9911796707
TMI Blog2012 (2) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 234B of the Income-tax Act. 3. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer restored." 3. The issue raised by the Revenue in this appeal is identical to the issue raised by it in AY 03-04 and 05-06 before the Tribunal in ITA No.3095/mum/07 and ITA No.5097/mum/08 respectively. This Tribunal on identical facts has already taken a view that that the sums received by the Assessee in both the aforesaid A.Y.s for supply of software is not in the nature of royalty within the meaning of Article 12(3) of the DTAA between India and USA and was in the nature of business income and since the Assessee did not have a Permanent Establishment (PE) in India the receipts are not taxable in India. The operative part of the order of the Tribunal in ITA No.3095/Mum/07 for AY 03-04 reads as follows: 3. The assessee is a company incorporated in the USA and a tax resident of USA. The assessee filed tax resident certificate before the Assessing Officer and is therefore entitled to the benefit of the Double Taxation Avoidance Agreement between India and USA (DTAA). The assessee develops and marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. He held that the payment received by the assessee was in the nature of royalty and he accordingly brought the same to tax. On appeal by the assessee, learned CIT(A) held that the payment in question was not in the nature of royalty and was payment for purchase of copyrighted article. Addition made by the Assessing Officer was deleted by the learned CIT(A) giving rise to Ground No. 1&2 of the revenue before the Tribunal. 6. We have heard the rival submissions. The sample copy of the software distribution agreement filed before the lower authority shows that under section 6, thereof, the distributor has to obtain orders for the product and was free to fix price of the product. The assessee had a right to accept or reject the request of the distributor for supply. The distributor was not authorized directly or indirectly to entered into any written or oral contract on behalf of the assessee. More importantly, distributor cannot tamper with or remove from the original packaging and all product shall be distributed by the distributor in unopened packaging in which such products were received from the assessee. The Distributor does not have any right to make further copi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke any other audio cassette or painting on canvas or a book. It is ceases to be transfer of intellectual property right. In fact, Bangalore Bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO, 92 ITD 366 (Bang) has also taken the view that in such a situation there is no acquisition of any right in software. Definition of 'royalty' is given in section (9)(1) Explanation (2) of the Act and the definition of Royalty in Article 12(3) of the Indo-US DTAA shows that definition of royalty under DTAA is more restrictive than what is provided in section (9)(1) of the Act. Under the definition as contained in DTAA, there should be a transfer of copyright. Sale of software by the assessee to the distributor or end user does not involve any transfer of copyright either in part or in whole; therefore consideration paid by the distributor cannot be said to be a payment for right of use copyright or transfer of use of copyright. It has been uniformly held in several decisions of the ITAT that sale of shrink-wrap software does not involve receipt of consideration, which can be said to be royalty. Decisions in this regard are as follows :- * Samsung Electronics Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether the amounts paid to the foreign software suppliers were royalty. The Hon'ble Court after considering the provisions of Sec.14 of the Copyright Act, 1957, definition of "Royalty" under Double Taxation Avoidance Agreement (DTAA), terms of use of shrink wrap software by the end user, distributor and sub-distributor, held as follows: "24. It is clear from the above said provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under Section 51 of the Act. However, if such copying of computer program is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrinkwrapped / off-the-shelf software into the hard disk of the designated computer and to take a copy for backup purposes, the end user has no other right and the said taking backup would have constituted an Infringement, but for the licence. Therefore, licence 1granted for taking copy of the software an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 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 the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music software as book and prerecorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court. Accordingly. we answer the substantial, question of law in favour of the revenue and against the assessee by holding that on facts and circumstances of the case, the ITAT was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software Suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following Order: "All the appeals are allowed. The order passed by the Income Tax Appellate Tribunal, Bangalore Bench "A" impugned in these appeals is set aside and the order passed by the Commissioner of Income Tax (Appeals) confirming the order passed by the Assessing Officer (TDS)-I is restored." 5. The learned counsel for the Assessee relied on the decision of the Hon'ble Delhi High Court in the case of Director of Income Tax Vs. Ericsson A.B., New Delhi ITA No.504/2007 dated 23.12.2007. The Hon'ble Delhi High Court was dealing with a question as to whether the Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and hence was not assessable both u/s.9(1)(vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uo;royalty income reads as under:- "Section 9 .INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) The following incomes shall be deemed to accrue or arise in India :- (i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India" 51. The submission of Mr. Prasaran, learned ASG was that software part of the equipment supply would attract royalty as copy right of the said software programme still vests with the assessee. Therefore, payments made for the licence to use the software programme give rise to "royalty for the purposes of both the Income-Tax Act as well as DTAA entered into between Sweden and India. Referring to Explanation-II (v) to Section ( (1) (vi) of the Act as well as Article 13, para-3 of DTAA, it was argued that for the purposes of Income-Tax law, royalty is essentially a payment received as consideration for the use or right to use a particular integral property right, whether partially or entirely. 52. We find that the Tribunal has held that there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e use of, or the right to use, any copyright of literary, artistic or scientific work". The ITAT, it was submitted, has not appreciated that the royalty is for the use or right to use any copyright. According to him, since title of the software continued to vest with the assessee as provided in clause 20.2 of the Supply Agreement and the assessee was free to grant nonexclusive licenses to other parties, it follow that there was no full time transfer of copyright but it was only a case of right to use the software, and thus payment for use of software is to be treated as royalty. He further argued that reference to OECD Commentary was not apposite as it could not be used to interpret the scope of the relevant provisions of DTAA. 54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." xxxxxxxxxx "In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 9(1)(vii) of the Income Tax Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfillment of the main contract entered intoprincipal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the learned counsel for the assessee that this separate specification of the hardware/software supply was necessary because of the differential customs duty payable. 59. Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of now on the issue. Both the decisions have taken note of the terms of the agreement subject to which software was to be used by the customer. 7. It was the submission of the learned counsel for the Assessee that where two views are available on an issue one favourable to the Assessee and the one against the Assessee, the view which is favourable to the Assessee and does not support levy of tax on the Assessee should be preferred. The learned D.R. on the other hand submitted that the decision of the Hon'ble Delhi High Court was rendered in the context of sale of equipment in which software was embedded and not a case of shrink wrap software as such and therefore that decision should be applied to a case where sale of shrink wrap software is involved. Alterntively it was submitted by him that the concession that where two views are available on an issue one favourable to the Assessee and the one against the Assessee, the view which is favourable to the Assessee and does not support levy of tax on the Assessee should be preferred, should not be applied to non-resident assesses. 8. On the argument of the learned D.R. that where two views are available on an issue one favourable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct on a non-exclusive basis for making the product available to the end-user within the territory for his internal use. The product was sold to the VAR for a consideration based on the standard list price less discount ; and the VAR in turn would sell the product to the end-users at a price independently determined by the VAR. The end-user would enter into the end-user licence agreement with the applicant and the VAR for the product supplied. The reseller did not hold any inventory of the software in India. The VAR was free to negotiate the price with the customer but the VAR paid to the applicant the standard price in force less agreed discount. The reseller (VAR) would get the order from the end-user and place a back-to-back order on the applicant. On acceptance of the order by the applicant, the applicant would provide a licence key via email so that the customer would directly download the product through the web link. On these facts, the applicant sought the advance ruling of the Authority on the question "Whether on the facts and circumstances of the case and in law the payment received by Dassault Systems K. K. (hereinafter referred to as `the applicant') from sale of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supra), which is as follows: "Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a programme to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software. Payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyright rights) will represent a royalty where the consideration is for granting of rights to use the programme in a manner that would, without such licence, constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Dassault Systems KK (supra) observed as follows: "It has been contended on behalf of the Revenue that the right to reproduce the work in any material form including the storing of it in any medium by electronic means (vide section 14(a)(i) of the Copyright Act) must be deemed to have been conveyed to the end-user. It is pointed out that a CD without right of reproduction on the hard disc is of no value to the end-user and such a right should necessarily be transferred to make it workable. It appears to us that the contention is based on a misunderstanding of the scope of right in sub-clause (i) of section 14(a). As stated in Copinger's treatise on Copyright, "the exclusive right to prevent copying or reproduction of a work is the most fundamental and historically oldest right of a copyright owner". We do not think that such a right has been passed on to the end-user by permitting him to download the computer programme and storing it in the computer for his own use. The copying/ reproduction or storage is only incidental to the facility extended to the customer to make use of the copyrighted product for his internal business purpose. As admitted by the Revenue's representative, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 52(aa) is not commercial exploitation, but only utilizing the copyrighted product for one's own use. The exclusion should be given due meaning and effect; otherwise, section 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one's own use. Even without such licence, the buyer of product cannot be said to have infringed the owner's copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer/licensee of product has acquired a copyright therein." (underlining by us for emphasis) 12. The above decision of the AAR in the case of Dassault (supra) was a case of sale of shrink wrap software and the AAR has held that reproduction and adaptation envisaged by section 14(a)(i) and (vi) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. 13. The ruling of the AAR in the case of Dassault (supra) was approved by the Hon'ble Delhi High Court in the case of DIT Vs. Ericsson AB,New Delhi (supra). It can therefore be said that the Hon'ble Delhi High Court has held that consideration pai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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