TMI Blog2012 (8) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... as a consequence of Article 20 of the Supply contract. Distinction has to be made between the acquisition of a 'copyright right" and a "copyrighted article". Even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9(1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13 para 3 of the DTAA - the consideration received by the assessee in that case allowing the use of the software was not considered as a royalty and instead, it was held as business receipts in the hands of the assessee - in favour of assessee. - ITA NO.157 & 158/PN/2011 - - - Dated:- 25-6-2012 - Shri I.C. Sudhir, And Shri R.K. Panda, JJ. Appellant by : Sri Rajendra Agiwal Respondent by : Sri Mukesh Verma, CIT ORDER PER R.K. PANDA, AM : The above two appeals filed by the assessee are directed against the separate orders dated 25-11-10 passed u/s.143(3) r.w.s. 144C(13) of the I.T. Act by the AO for the Assessment Years 2004-05 and 2007-08 respectively. Since common grounds are involved in both these appeals, therefore, these were heard together and are being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts on license charges received under software license agreement granting user right in software as royalty under the Act and under the India-Germany tax treaty for avoidance of double taxation ( tax treaty ), thereby assessing the taxable income of the Appellant for A.Y. 2004-05 at Rs. 75,30,226/- instead of the returned income of Rs. 36,08,460/-. Ground of appeal No. 2 : 2.1 That the Hon ble DRP and consequentially the learned Assessing Officer has erred in law and facts regarding the consideration received from Bajaj Allianz Life Insurance Company Ltd. ( BA Life ) amounting to Rs. 39,21,586/- for provision of user rights of software OPUS to be Royalty as defined in Explanation 2 to section 9(1)(vi) of the Act and therefore liable to tax in India . 2.2 That the Hon ble DRP and consequentially the learned Assessing Officer has erred in law and facts in holding the consideration received by the Appellant for provision of user rights of software OPUS to BA Life to be Royalty under Article 12 of the tax treaty and levying tax @ 10% on the same. 2.3 That the Hon ble DRP and consequentially the learned Assessing Officer has erred in law and facts in not appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions. The pertinent point to be addressed in this appeal relates to the nature of the payments received by the assessee as license charges. As per the assessee, the payments have been received against granting of a user right in the Opus software, which is a copyrighted product and not for the use of copyright itself. Therefore, the case of the assessee is that such license charges are liable to be treated as profits falling in Article 7 of the India-Germany DTAA and as such license charges are not attributable to a Permanent Establishment (PE) in India, same are not taxable in India. In so far as the plea of the assessee that it has granted only user right to BA Life and BA General in terms of the license agreement, the same is not disputed by the Assessing Officer. The following discussion by the Assessing Officer would show that there is no dispute to the assessee s assertion that it is only right to use of a copyrighted article which has been granted and not for the use of a copyright:- Thus the rights were received by Allianz AG to use the software. These rights were transferred by Allianz to BA Life and BA General to use the software in Indian Territories. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a). In that case,, the Revenue had contended that the receipts in respect of license to use software, which was a part of the hardware, could be taxed on the basis that the same constituted royalty within the meaning of section 9(1)(vi) of the Act and the relevant clauses of the Double Taxation Avoidance Agreement (DTAA) with the country of assessee s residence. As per the Special Bench, if the payment was for copyright, the same was liable to be classified as royalty under the Act as well as under the DTAA so as to be taxable in the hands of the assessee. On the contrary, if the payment is found to be for a copyrighted article, then it takes the character of purchase price of the article and would not constitute royalty under the Act or under the relevant clauses of the DTAA. The Special Bench after considering the meaning of the expression royalty under the Act and that of a copyright under the Copyright Act, 1957 held that what was sold by the non-resident was the copyrighted article and the payment was not for a copyright. The aforesaid proposition has since been examined and affirmed by the Hon ble Delhi High Court in its order dated 23.12.2011 (supra), the relevant po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of value for the customs duty purposes. (vi). The software provided under the contract is goods and therefore no royalty can be said to be paid for it. 53. Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Supply Contract uses the term 'licence' and the same term is used in the context of software throughout the three Agreements indicating that it is not an outright sale of goods, or a full transfer rights from the assessee to the Indian company. He also submitted that the software is a computer programme, which is treated differently from a book, not only in the Copyright Act,1957 but also the Income tax Act' itself. His submission was that Section 52(1) (aa) of the Copyright Act only deems that certain acts will not to amount to infringement in the light of various concerns, where otherwise such acts would amount to infringement under Section 51 of the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in TATA Consultancy Services State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and therefore, l liable to sales tax. Following discussion in this behalf is required to be noted:- ` "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h property cannot be regarded as a payment by way of royalty. 57. It is also to be borne in mind that the supply contract cannot be separated into two viz. hardware and software. We would like to refer the judgment of Supreme Court in CIT Vs. Sundwiger EMFG Co., 266 ITR 110 wherein it was held: "A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical services rendered by a non resident company, it must be deemed that there was a "bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 9(1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13 para 3 of the DTAA. This is so because he definition in the DTAA is narrower than the definition in the Act, Article 13(3) BRINGS WITHIN THE AMBIT OF THE DEFINITION OF ROYALY A PAYMENT MADE FOR THE USE OF OR THE RIGHT TO USE A COPYRIGHT OF A LITERARY WORK. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. 61. we thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. In our view, the aforesaid judicial pronouncement clearly supports the proposition advanced by the assessee in the present case. In fact, in so far as the factual aspect is concerned, the Assessing Officer has clearly stated that the copyright of software vests only with the CGI Group and therefore, even from that standpoint, there can be no divergence from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be applied to non-resident assessee in this case. Accordingly, the consideration received by the assessee in that case allowing the use of the software was not considered as a royalty and instead, it was held as business receipts in the hands of the assessee. Therefore, in the present case also we find ample force to adopt a similar approach and, therefore, we hold that the assessee is justified in canvassing that the license charges earned by it was not liable to be treated as royalty following the judgement of the Hon ble Delhi High Court. Accordingly, the appeal of the assessee has to succeed. 13. In the result, the appeal of the assessee is allowed. 9. We find the Tribunal while deciding the issue has also considered the decision of the Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (Supra) and a number of other decisions. Considering the totality of the facts of the case and respectfully following the decision of the Coordinate Bench of the Tribunal in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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