counsel for the Revenue has pointed out that the assessee seeks to rely on this decision for the proposition that there is difference between copyright and copy righted article. He submits that the decision of the Apex Court will have to be read in the context in which it was rendered. The Hon ble Court observed but the moment, copies are made and marketed, it becomes goods which are susceptible to sales tax . The factor of marketability or the copies of software being regarded as goods are the observations which have to be read by the qualifying words appearing at the end of the sentence viz which are susceptible to sales tax . 56. He has further submitted that in the case of Motorola Inc. (supra) the specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights to the licensees. (iii) End-user license agreement, which makes specific transfer of rights in a copyright. (c) On law, the following aspects were not raised and/or considered by the Special Bench: (i) Effect of second proviso to Section 9(1)(vi) and of Section 115(1 A). (ii) Effect of distinction between computer software and article maintained under the IT Act. (iii) India s reservation on the OECD commentary. (iv) The submission that reference to the Copyright Act has to be for the limited purpose of finding out the definition of copyright . (v) The submission that the rights u/s 14(a)(i) do not cease to be rights by reference to Section 52 particularly when in the present case, there is no breach of copyright by the licensee so as to attract Section 52. In fact, all such rights are specifically given under the license. (vi) The submission that rights u/s 14(a)(i) are not qualified or limited by the nature of the use of such rights by the licensee. (vii) In view of the above, it has been submitted that the decision of the Special Bench would not be applicable to the facts of present case before the Tribunal and in view of the submissions not raised bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icense to copy the programme (right to reproduce). The connected appeal in the case of MRSC proceeds on the basis of right of distribution (sale). In that case, the question to be considered would be whether Indian distributor is making payment for getting the right to sell the software, as contemplated under section 14(b)(ii). The fact of Microsoft Software being patented in USA and also the fact that various agreements between Microsoft and the Gracemac; Gracemac and MO and MRSC and distributors and Microsoft and EULA clearly stipulating that the programs are protected both under copyright as also patent was not brought to the notice of the Tribunal. In the light of these agreements, and the products enjoying patent protection, it is not open to argue that because of the observation of the ITAT in the case of Sonata Information Technology Ltd. (supra), computer software cannot be treated as patent, invention or process etc. 61. The other decisions of the ITAT relied upon by the appellant are also distinguishable and not a binding precedence for similar reasons as these decisions primarily rely on Motorola. 62. In rejoinder the ld. counsel for the assessee clarified the positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue have been rejected on the ground that the same are not applicable to the issue involved in the present case. Referring to TRIPS agreement and WIPO Copyright Treaty the ld. counsel for the assessee submitted that additional right under section 14(b)(ii) of Copyright Act was granted to owners for commercial rentals of copies of computer software. He further submitted that term sale in section 14(b)(ii) of Copyright Act has been used merely to prevent sale of used products by end-users as in such case more than one end-user can use the same copy of software again. In the distribution channel no commercial exploitation can be envisaged as distributor is only a medium to distribute a copy of software product to end-user (without any use, adaptation, alteration etc.). Therefore there is no commercial exploitation by the distributors. It has also been submitted that for a transaction to qualify for royalty under Explanation 2 to section 9(1)(vi) two important ingredients are required i.e. the right should be exclusive under section 14(b)(ii) of Copyright Act and (ii) for the purpose of Explanation 2 to section 9(1)(vi) the consideration must be towards grant of right in copyri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or and resellers only distributes the same copy till the time it reaches the end user. Keeping a wider perspective, even if all the elements in the supply chain obtain a right to sell i.e. MRSC, distributors and resellers, there is no price for such right to sell and the consideration flowing from end users till MRSC are purely for supply of copy of software. MRSC has neither given any exclusive rights in the software programme nor the consideration received from Indian Distributor is towards grant of right to sell software programme. 67. We have heard both the parties and gone through the material available on record. In these cases the ld CIT(A) has upheld the order of the assessing officer holding that the payments made by the end users amounts to royalties within the meaning of section 9(1)(vi) of the Act. In brief the controversy revolves around the point whether the use of or the right to use (including the granting of licence) in respect of computer programme amounts to royalty or sale of copyrighted articles. 68. The first contention of the ld. counsel for the assessee is that the word of should be supplied after copyright and before literary so as to read the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films On plain reading of definition of royalty as appearing in clause (v) of Explanation 2 of section 9(1)(vi) one will find that the legislature has used coma (,) after word copyright . It is settled law that use of punctuation marks cannot be said as redundant. The use of punctuation mark coma (,) after word copyright indicates that legislative intent is to treat word copyright independent of words literary, artistic or scientific work . Therefore, word copyright cannot be read in conjunction with words literary, artistic or scientific work by substituting punctuation mark coma (,) by word of . Therefore, without making any tinkering to the language employed in clause (v) of Explanation 2 it reads in a case where there is transfer of all or any rights (including the granting of licence) in respect of any copyright, literary, artistic or scientific work etc., the consideration received by an assessee will be liable to tax as royalty. Thus none of the words such as literary, artistic or scientific work has become redunda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the assessee has also pleaded that the doctrine of casus omissus be applied while explaining the provisions Article 12(7)(b) of Indo -US DTAA. It has been submitted that the term right in article 12(7)(b) should be interpreted to mean Copyright as used in the Article 12(3)(a) for harmonious construction. What is essential under Article 12(7)(b) is that the copyright itself should be used in India. Accordingly, it has been submitted that Article 12(7)(b) should be read as under: Where the consideration for use of, any copyright is relating to the use of such copyright in India, the royalties shall be deemed to arise in India. This contention of the ld. Counsel for assessee cannot be accepted as it would amount to modification of Indo-US DTAA. The language of Article 12(7)(b) is clear and unambiguous. The royalties or fees for included services shall be deemed to arise in that Contracting State in which the use of, or the right to use, the right or property, or the fees for included services is performed. There is vast difference between the language used by authors of Article 12(7)(b) and proposed above by the ld counsel for the assessee as is evident from Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter software is very much covered under the definition of royalty as appearing in the Act and (ii) the law treats computer software as different from copyright in any book. The suggestion of the assessee that section 115A is only a machinery section is totally misconceived as a section which provides the rate of tax cannot be a machinery provision. He further submitted that a ridiculous proposition has been sought to be advanced that Parliament prescribed rate of tax for an item of income not covered in charging section 9(1)(vi) of the Act. No rate of tax could be provided in section 115A, unless computer software gives rise to royalty income. 74. We have heard both the parties and perused the material available on record. Chapter XII of the Income tax Act, 1961 deals with determination of tax in certain special cases. Section 115A deals with computation of tax payable on income by way of dividend, royalty and technical fees in the case of foreign companies. Section 115A(1 A) provides that where the royalty payment is in respect of transfer of all or any rights (including the granting of a licence) in respect of copyright in any book to an Indian concern or in respect of any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commentary should not be placed at all and the issue relating to royalty be decided on the basis of provisions of Income tax Act, 1961 read with Indo-US DTAA. He has also submitted that the computer software is different from Article or goods and the Parliament has recognized the difference by enacting section 80-HHE for export of computer softwares. If computer software was included in the definition of article or goods there was no need for enacting a separate section for export of computer softwares. 76. We have heard both the parties and examined the contentions carefully. In the cases before us the taxation of payments made by end users for computer programme in the form of shrink wrapped software through a distribution channel is involved. The expression copyrighted article is not defined either in the Income-tax Act or in Indo-US DTAA. As per Law Lexicon the term copyrighted means when a copyright is registered. As per section 2(o) of Patents Act, 1970, patented article and patented process means respectively an article or process in respect of which a patent is in force. However, there is no such definition in the Copyright Act, 1957 defining copyrighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the decision of Hon ble Madras High Court in paragraph 16 rejected the contention of Revenue based on OECD commentary by holding as under: 16. Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or in any other agreements. 79. From the decision of Hon ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra) it is clear that OECD Commentary or US IRS Regulations would not be a safe or acceptable guide or aid for interpretation of provisions of Income tax Act, 1961 or Double Taxation Avoidance Agreement between India or other country. During the course of arguments the ld. Counsel for the assessee has not brought out anything to suggest that the language used in Explanation 2 to section 9(1)(vi) or Article 12(3) of the treaty defining the term royalty is ambiguous. In fact the words copyri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re very different. While the object of the Sales tax law is to tax transactions of sale of movable properties, Income-tax law is concerned with taxing incomes and profits of individuals, companies and other entities in whatever manner earned . Delivery of goods on hire purchase and transfer of right to use goods are deemed under this branch of law as amounting to same. There is no provision with regard to royalty under the Sales tax law. As could be seen from Tata Consultancy s case [2004] 271 ITR 401 (SC), the court has treated the disc / floppy containing the software as goods, whose value has been greatly enhanced because of the intellectual property input incorporated in it. Passing off the right to use intellectual property as such has not been regarded as a taxable event. On the other hand, under the Income-tax Act as well as the DTAA the payment made in lieu of transfer of right to use copyright is a royalty income. The transfer of disc/floppy on which the copyrighted software has been inscribed is immaterial for this purpose. From the decision of AAR it is clear that the issue of royalty was not before the Hon ble Supreme Court nor was it required to be adjudicated upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is guilty of an act of piracy . On a careful reading of the decision of Hon ble Supreme Court in the case of R.G. Anand (supra) above, one would infer that Hon ble Court has used expression copyrighted work with reference to a work in which a copyright subsists. 82. Before we embark upon any enquiry with respect to construction of Clause (v) of Explanation (2) to section 9(1)(vi), we have to keep in mind certain basic principles of interpretation of statutes. It is settled law that that the words of a statute are first understood in their natural, ordinary or popular sense and phases and sentences are construed according to their grammatical meaning unless that leads to some absurdity or unless there is some thing in the context, or in the object of the statute to suggest the contrary. In a case if the language of the statute is not clear and there is need to resort to aids of construction, such aids can be either internal or external. Internal aids of constructions are definitions, exceptions, explanations, fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuations, saving clauses, non obstante clauses, etc. The external aids are dictionar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to(iv), (iva) and (v). 85. The term royalty takes into its ambit the industrial and copyright royalties. Transfer of the right in the property is not the subject matter. It is the transfer of the right in respect of the property . The two transfers are distinct and have different legal effects. In first category the rights are purchased which enable use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to reproduce the work in any material form including the storing of it in any medium. Section 14(b)(ii) takes the activity to sell or give on commercial rental a copy of computer programme within the ambit of copyright. He has referred to Government of India Publication Hand book of Copyright Laws according to which copyright means the right to make one or more copies. Therefore, according to the ld. counsel for the Revenue there is no contemplation that reproduction will arise only mass copies are produced or only if these are produced for sale or commercial exploitation. 87. We have considered the submissions made by both the parties. The word copyright is neither defined under Income-tax Act nor under Double Taxation Avoidance Agreement. Section 14 of the Copyright Act, 1957 defines the term copyright . Clauses (a) and (b) of section 14 of the Copyright Act, 1957 which are relevant for deciding of the issue are extracted as below: 14. Meaning of copyright - For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome other party to do one or more acts will not have copyright in respect of the property. Even grant of one right in respect of a copyright or work would amount transfer or the use of copyright. Section 30 of the Copyright Act, 1957 empowers the owner of the copyright in any existing work or in future work to grant any interest in the right by licence in writing signed by him or by his duly authorised agent. Therefore, for the purposes of a licence there is no requirement in Copyright law that the author should grant exclusive right to other person to do all or any of the acts to which the author is having exclusive rights. The expression reproduce used in section 14(a)(i) is explained in Govt. of India Publication Handbook of Copyright Law to mean the right to make one or more copies . There is no contemplation that reproduction will arise only if mass copies are produced or only if these are produced for sale or commercial exploitation. We are not dealing with an issue whether or not; there is any infringement of copyright for which reference to section 51 or section 52 of the Copyright act, 1957 should be made. The issue of royalty is to be decided as provisions of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above reasons a computer programme has been treated as literary and the author has been granted protection under the Copyright Act, 1957. Since the computer programme has been considered as a literary work in order to protect the interests of the author under the copyright Act, it would be incorrect and illogical to interpret the income tax provisions relating to royalties based on the Copyright Act. Whether a consideration is in nature of royalty or not reference has to be made to provisions of Income tax Act and Indo-US DTAA. But since the computer programme is a literary work within the meaning of sections 2(ffc) and 2(o) of the copyright Act, the consideration received will be in nature of royalty if it is in respect of the transfer of all or any rights (including the granting of a licence) in respect of the same under clause (v) of Explanation 2 of section 9(1)(vi) of the Act. 90. There is nothing either in the Income tax Act or Indo-US DTAA that once a case falls in one of the clauses of Explanation 2 of section 9(1)(vi) it cannot be considered in any other clause. Moreover the plain reading of definition of royalty as contained in Explanation 2 to section 9(1)(vi) and Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d result in giving arise to royalty payments under Explanation 2(ii)/(iii) of Section 9(1)(vi) of Act. Reliance has been placed on New Oxford Dictionary wherein the meaning assigned to the word process is series of action or steps taken in order to achieve a particular end . To provide a clear understanding of the term use or right to use a process, reliance is placed upon the judgment of ITAT given in the case of Asia Satellite Tele Communications Co. Ltd. v. Dy. CIT [2003] 85 ITD 478 (Delhi) wherein it was held that assessee derived benefit by utilizing the process in the transponder facilitating rely of their programme to the viewers and process involved in the transponder was used by the assessee for carrying on their business. 93. Ld Counsel for the assessee in rejoinder has submitted that since the Parliament has chosen to classify computer programs as literary work under section 2(o) of the Copyright Act, the other category of the IPR s which are patent, invention, secret formula or process will not operate. However, even if computer software is to be considered as falling under process, the term process has to be interpreted as an intellectual property right ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was deriving income from lease of transponder capacity of its satellites. The assessee was amplifying and relaying the signals in the footprint area after having been linked up by the TV channels. The essence of the agreement of the TV channels with the assessee was to relay their programmes in India. The responsibility of the assessee was to make available programmes of the TV channels in India through transponders on its satellite. The function of the satellite in the transmission change was to receive the modulator carrier that earth stations emitted as up-linking, amplifying them and retransmitting them and down-link for reception at the destination earth stations. The meaning of the word process being a series of action or steps taken in order to achieve a particular end, considering the role of the assessee in the light of meaning of the term process , it was evident that the particular end, namely, viewership by the public at large was achieved only through the series of steps taken by receiving the up-linked signals, amplifying them and relaying them after changing the frequency in the foot-print area including India. It was held that the TV channels in entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er software/programme is an invention, the ld counsel for the assessee submits that since computer software/programme has been granted protection under Indian Copyright Act, 1957, in order to determine the taxability of the assessee pursuant to sale of computer program to end user under provisions of Explanation 2 to section 9(1)(vi), reliance should be placed only on the Indian copyright Act, 1957 and not under any other category of intellectual property right laws. On the contrary the contention of Revenue is that computer software, particularly Microsoft software products also fall within the ambit and scope of an invention and a patent . 97. There is no dispute that MS Softwares are patented in USA and find mention in the parent subsidiary agreements. No doubt the computer software are provided protection under copyright Act as literary work, it does not mean that the computer programme will not be an invention. These softwares are held to be original inventions. The assessee has himself asserted in their agreements that what is being distributed by MRSC is patented software. EULA refers that the product is protected by copyright and other intellectual property rights. Eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD are not copyrighted articles and therefore there is no need to decide the issue whether an intangible property will be in nature of equipment. The plea raised by Revenue is an alternate plea and that too in situation when computer programme in a CD was to be considered as a copyrighted article . 99. The owner of a copyright may grant an interest in the copyright by a licence. The licence may be confined to one or more interests or to the entire copyright. A licence is an authorization of an act which without such authorization would be an infringement. In the case of a licence the licencee gets the right to exercise particular right subject to the condition of the licence, but does not become the owner of that right whereas an assignee becomes the owner of the interest assigned. In the case of a sale the purchaser becomes the owner of the property and acquires the right to sell, lease, licence etc. In order to decide the nature of the transaction in the present appeals it is important to refer to various clauses of End User Licence Agreement. EULA contains the following warning important - read carefully which is reproduced as below: This End User Licence Agreement (E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 6, it is clear that the end users have not purchased copy of software products on electronic media as contended by the assessee but a licence to use such software products. As we have held that copyrighted article means a work in which copyright subsists. Therefore the end user is not simply using the CD but the programme contained in the CD, which is protected by copyright and right to copy the programme has to be exercised before it can be put to use. Therefore, the payments made by the end users is for the granting of license in copyright and other intellectual property rights in the product and will amount to royalty u/s 9(1)(vi) of the Act. 100. After conclusion of the hearing the Revenue has filed a list of some of the cases out of large number of cases in which Hon ble Delhi High Court disposed of plaints as below: S. No. Diary No./ [STATUS] Case No. Petitioner v. Respondent Advocate Listing date Court No. 1. CS (OS) 994/2009 [Disposed off] Order(s) Judgment Microsoft Corporation Anr. v. Mr. Gaurav Arora Anr. Advocate: Anand Anand Disposed on 28/7/2009 2. CS ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isual studio, visual c++ (various versions). The grievance of the plaintiff before the Hon ble Delhi High Court was that the defendants i.e. Mr. Pawan Jain Others were using un-licenced / pirated versions of the plaintiff s softwares in their computer system for their business purposes. Defendant No. 2, M/s. Safexpress Pvt. Ltd. is an entity engaged in the business of providing range of logistics and supply chain solutions and is carrying on its business from its corporate office located at Safexpress, Cargo Complex, Safex centre, National Highway No. 8, Mahipalpur Extn., New Delhi - 110 037. Shri Pawan Jain is the Managing Directror of M/s. Safexpress Pvt. Ltd. As per the plaint the plaintiffs have received information in May, 2009 that the defendants were using large volumes of software programmes belonging to the plaintiffs including Microsoft windows, Microsoft office products, windows server, visio etc. on about 380 computer systems including laptops for their business and other commercial purposes at its office. On the basis of information available in the office it has been stated by the plaintiff that defendants have made volume purchases of 99 licenses of Microsoft offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Hon ble Delhi High Court granting injunctions under the Copyright Act it is proved beyond doubt that computer programmes licenced by the assessee whether in FPP or VPP contain copyright in them. 103. As discussed above under the Copyright Act, 1957 computer programme is a literary work, but section 115(1A) deals with the computation of tax payable on royalties in respect of copyright in any book and in respect of any computer software. The Parliament while prescribing special rates and mode computation of tax has made clear distinction between a copyright in any book which is in the nature of literary work and any computer software. It means for the purposes of the Copyright Act, 1957 computer software is a literary work, but for the purpose of Income-tax it is not so. Further second proviso was inserted to section 9(1)(vi) with effect from 1/04/1991, according to which the provisions of section 9(1)(vi) shall not apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a resident for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. In other words, a proviso cannot be torn apart from the main enactment nor can be used to nullify or set at naught the real object of the main enactment. Sometimes a proviso may be embedded in the main provision and becomes an integral part of it so as to be a substantive provision itself. But such a substantive provision will have to be within the framework of the main section of which it is a proviso. 106. In State of Rajasthan v. Mrs. Leela Jain AIR 1965 SC 1296, section 4(1) of the Rajasthan City Municipal Appeals (Regulation) Act, 1950 fell for consideration before Hon ble Supreme Court. An order passed by the President of the Municipal Council was set aside by the State Government in purported exercise of its jurisdiction under the proviso to section 4(1) which reads as follows: 4. Second municipal appeals and revision. (1) Notwithstanding anything contained in any municipal law, no municipal appeal shall lie from any order passed in appeal under section 3. Provided that the Government may, of its own motion or on the application of a Municipal Authority or of an aggrieved person call for the record of any case for the purpose of satisfying itself as to the corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enched driver. This offer is to be made after the exercise of power under the first branch of regulation 17(3). There is, therefore, no doubt that the second branch of regulation 17(3) is a substantial provision and not in the nature of a proviso to the first branch thereof. 110. Second proviso to section 9(1)(vi) was inserted in the statute by the Finance (No 2) Act, 1991 w.e.f. 1.4.1991 and reads as under: Provided further 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 payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. 111. On plain reading of second proviso to section 9(1)(vi) we find that the proviso carves out an exception from main section exempting lump sum payment made by a resident for the transfer of all or any rights (including the granting of a licence) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 115A(1A) of the Act. We, therefore, reject the contention of the assessee that without amendment of section 9(1)(vi) royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer programme cannot be taxed u/s9(1)(vi) of the Act. 113. We may also like say that the use of expressions in respect of copyright in any book to an Indian concern or in respect of any computer software to a person resident in India in section 115A(1A) by legislature shows that for the purposes of income tax the copyright in computer software is different from copyright in any book though both are literary works under the Copyright Act, 1957. The Income tax Act and the copyright Act operate in different fields. The object of the Copyright Act is to provide protection to the copyrights in various works of the authors whereas the purpose of income tax is levy and collect tax on various types of incomes. Therefore, provisions of income tax Act cannot be explained by resorting to various provisions of the Copyright Act, 1957. However, a limited reference to understand the meaning of term copyright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered service in India 117. From plain reading of the Explanation inserted with effect from 1/06/1976 by the Finance Act, 2007 which has been again substituted by the Finance Act, 2010 with retrospective effect from 1/06/1976 it is clear that income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) irrespective of the fact whether the non-resident has a residence or a place of business or business connection in India or the non-resident has rendered services in India. Therefore, once the consideration is received by non-resident for the transfer or all or any rights including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or similar property or any copyright literary, artistic or scientific work, the consideration received shall be deem to accrue or arise in India and will be taxable in India. In earlier paragraphs we have h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. 119. The four clauses of sub-section (1) lay down the scope of power of Central Government to enter into an agreement with another country. Clause (a) contemplates situations where tax has already been paid on the same income in both the countries and that case it empowers the Central Government to grant relief in respect of such double taxation. Clause (b) of section 90 which is wider than clause (a) provides that an agreement may be made for the avoidance of double taxation of income under this act and the corresponding laws enforced in that country. Clauses (c) and (d) essentially deal with the agreements made for exchange of information, investigation of cases and recovery of Income-tax. The effect of an agreement made pursuant to the section 90 is that if no tax liability is imposed under this Act, the question of resorting to agreement would not arise. No provision of the agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] : (i) During the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and (b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or business connection in India. Hon ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra) has held that the provisions of agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of section 90(2). Section 90(2) makes it clear that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein. No such case conflict between income tax Act and the treaty has been made out by the ld counsel for the assessee. Therefore, in our considered opinion there is no merit in the arguments of ld counsel for the assessee that copyright was not used in India and therefore, stands rejected. 123. We have in preceding paragraph observed that no case of conflict between the provisions of the Act and the Indo-US treaty was made out by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Act, 2010 with the same date i.e. 1/06/1976. The legislature by these amendments has declared that the income of a non-resident shall be deem to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9(1) and shall be included in the total income of a non-resident whether or not the non-resident has residence or place of business or business connection in India or the non-resident has rendered services in India. Hence, once it is found that income by way of royalty has deemed to accrue or arise in India such income shall be included in total income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India. 124. The ld. counsel for the assessee in the course of his arguments has placed reliance on OECD Commentary. He has also submitted that the computer programme has not been specifically mentioned in Indo-US DTAA. He has also submitted that in the treaties entered by the Government of India between 1996 and 2000 with Turkmenistan, Russia, Morocco, Trinidad and Tobago, Kyrgyz Republic and Malaysia the expression computer software has been specifically incorporated in Article 12(3), whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d users through distributers in respect of sale of computer softwares will be taxable as royalty u/s 9(1)(vi) of the Act. 126. In the case of Gracemac Corporation under Parent- subsidiary agreement Microsoft Corporation granted exclusive rights to M/s. Gracemac Corporation, a wholly owned subsidiary to manufacture and distribute Microsoft products, who in turn granted non-exclusive right to manufacture and distribute the Microsoft products to Microsoft Operations, another wholly owned subsidiary of Microsoft Corporation. Non-exclusive distribution rights for Asia were further transferred by MO to Microsoft Regional Service Corporation, Singapore, again a wholly owned subsidiary Microsoft Corporation. Normally the end-user licence agreement should have been signed between the Gracemac and the end-users, but since the copyrights in the computer programmes are with Microsoft, the agreement was entered into between Microsoft Corporation and the end user. If such an agreement is not made the Microsoft products on CD or electronic media would have been a dumb CD and would not have fetched any amount. From clause -19 of EULA specifically mentions that Microsoft or its suppliers own the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or any portion of the manufacturing of the Marketing Programs; provided Distributor continues to meet all of its obligations set forth in this Article. Distributor agrees that the Marketing Programs if manufactures will meet the quality standards set by MS Corp. in its written specifications. As a guide, it is the parties intention that the quality of the Marketing Programs produced by Distributor will be approximately equivalent in quality to the software products manufactured by MS Corp. MO shall provide Distributor with updated master copies if and when MS Corp. updates the Marketing Programs. Distributor agrees to pay a royalty to MO for each Marketing Program and update manufactured and distributed by Distributor pursuant to this Article. The royalty amount and payment method shall be as set forth on Schedule A. Distributor may purchase Marketing Programs from MS Corp. or any MS Corp. affiliate. Distributor may sell Marketing Programs to distributors, resellers, vendors, end users and any MS Corp. affiliate 128. From the above it is evident that MRSC was also authorized to reproduce certain products and distribute the same to end users through the distributors appointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has no connection with the granting of licence. The real transaction of the granting of the licence in respect of copyrights in computer programmes have camouflaged by entering into various agreements between Microsoft and Gracemac; Gracemac and Microsoft operations; Microsoft operation and MRSC; and MRSC and Indian distributors but when real intention is gathered from the in-depth reading of the agreements, the matter becomes crystal clear. Since we have held that end users have made payments in respect of the granting of licence in respect of copyright in computer programmes the payments made by end-users as consideration for the same will be taxable in the hands of Gracemac. 129. Another contention raised by the ld. counsel for the assessee before us relates to the assessment by the assessing officer assessing the income from royalty under section 9(1)(vi)(c) of the Act, which is applicable in the case of a non-resident making payment of royalty to another non-resident. Since there was no use of copyright in India the income could not be assessed under section 9(1)(vi)(c) of the Act. In this regard, we would like to observe that the ld. CIT (Appeals) while confirming the stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee has relied on the decisions of several Benches including the decision of Special Bench in the case of Motorola Inc. (supra). In the case of Motorola Inc. (supra) the issue involved related to case of a cellular operator, who had been denied the right to make copies of the software except for archival back-up purposes whereas in the case of the assessee licence has been granted for the use of software. The assessee has granted the end users the right to make copies not only for archival purposes, but also for installation of the programmes on the hard disc. In the case of Motorola Inc. (supra) the software was part of hardware and it has no use or value independent of it whereas in the case of assessee the computer programme is licenced with the right of reproduction though for limited use. For the ratio of the decision in the case of Motorola Inc. (supra) that copyrighted article is a product without any copyright in it, the special Bench has relied on US Regulations and OECD commentary. Whereas we have followed the decision of Hon ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra) wherein it has been held that taxation policy is within the power o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the assessee are of no help. 131. Another contention of the ld. AR of the assessee is that Microsoft Operations and Gracemac are legal fa ade. Microsoft Operations was incorporated under laws of United States and MRSC under the laws of Singapore and had been issued residency certificates. Once these assessees have been issued tax residency certificates by authorities of respective countries, to consider such entities as fictitious or to say that the companies are legal facade is not justified. Hon ble Gujarat High Court in the case of Arabian Express Live Ltd. of United Kingdom (supra) has held that when a Sovereign State recognizes the legal existence of an entity by issuing a tax residency certificate it is obligatory for any other Sovereign State including India to recognize the same and it is not open to Revenue to declare these entities as fa ade without any basis and this finding of ld CIT(A) has to be reversed. We order accordingly. 132. As discussed above, MRSC reproduced certain software products and distributed the same through chain of distributors in India. Therefore, the very appointment of distributors by MRSC in India, had business connection in India and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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