TMI Blog2011 (10) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. 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. Further, it is stated that obligation to deduct TDS u/s 195 arises only when there is a sum chargeable under the Act and not all payments are subject to TDS. Decided against the aseessee. - ITA No. 2808 of 2005 and others - - - Dated:- 15-10-2011 - Shri V.G. Sabhahit and Shri Ravi Malimath, JJ. Represented by: Shri M.V. Seshachala, Advocate, for Appellant Shri K.P. Kumar, Sr. Advocates, for M/s Universal Legal Advisor for Respondent Other ITA 2809/2005; ITA 2810/2005; ITA 1267/2006; ITA 1265/2006; ITA 1264/2006; ITA 1062/2006; ITA 1059/2006; ITA 3080/2005; ITA 3079/2005; ITA 3078/2005; ITA 3077/2005; ITA 3076/2005; ITA 3075/2005; ITA 1258/2006; ITA 1268/2006; ITA 1269/2006; ITA 1270/2006; ITA 609/2006; ITA 610/2006; ITA 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years 1999-2000, 2000-2001 and 2001-2002, the assessee made payment of Rs. 2,28,960/-, Rs. 10,825/- and Rs. 151,85,430/ respectively for importing software from non-resident companies of USA, France and Sweden. No tax was deducted at source in respect of such payments. As the Income Tax Officer was of the view that the appellant ought to have deducted the tax at source regarding such payments, he asked the assessee as to why tax was not deducted at source. The Manager (Finance) of the respondent-company appeared before the ITO (TDS) and filed a letter dated 20-3-2001 stating therein details of the software imported during the period mentioned above and contending that the software imported by the company is shrink wrap product and the same is not customized and no tax was deducted as it was not taxable in India and as the payment does not constitute royalty under Section 9(1)(vi) of the Income Tax Act, 1961 (hereinafter called the 'Act') and also in terms of the provisions of DTA agreement since the payment was not chargeable in the hands of the non-resident assessee at USA, France and Sweden, no tax arose in India and therefore, there was no obligation to pay the tax. It was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at source unless certificate is obtained by making an application under Section 195(2) of the Act that there is no liability to deduct tax at source and accordingly allowed the appeals filed by the revenue by setting aside the order passed by the Tribunal. The respondent and others who are aggrieved by the common order dated 24-9-2005 passed by this Court in ITA No. 2808/2005 and connected cases filed Civil Appeal Nos.7541-7542/2010 and connected matters before the Hon'ble Supreme Court and the Hon'ble Supreme Court by order dated 9-9-2010 set aside the order passed by the Division Bench of this Court by analyzing the provisions of Section 195 of the Act and remitted the matter to this Court for answering the substantial questions of law framed by it as referred to above. Accordingly, these appeals are posted for hearing before us for answering the aforementioned substantial question of law. 4. We have heard the learned standing counsel appearing for the appellants and learned Sr. Counsel appearing for the respondents and reply arguments. 5. Sri M V Seshachala, learned Standing Counsel appearing for the appellants submitted that the respondents have failed to deduct the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale as no copyright or any part of the copyright is sold to the respondent-company. The learned counsel submitted that in view of the definition of royalty under Article 12 under the DTAA which is narrower than the definition of the term 'royalty' under Explanation (2) of Section 9(1)(vi) of the Act, the payment is covered as royalty and cannot be considered as sale and he further submitted that even if it is considered as sale, it would be a part of the business income and existence of the permanent establishment in India is not necessary. He has relied upon the following decisions: (1) [2010] 323 ITR 211 AIRPORTS AUTHORITY OF INDIA, IN RE (2) [2008] 304 ITR 216 AIRPORTS AUTHORITY OF INDIA, IN RE (3) [2004] 267 ITR 727 (AAR) FLAKT (INDIA) LTD., IN RE (4) [2009] 312 ITR 317 WORLEY PARSONS SERVICES PTY.LTD, IN RE (5) [2007] 289 ITR 355 (AAR) CARGO COMMUNITY NETWORK PTE. LTD, IN RE (6) [1999] 238 ITR 296 (AAR) XYZ, IN RE (7) [1999] 238 ITR 296 (AAR) ABC, IN RE (8) ITA NO. 1331/Del/2008 DTD. 26-10-2010 (DEL) M/S. GRACEMAC CORPORATION v. ADIT, NEW DELHI ITA NO. 1392/DEL/2005 DTD 26-10-2010 (DEL), M/S.MICROSOFT CORPORATION v. ADIT, NEW DELHI (9) W.P. NO.3811 18886 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent and what has been purchased is only shrink wrapped software and at the most it may amount to sale of the software which will be a constituent of business income of the non-resident company. However, the said income would not be taxable in India as the non-resident company to whom the payment has been made is not having any permanent establishment in India. He submitted that in TATA CONSULTANCY SERVICES v. STATE OF ANDHRA PRADESH, the Supreme Court was considering the identical transaction and has held that such transaction i.e., transfer of incorporeal right in the software wherein copyright remains with the originator and what is sold is a copy of the copyrighted software and when one buys such copy of copyrighted software, he only acquires ownership of that particular copy but not the intellectual property in the copyright and therefore it would be a sale within the meaning of Article 366(12) of the Constitution of India and payment would not satisfy the requirement of Section 9(1)(6) read with Explanation (2) of the provisions of the Act or Article in the DTAA as the definition of royalty under the DTAA is restrictive. The learned Sr. Counsel further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, divorced from the context of question under consideration and therefore, the transaction pertaining to the payment made to the non-resident assessee can never be termed as loyalty. He further submitted that the decision relied upon by the learned counsel appearing for the appellant is not helpful to him in the present case as in the said case transaction was not similar. He further submitted that if payment is made for purchase of a copyrighted software without any right whatever in the copyright being conferred on the purchaser either by assignment of a right in the copyright or grant, of a licence to use the copyright, is said to fall within the scope of Explanation-2 (v) to Section 9(1)(vi) of the Act, it will have a devastating effect and result in wholly unintended consequences and in terms of Section 194J of the Act if a resident makes payment of royalty to another resident, he has to deduct income tax at source at 10%. Accordingly, he submitted that contention of the learned counsel appealing for the revenue may be rejected and substantial question of law may be answered in favour of the respondent against the revenue. 7. Sri G Sarangan, learned Sr. Counsel appearing fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y can never be termed as royalty in view of Explanation (2) to Section 9(1)(vi) of the Act or Clauses under DTAA with the non-resident company of the country wherein the non-resident company is situated. He submitted that the decision relied upon by the learned counsel appearing for the appellant is not helpful to the revenue in the present case in view of the fact that there is no permanent establishment of the assessee-company and the payment made is not taxable in India and therefore there was no obligation to deduct tax under the Act and question of making deduction would not arise and the Tribunal, after detailed consideration of all the contentions urged has rightly held that payment made by the resident-company would not amount to royalty and it was a sale and since the non-resident company has no permanent establishment in India, income is not taxable and therefore not deductible under Section 195(1) of the Act and consequently, the order passed by the Tribunal may be confirmed by answering the substantial question of law against the revenue and in favour of the assessee. 8. Sri Aravind Datar, learned Sr.counsel appearing for the respondent in ITA Nos.3080/2005 and connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not make any payment and he does not acquire any right to use copyrighted article nor make any payment for 'royalty' and the payment is made by the customer and he does not even open the shrink wrapped software and even without reading of terms and conditions in the agreement for the sale of shelf shrink wrapped software, he hands over the goods to the customers and therefore amount paid towards the said transaction made by the respondent-company to the non-resident assessee cannot be taxed in India and accordingly the substantial question of law may be answered against the revenue and in favour of the assessee. He has reiterated the arguments of the learned Sr. counsel appearing for the respondents in other cases. 10. In reply, the learned counsel appearing for the appellant submitted that payment made by the respondent would amount to royalty even assuming that it is sale as contended by the respondents, it is not necessary that the said payment would be taxable in India even if the non-resident assessee has no permanent establishment in India. In support of his contention, he has taken us through the provisions of Section 9(1)(vi) of the Act and submitted that decisions reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may disentitle the payer to any allowance apart from prosecution under Section 276B. Thus, Section 195 imposes a statutory obligation on any person responsible for praying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) Chargeable under the provisions of the I.T. Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the I.T Act to which the aforestated requirement of tax deduction at source applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the I.T. Act read with Rule 30 of the I.T. Rules 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the I.T. Act. In addition, he would also be liable under Section 201 (1A) to pay simple interest at 12 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO (TDS) that the question of making an order under Section 195(2) will arise. In fact, at one point of time, there was a provision in the I.T. Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company v. ITO 81 ITR 162 (Calcutta) that an application for NOC cannot be said to be an application under Section 195(2) of the Act. Which deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9 (1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. Reference to ITO (TDS) under Section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. In our view, Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. v. Eli Lilly Co. (India) (P.) Ltd. [312 ITR 225) the previsions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. Section 195(1) uses the expression "sum chargeable under the provisions of the Act". We need to give weightage to those words. Further, Section 195 uses the word 'prayer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The above mentioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the I.T. Act. When the payer remits an amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not go into the merits of the case and it went straight to conclude that the moment there is remittance an obligation to deduct TAS arises, which view stands hereby overruled. 12. Since the High Court did not go into the merits of the case on the question of payment of royalty, we hereby set aside the impugned judgments of the High Court and remit these cases to the High Court for de novo consideration of the answer is-whether on facts and circumstances of the case the ITAT was justified in holding that the amount(s) paid by the appellant(s) to the foreign software Suppliers was not "royalty" and that the same did not give rise to any "income" taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source? 14. It is clear from the scrutiny of the material on record, the fact that respondent-company has imported software from the non-resident is not in dispute. It is also not in dispute having regard to the contention of the assessee and the revenue and the counsel appearing for them that the assessee has acquired right to use the copyrighted article. It is also not in dispute that software which is in legal parlance called computer program is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC): "It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." Section 90 of the Income Tax Act, which deals with agreement with foreign countries or specified territories reads as under: 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, - (a) for the granting of relief m respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in forc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g had been sought; and (c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction. (2) The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced." 15. Section 9 of the Act deals with income deemed to accrue or arise in India, which reads as under: 9. (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Section 9(1)(vi) of the Act reads as under: (vi) income by way of royalty payable by- (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tific equipment but not including the amounts referred to in section 44BB,] (v) the transfer 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 stab-clauses (i) to [(iv), (iva) and ] (v). The definition of the term 'royalty' is similar in all the DTAA agreements entered into with foreign countries and the same reads as under: "Payment of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with 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 aliena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from Business', whether the non-resident is required to have a permanent establishment in India. Further, in the absence of any permanent establishment of the non-resident in India, is there no obligation on the part of the payee, the respondent herein to deduct tax at source under Section 195 of the Act. Therefore, the fact that the payments made by the payee, the respondent herein to the non-resident would constitute income of the non-resident is indisputable. However, the dispute is as to whether such income in the hands of the non-resident is to be treated as sale and income from business covered under Article 7 of the DTAA with respective countries or whether the payments would amount to royalty in the hands of the non-resident, for which no permanent establishment is required for making payment in India. There is also no dispute that if the payments made by the respondent are held to be royalty and not 'Income from Business', there is an obligation on the part of the payee, the respondent herein to deduct the tax at source and in default, the respondent herein would be considered as a default assessee. Once there is an obligation to deduct tax at source under Section 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the said definition of 'royalty' in clause 12 of the DTAA, which reads as under:- "Article 12 of DTAA WITH USA: Article 12: Royalties and fees for included services 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. ** ** ** 3. The term "royalties" as used in this article means: (a) payments of any kind received as consideration for the use of or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with 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 or property which are contingent on the productivity, use or disposition thereof and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribute via resellers the Software, upon payment of the licenses set forth in Exhibit A to the agreement only to End Users pursuant to a valid Actuate shrinkwrap or other Actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the Software the Documentation or any derivative works based upon the Software or Documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modify the source code for the Software. Distributor shall have no rights to the Software other than the rights expressly set forth in the agreement. Distributor shall not modify or copy any part of the Software or Documentation. Distributor may not use sub-distributors for further distribution of the Software and Documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the Distributor of the Software as enumerated in Exhibit A to the agreement. Further, Clause 6.01 of the agreement dealing with title states that the Distributor acknowledges that Actuate and its suppliers retain all right, title and interest in and to the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pearing for the respondents has strongly relied upon the decision of the Hon'ble Supreme Court in TATA CONSULTANCY SERVICES v. STATE OF ANDHRA PRADESH [2004] ITR (Vol. 271) 401 (hereinafter referred to as the TCS's case), wherein the Hon'ble Supreme Court was considering the question as to whether the canned software sold by the appellants can be termed to be "goods" and as ouch assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. Having regard to the broad definition of 'goods' under Section 2(h) of the said Act and also the provisions of Article 366(12) of the Constitution of India, the Hon'ble Supreme Court was pleased to answer the said question for determination by holding that once the 'information' or 'knowledge' is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recording of the software is not an incorporeal right to be comprehended and accordingly, held that the software marketed by the appellants therein indisputably was canned software and thus, sale of the same would attract the provisions of the Andhra Pradesh General Sales Tax Act, 1957. 22. The question as to whether the payment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with meaning of 'Copyright' reads as follows:- "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 authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely: - (a) in the case of a literary, dramatic or musical work, not being a computer programme,- (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work: (vi) to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to do which is by the Act conferred upon the owner of the Copyright. Section 52 of the Act dealing with Certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely- "** ** ** (aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy. (i) in order to utilise the computer programme for the purpose for which it was supplied; or (ii) to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied." 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 such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have constituted infringement of copyright and licencee is in possession of the legal copy of 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 copyright 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 combination of all and in substance, unless licence is granted permitting the end user to copy and download the software, the dumb C.D. containing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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