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TMI Blog2012 (12) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions contained in section 9(1)(vi) of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"] and in considering the sale of software as royalty. 4. The facts of the case in brief are that the assessee is a private limited company and was engaged in the manufacture and sale of Automated Teller Machines (ATMs), ATM parts and accessories. The assessee imported software from NCR Global Solutions Ltd., Ireland, however while making outward remittances, the assessee did not deduct tax at source. The AO held that the payment in question amounted to payment of royalty, for failure to deduct tax as required u/s. 195 of the Act, the AO assessed the liability u/s. 201(1) of the Act and charged interest u/s. 201(1A) of the Act. 5. Being aggrieved, the assessee carried the matter to the ld. CIT(A) and admitted that the Hon'ble Karnataka High Court in the case of CIT (International Taxation) v. Samsung Electronics Co. Ltd. [2010] 320 ITR 209/[2009] 185 Taxman 313 has held the issue against the assessee, still it was stated that the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it is a case of purchase, sale or distribution or otherwise of the off-the-shelf software. It is described as a 'software licence agreement', wherein it is averred that customer accepts an individual, non-transferable and non-exclusive licence to use the licensed software program(s) on the terms and conditions enumerated in the agreement. It is further averred that the customer - Samsung Electronics shall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and copyright continue to be with the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement, which authorizes the end user i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of copyright or any part thereof under the agreements entered into by the respondent with the non-resident supplier of software cannot be accepted. 21. It is further contended by the learned senior counsel appearing for the respondents that in view of the fact that what is supplied by the non-resident to the respondent in India is only a shrink wrapped software/off-the-shelf software, which is not customised to suit the needs of the respondent, the said software is to be treated as goods and there is sale of the software and copy of the software. Therefore, the question of paying any royalty would not arise. In support of the said contention, the learned senior counsel appearing for the respondents h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a direct tax and Sales Tax is an Indirect Tax and wherefore, mere finding that the computer software would be included within the term 'Sales Tax' would not preclude this Court from holding that the said payments made by the respondents to the non-resident Company in the present cases would amount to 'royalty' unless the respondents are able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in the absence of any permanent establishment of the non-resident supplier, there is no obligation on the part of the payee to make deduction under Section 195(1) of the Act. 23. It is well settled that in the absence of any definition of 'copyright' in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of 'Copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that "literary work" includes computer programmes, tables and compilations including computer [databases]. Section 16 of the Copyright Act, 1957 states that no person shall be entitled to copyright or any similar right in any work, whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) in the case of a sound recording,- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, on offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation.- For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation. It may also be noted that under Section 51 of the Act dealing with "When Copyright infringed" states that Copyright in a work shall be deemed to be infringed -when any person, without a licence granted by the owner of the Copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the cases in support of his contention that by no stretch of imagination, payment made by the respondents to the non-resident suppliers can be treated as 'royalty' is not helpful to the respondents in the present cases as in the said case, Delhi High Court was considering the provisions of Section 40(a)(i) of the Act and the order of the High Court reads as follows :- "What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold it further in Indian market by no stretch of imagination, it would be termed as royalty." Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e within the meaning of the 'Copyright' as referred to above under Section 14 of the Copyright Act. 25. It is also clear from the above said analysis of the DTAA Income Tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of the Act as the definition of 'royalty' under clause 9(1)(vi) of the Act is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, 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. Once it is held that payment made by the respondents to the non-resident Companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective coun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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