TMI Blog2013 (9) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... ht. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. - Decided in favour of Revenue. The definition of "royalty" in the Income-tax Act, 1961 is, consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, innovation, model, design, secret formula or process or trade mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work. License is not confined to an exclusive license. When a software, over which a copyright is acquired and thus owned, is licensed for use to another or sold to another for his own use, the licensee or the purchaser gets the right to use the software without being held guilty of infringement of the copyright. The words within brackets, "including the granting of a license" indicate an expansive definition. The word "includes" is an inclusive definition and expands the meaning. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) - LTHPL entered into an agreement for supply of hardware, software and also installation and that company is an Indian company. After entering into an agreement supply of software was assigned to the assessee Lucent by way of the Tripartite agreement between Reliance and LTHPL and assessee Lucent. Eventhough, installation was on Indian company there is no evidence of either deputing personnel of assessee Lucent to India nor there is any evidence in the record for invoking Service PE as in other case. Moreover for invoking Agency PE , facts do not support AO's contentions. The agreement entered is an independent agreement, entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken any responsibility of the assessee Lucent. On the facts of the case we are of the opinion that there do not exist any PE, more so of agency PE. It is also not the case of the Revenue that the assessee deputed its personnel to India so as to invoke Service PE as per Indo-US DTAA. In view of the above, we hold that there is no PE to the assessee company in India and as there is neither any office in India nor it has any business connection in India nor carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and as per DTAA between India and USA, the amount paid is not taxable in India. AO after examining the details of agreements held that the assessee was getting only license to use the software and is in the nature of royalty, taxable at 20% in India under the provisions of Income tax Act 1961. Not only in the case of Lucent, Reliance also similarly placed orders with various other suppliers of telecom software in other countries and sought no deduction certificates on similar contentions. AO passed similar orders in all the cases where Reliance was to remit the monies over a period of time. After deducting tax as directed by the AO, Reliance however preferred appeals before the Ld.CIT(A) as per the then existing provisions of section 248 of the IT Act. The learned CIT(A), vide his orders, held that the amounts paid cannot be considered as royalty as Reliance purchased 'goods' which is a copyrighted article and so, since the seller do not have PE in India the amount is not taxable. Accordingly, he gave relief to Reliance. The Revenue is aggrieved on these orders. The lead order of the AO and CIT(A) pertains to ITA No. 837/Mum/2007 in which the AO' order under section 195(2) date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and Wireless Network General Terms and conditions Contract (GTC) dated 31.07.2002 with Lucent technologies Hindustan Private Ltd (LTHPL) and another Wireless Software Assignment and Assumption Agreement dated 05.08.2002 with LTHPL and Lucent Technologies GRL LLC (LTGL), USA for purchase of certain software for the purposes of operation of wireless telecommunication network. Initially, Reliance placed seven purchase orders of total amount of US$ 11,06,56,855/-. The Reliance filed a applications u/s.195(2) before the DDIT(IT)-2(1), Mumbai (AO) requesting for payment for purchase of software without deduction of tax at source u/s.195. The AO did not allow the petition and held that the tax has to be deducted at source. The Reliance has mentioned that LTGL is a company resident in USA and does not have any PE in India. Therefore provisions of the Double Taxation Avoidance Agreement between India and USA (DTAA) would be available to LTGL, since section 90(2) provides that the provisions of Income-tax Act would apply only if they are more beneficial to LTGL and has relied upon the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan Another (2003) 263 ITR 706. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of DTAA. The AO also relied upon the decision of AAR's ruling in the case of ABC Vs. RE (154 CTR 2.46). The AO relied upon the decision of Hon'ble Calcutta High Court in the case of Leonhardt Andra Und Partner, Gmbh 249 ITR 418. The AO also relied upon the decision of Hon'ble AAR in P.No.30/1999 reported in 238 ITR 296. The AO held that the payment for purchase of software amounts to royalty within the meaning of section 9(1)(vi) of the LT. Act and Article-12(3) of the DTAA. He accordingly directed Reliance to deduct tax at 20% as Royalty. After deducting tax, Reliance appealed to Ld CIT(A). 10. Learned CIT(A), vide his order, has considered the issues as under: 2.14 I have carefully considered the arguments of the AR and I have also perused the records and gone through the arguments of the A0. It is seen that in the order u/s. 195(2), facts brought out are very scanty. The nature of the transactions and the purposes of acquisition of software has not been examined. The appellant was accordingly required to file copy of agreements, details of purchase bills, purposes of the software acquisition and the role of use of software with the hardware acquired. It is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Purchaser (the "Software Provisions"). Assignee agrees (i) to be bound by and subject to all terms and conditions set forth In the General Terms and Conditions relating to the Software Contract and/or the obligations and covenants assumed by Assignee pursuant to Section 1 above, and (ii) that in the event of any breach of any of the Software contract and/or the obligations and covenants assumed by Assignee pursuant to Section 1 above or any breach of any of the Software Provisions by Assignee or Assignor, Purchaser may proceed directly against, and may seek monetary damages and/or equitable relief from, Assignee to the extent provided under the provisions of the General Terms and conditions and the Software Contract." 2.15 As per this contract LTGL took over the responsibility for the supply of software whereas the hardware was being supplied by LTHPL. LTHPL was also providing the services in relation to the contract. The AR has explained that the telecom software acquired through the agreement with LTGL and the hardware acquired through LTIIPL has been used to setup wireless communication network in India. The brief note, provided by the appellant reads as under: "Telecom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue $ 1 13012535 16-Nov.2002 70,203,104 13012536 16-Nov-2002 30,157,500 2 13012539 16-Nov-2002 67,163,336 13012540 16-Nov-2002 28,848,070 3 13012363 12-Nov-2002 26,364,714 13014732 25-Dec-2002 11,299,252 4 13012361 12-Nov-2002 73,156,266 13014730 25-Dec-2002 31,464,456 5 13012891 23-Nov-2002 5,388,950 13012918 23-Nov-2002 299,177 6 13013459 4-Dec-2002 2,433,224 13013460 4-Dec-2002 194,300 7 13014935 28-Dec-2002 19,586,150 13014936 28-Dec-2002 8,394,100 264,295,744 110,656,855 2.17 The AR has explained that through the hardware purchase orders appellant has purchased hardware, namely, Flexent Wireless Solution, Base Transceiver Station, spares for Flexent Wireless Solution, upgrade for Flexerit Wireless Solution. Against the hardware, namely, Fl xent Wireless Solution, Base Transceiver Station, spare pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (already quoted above in para 2.14) Section-15.1 of the Wireless Network General Terms and Conditions Contract reads as under: "15.1 License Grants 15.1.1 Subject to the terms Of this Section 15, upon delivery of Software, Vendor hereby grants to Reliance or Its Affiliates (and to third parties whom Reliance or Its Affiliates have contracted to operate the Wireless Reliance Network on their behalf (and to the extent of the same) upon payment, or agreement to pay, the relevant license fees by Reliance and/ or its Affiliates, a perpetual, irrevocable, non-exclusive, unrestricted (within the Wireless Reliance Network), unlimited (where specifically so identified in the relevant Documents), royalty-free license, to use such Software for the benefit of Reliance In connection with the ownership, operation and maintenance of the Wireless Reliance Network in the Territory and the provision of relevant services in the Territory to Reliance's customers. The Software shall be used in accordance with the relevant Documents. 15.1.2 For the avoidance of doubt, the licenses referred to in Section 15.1.1 above are not intended to restrict the provision by Reliance of telecommunications servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or modify, decompile, reverse engineer, or disassemble, or in any other manner decode Software furnished as object code for any reason. Reliance and Reliance Affiliates shall not copy the Software, including firmware except for the purposes of making a limited number of archival copies (for backup use in operating and maintaining the Wireless Reliance Network) in accordance with the Documentation and/ or the relevant Agreement; or as otherwise authorized in writing by the, Vendor or as otherwise set, out in the relevant Documentation. Except as provided below, no license is granted to Reliance to use the Software outside of the Territory. For the avoidance of doubt, the changing by Reliance or Reliance Affiliates of tables and values in the Software, modification by Reliance and/or its Affiliates of the Software by using the tools provided in or with the Software or any modification, in accordance with and pursuant to the relevant Documentation, shall not constitute 'modification' of the Software provided always that Reliance may only change, amend or modify Software which is designed for 'customer access' and to be so modified. 15.1.5 Reliance agrees that the Software, whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer, assign or sublicense any Software in conjunction with any portion of the Wireless Reliance Network to a third party, and where such Software shall remain in place or be moved within the Territory and used for substantially the same purpose as used by Reliance and where such third party resides' in the Territory and Is approved by the Vendor (which approval shall not be' unreasonably withheld or delayed); or (ii) elects to transfer, assign or sublicense Software to a Reliance Affiliate, in conjunction, with any portion of the Wireless Reliance Network. Then Reliance may so transfer, assign or sublicense its Software Licenses for the Software furnished under the Documents for use with such portion of the Wireless, Reliance Network, without the payment of any additional fees or monies of the Vendor. If, however, the Software Licenses for the Software contains usage or per subscriber limits and/or the processor to be used by transferee, assignee or sublicensee, as applicable, requires additional memory or hard disk space to meet the transferee's, assignee's or sublicensee's new or different requirements, then, unless otherwise agreed in writing, Reliance shall only transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable terms. 15.1.8 The rights and obligations of Reliance under the Software Licenses, shall survive the termination of all or any portion of the Documents, regardless of the cause of term/nation, provided Reliance has met its material obligations as set forth in this Section 15. In the event that Reliance falls to pay applicable and undisputed Charges, Vendor may terminate Reliance's right to use the, Software to which such Charges apply; provided that Vendor has given written notice and details of such breach to Reliance and has advised Reliance of its intention to terminate, and Reliance has failed to make such payment within thirty (30) days from Vendor's notice thereof. Such terminated rights shall be immediately reinstated upon payment of all applicable license fees. In no event other than as set forth in this Section 15.1.8 may Vendor terminate the Software Licenses or, Reliance's right to use, the Software Notwithstanding any other provision of the Documents, if there is a dispute hereunder, pending final resolution of such dispute, all of Re/lance's rights under the Documents shall continue in full force and effect, and Vendor will not terminate the Software Licenses, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act." 2.21 It is therefore now established law that computer software after being put on to a media and sold has become goods like any other audio cassette or painting on canvas or a book. The AO was therefore not justified in holding that the computer software on a media continues to be intellectual property right. The issue of payment for acquisition of copy of software programme has been considers by Hon'ble ITAT Bangalore Bench in the case of Lucent Technologies Hindustan Ltd. Vs. ITO (2005) 92 ITD 366. In this case the taxpayer had purchased from US company an integrated equipment which consisted of both hardware and software as one cannot function without help of other. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, 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 in India or for the purposes of making or earning any income from any source in India: Explanation 2. -For the purposes of this clause, "royalty" means consideration (inducing any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, Invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any Information concerning technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(3) of the DTAA is more restrictive than what is provided in Section 9(1)(vi). 2.26 LTGL is a tax resident of USA and therefore is entitled to the benefit of DTAA over the provisions of the Income-tax Act. Consequently if the payment of software is not covered by the definition of royalty in Article-12 being covered by section 9(1)(vii) would be irrelevant. Definition of royalty in Artfcle-l2(3) is in following parts: a) Consideration for the Use of, or the right to use, any copyright of a literary, artistic or scientific work. b) Consideration for the use of or right to use of any Patent, trademark, design or model, plan, secret formula or process. c) Consideration for the use of or right to Use cinematograph film or work on film, tape or other means of reproduction of the use in connection with radio or television broadcasting. d) Consideration for the information concerning Industrial, commercial or scientific experience. e) Including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof The computer software can only be covered in item (a) or (b) above. 2.27 Computer software as copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , cinematograph films and Sound recording. It is therefore clear that the copyright is different from the work. Copyright about work is not synonymous with that work. Copy right is an incorporeal property in a work (a corporeal property). 2.29 Section-14 of the Copyright Act provides the definition of copyright which reads as under: "14. Meaning of Copyright. For the purpose 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 inducing the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public and 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 make any adaptation of the work; (vii) to do, in relation to a translation or any adaptation of the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned in the section-is is that LTGL has given no part of Copyright as envisaged in section-14 of the copyright to the appellant. Thus, sale of software by LTGL to the appellant cannot be said to be the transfer of the copyright to LTGL either in part or in whole. Thus, consideration paid by the appellant to LTGL for acquiring copy of software is not for the use of copyright or transfer of right to use of copyright. As mentioned above, copyright is different from the work In respect of which copyright subsist. The appellant has only got a copy of software without any part of the copyright of the software. Thus, payment made by the appellant for acquiring copy of software does not amount to royalty within the definition of Article-12(3) of the DTAA. 2.32 Similar issue that whether the supply of a copy of software programme without transfer of any part of copyright amounts to royalty or not has been considered by various benches of ITAT recently. Hon'ble ITAT, Bangalore Bench in the case of Samsung Electronics Co. Ltd. Vs. ITO 93 TTJ 658, 276 ITR (AT) 1 has had a occasion to consider the similar case. It was held in the case that the definition of royalty u/s.9(1)(vi) is wider than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amount to royalty as there -is no transfer of any part of copyright in the, computed programme which continues to remain with the software supplier. 2.35 The Hon'ble ITAT Bangalore Bench in the case of Sonata Information Technologies Ltd. ITA No.1561 to 1580/Bang/2004 dated 31.01.2006 have considered the issue of payment received on sale of computer software without transfer of any copyright. Hon'ble ITAT had examined the issue of royalty within the meaning of section 9(1)(vi) and as provided in the DTAA. Hon'ble ITAT had examined in detail the issue of royalty in respect of sale of shrink-wrap software. They also examined the copyright in respect of computer programme being the right to sell or given a commercial rental any copy of software programmes. The ITAT examined the genesis of additional copyright given in respect of computer programme in section 14(b)(ii) of the Copyright Act. The Hon'ble ITAT referred to Berne convention, Rome convention, WIPO copyright treaty, TRIPS. It was held that the copyright in the software is different from any right in the physical manifestation of the software contained in a CD floppy or on a hard Disc in which the software is downloaded. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment received is not royalty if there is no transfer of copyright partly or wholly. Facts obtaining in the case of appellant clearly point that no part of the copyright as envisaged by section-14 of the Copyright Act has been transferred to the appellant by LTGL. Therefore the payment for purchase of software cannot amount to royalty within the meaning of Article-12(3) 2.39 The AO has also held the software can be treated as patent and invention and has failed to provide how it can be treated as patent and invention. Under the Copyright Act, computer programme has been treated as literary, artistic work worthy of copyright. Patent has been defined in the Patents Act, 1970 in Section-2(1)(m) meaning a patent for any invention granted under this Act. Invention has been defined in section-2(1)(j) of the Patents Act meaning a new product or process involving an inventive step and capable of industrial application. Section- 3 of the Patents Act Provides "what are not Inventions", which reads as under: "3. What are not inventions - The following are not inventions within the meaning of this Act, - k) a mathematical or business method or a computer programe per se or algorithms;" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tradiction between the findings of the several benches of the ITAT and the US Australia Tax Rulings. 2.43 The AO has also relied upon the decision of Hon'ble AAR in the ruling In P.No.30 of 1999, 238 1TR 296. I have examined this ruling. In this case no software was supplied. On the contrary a central processing facility was created which was being used by other party and for such uses payment was being made. It was held that the payment made for such uses amounted to royalty since process being used included secret formula, design, model and also proprietary software. The facts in the case of appellant are entirely different. The appellant has purchased copy of software programme. Ratio of ruling of ARR is therefore not applicable. 2.44 The AR has referred to the decision of Hon'ble Calcutta High Court in the case of Leonhardt Andhra Und Partner, Gmbri vs. Commissioner of Income-tax (2001) 249 ITR 418. The AR has explained that this decision is not applicable since at the relevant time there was no DTAA between India and Germany and the definition of 'royalties' given in sec.9(1)(vi), Explanation (2) was applied. I have perused the order of the Hon'ble Calcutta High Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench decisions on the issue. Revenue is aggrieved. 12. Learned Special Counsel's arguments centred around the fact that what the assessee has obtained is only a license, which involved a copyright under the Copyright Act and the definition of Royalty under the Income Tax Act is also applicable. The detailed submissions canbe summarised as under: - a) Rights in software are in the nature of copyright, b) Licensing of software amounts to Royalty under the income tax even before amendment of 2012. c) Even under Article 12 of DTAA use of copyright of a literary article, scientific work, secret formula, process and also for use of industrial, commercial or scientific equipment is Royalty read with Copyright Act of India. Learned counsel, relying on the decision of the Hon'ble Delhi High Court in the case of Autodisk Inc. and Microsoft Computer (placed in the paper book at page 1698 to 1704) submitted that there is copyright involved as the infringement is punishable. He elaborated on OECD commentary, stand of India on OECD commentary. He mainly relied on the decision of the Hon'ble Karnataka High Court order in the case of CIT vs. Synopsis International Old Ltd. 212 Taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erring to clause 15 of the agreement, the arguments were that the license was given for use of non-tangible goods unlike hardware refer to various terms specified therein to submit that license is only for exclusive use by Reliance and no intellectual property right were transferred nor any copyrights were given. 15. The learned counsel referred to OECD commentary on Royalty, Software License agreements and provisions of the Act, DTAA and Copyright Act. He also distinguished the case law relied on by the learned counsel of Revenue. The learned counsel distinguished the decisions of Autodesk and Microsoft relied on by the Revenue submitting that they are given in the context of violation of copyright which are not involved in this transaction and does not apply. With reference to the Revenue's contentions about the amended provisions of IT Act, it was submitted that the DTAA (Article 12) has not been amended and so it has no application. He referred to the decision of B4U Int.holdings ltd in ITA/3326/Mum/2006 dt. 28/05/12 (Para 13-17) in support. Likewise decisions of WNS North America Inc in ITA 8621/M/2010 dated 14.12.2012 (para 3.6 to 3.10). It was also submitted that the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement was assigned to LTGL and not executed by Lucent india. He reiterated the contention that License is for use of copyright and not for copyrighted articles. He referred to the ownership and redesigning of software at the end of 10 year period to submit that software is not sold, only license to use was granted. Referring to the terms of agreement, it was submitted that when software was supplied through a medium of CD, Reliance has only license to use the same and in the case of software, it can only be treated as use of copyright. As an alternative submission, it was also contended that the use of software can also be considered as 'use of equipment' when it is loaded on CD becomes a tangible item and works through the computers. Since the software is to be referred as provided in clause 15.1.5, it is not taken as use of copyright, it can also be taken as use of equipment under DTAA. The learned counsel for Revenue submitted that in the case of product patent there can be sale but, a process patent can only licensed. ITA Nos. 7001/M/10 to 7004/ M/10 - Lucent Technologies GRL LLC 19. The facts in this case are, Lucent is a company incorporated in and a tax resident of USA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such software or modify, decompile, reverse engineer, or disassemble or in any other manner decode the software furnished, as object code. Reliance is also not permitted to make copies of the software except for back up purposes. The consideration received for supply of software is not in the nature of royalty since Reliance has not been granted any rights in the underlying copyrights of the software. Therefore, Reliance merely purchases a copy of the copyrighted article namely, a computer program, called 'software', which is a standard commercial software and can be supplied to any other telephony network player. The Lucent further argued that the payment is not covered by Copyright Act also and so cannot be considered in the nature of royalty. 21. AO discussed the issue about the receipts assessable as Royalty. His detailed order on the issue is as under: "To appreciate the nature of the transaction it is necessary to appreciate the special nature of software, the nature of transfers of software, sale of software, the concepts of royalty, etc which are dealt with in detail below: 4.1. What is software? The phrase "computer software" is commonly used to describe computer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitute as a sale of software. 4.3.2 The assessee has relied upon the decision of Constitutional Bench of Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh (20041141 Taxman 132 (SC). In this case, Supreme Court was concerned with canned software (i.e. computer software packages off the shelf). It was concerned with sale of canned software and whether such canned software can be termed as 'goods' and as such can it be assessable to sales tax. Supreme Court held that sale o software is clearly a sale of 'goods' within the meaning of Sec.2(h) of Andhra Pradesh General Sales Tax Act, 1957 and Article 366 of the Constitution of India. It was also held that no distinction can be made between branded and unbranded software. Supreme Court made certain interesting observations which are summarized below :- "The term 'goods' as used in Article 366(12) of the Constitution and as defined under the Act is very wide and includes all types of movable properties, whether those properties be tangible or intangible. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he software may also be considered as a "process', but this aspect is discussed later. 4.3.4 Thus, as per the Income Tax Act it is clear that the payment made for the purchase of software by the user can be considered as payment for use of intellectual property and not for the purchase of goods. The only exception provided is by the second proviso to sec. 9(1) (vi), which excludes the computer software supplied by a non-resident manufacturers 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. 4.3.5 The decision of the Tata Consultancy Services (supra) relied upon by the assessee is distinguishable with the facts of the present case. The Hon'ble Authority for Advance Rulings (Income Tax New Delhi) in the case of Airports Authority of India, in their judgement in A.A.R. Nos.755- 756 of 2007 dated 28.07.2008 discussed the issue in length and it was of opinion that decision is not applicable in such type of cases. The relevant portion is reproduced hereinunder: "We may now turn to the contention of the applicant that software is goods and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Customs Act defined 'goods' to include all kinds of movable property It held that what was being taxed under the Customs Act read with Customs Tariff Act and the Customs Valuation Rules was not the intellectual input alone but goods whose value had been enhanced by the said input. The final product at the time of import was either the magazine or the encyclopaedia or the engineering drawings or disc, as the case may be, and the charge of duty was on the final product. There was no scope for splitting the engineering drawing or the encyclopaedia into intellectual input on the one hand and the paper on which it is scribed on the other. It may be mentioned that the legislative scheme of sales tax law and income tax law are very different. While the object of 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. For this purpose, income has been classified into different types, like business income, income from house property, salary income, capital gains, royalty income, etc., which have been given tax treatments. Under The sales tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods (as per expanded definition of sale) did not come up for consideration in that case. On the other hand, the issue under consideration in the present case is different. The question here is whether the consideration is paid for the use or right to use copy right in which case it will be royalty income. As is clear from the contract provisions, there is no outright transfer of copyright or sale of disc/ floppy containing software programme in the present case. The factual background and the legislative provisions with reference to which Tata Consultancy Services' case (supra) was decided, are quite different from those of the present case. Thus the applicant can seek no support from the said decision in order to assail the correctness of the view taken by the Authority in the earlier case of the applicant" 4.3.6 The software is also covered within the scope of explanation (2)(via) to sec. 9(1)(vi) which deals with the use or tight to use any industrial, commercial or scientific equipment. Hon'ble ITAT, Hyderabad also held in case of M/s Frontline soft Limited ITA no 1080- 1081/Hyderabad/03 held vide para 25 as below: 25 The Apex Court in the case of Tata Consultancy Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ashmore India Ltd. (190 ITR 626 (Cal) have also clearly held that the royalty is a payment for grant of right to use any property, the ownership of which continues to vest with the grantor. This means that only in cases where ownership of the asset in question is retained and the right to use is granted, the payment of the same will constitute royalty. 4.4.3 For the purposes of interpretation of the DTAA, one has to go by the general meaning of the term 'royalty' in view of the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO (1987) 22 lTD 87 (Born.) and not by the definition as contained in Explanation 2 to section 9(1)(vi). The general meaning of royalty, after considering the Calcutta High Court decision in CIT v. Stanton Stavely (Overseas) Ltd. t19841 146 ITR 405, its definition meaning given in Encyclopedia Britannica (1972 Edition) and Gujarat High Court decision in CIT v. Ahmedabad Mfg. Calico Printing Co. (19831 139 ITR 806 and others, the Hon'ble ITAT observed as under: "It is thus clear that the general concept of the term 'royalty' does not rule out 'lump sum payments' being considered as 'royalty' as well as payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue or arise in India and also defining the term "royalty" 15.4 In view of the aforesaid amendment, royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, will ordinarily become chargeable to tax in India. 15.5 For the purposes of the aforesaid source rule, "royalty" has been defined in Explanation 2 to section 9(1)(vi). It will be seen that the definition is wide enough to cover both industrial royalties as well as copyright royalties. Further, the definition specifically excludes income which would be chargeable to tax under the head "Capital gains" and accordingly such income will be charged to tax as capital gains on a net basis under the relevant provisions of the law. 4.5.2 From the above it can be seen that the intention of the legislation is very clear and the same is to bring to tax all payments made for the acquisition of know how in any form, where the source of payment is in India. This is in accordance with the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trademark, or similar property; (iv) the imparting of any information concerning technical, Industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use, any industrial, commercial or scientific equipment, but not including the amounts referred to in section 4488; (v) the transfer of all or any rights (including the granting of a license) 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)" 4.6.4 An analysis of the above definition of royalty would show the following categories fall under the scope of royalty (i) Patents, designs, invention, secret formula, process etc. (ii) Information concerning technical, industrial or commercial or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents partake the character of "Royalty" as defined in the Sec.9(1)(vi) itself, As discussed above, clause (i) to (iv) are applicable In the case of intangible property and payment for its mere use is in the nature of royalty. As mentioned above, software Is not goods but an intangible property. Hence consideration paid for its use or right to use is in the nature of royalty. 4.7. Whether "process"? - 4.7.1 Alternative to the above discussion, it is to be seen whether 'software' fits into one of the categories mentioned in clause (i) and (iii) of explanation 2 to Sec.9(1)(vi). Klaus Vogel in his commentary on the phrase 'secret formula or processes' has stated that definition cover know-how in a narrower sense of the term, viz, all business secrets of a commercial or industrial nature [Para 59/Article 12~. In most countries, they enjoy at least a relative protection or are capable of being protected. 4.7.2 In New Skies Satellites vs. ADIT (ITAT Delhi Special Bench) ITA no 5385-87/2004 (Decision dated 16/10(2009) it was held that the provision of the transponder through which the telecasting companies are able to uplink the desired images/data and downlink the same in the desir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical flow diagram. Thereafter the statement of instructions in a computer language is relatively unskilled though it may be very laborious. The detailed writing will likely be in a so-called 'high level' language (such as Fortran or Cobol). giving the diagram in source code. The computer itself then converts this into operational terms of object code, by means of a separate 'system control' program. 'Computer Program' is a term that may describe a wide range of phenomena, from basic algorithms capable of application in an indefinite number of more specific uses to detailed instructions for the solution of particular problems. A different complication is this: the result of actually using a Programmed computer is to produce information which may be taken for itself, or may immediately be put to some further use, as where a computer controls a step in the operation of a production process. To add to the complexities. there is, for instance, the possibility that principles which might be written into programs are instead given expression in the circuitry of the computer, and the possibility of writing programs that will bring about the co-operation of a network of computers. 4.7.5 W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the electronic circuitry of a read-only memory (ROM) and the claim was to a ROM carrying the relevant controls. Aldous J. was prepared to accept the claim; but the Court of Appeal refused the application for its very apparent reference to mathematical procedures for producing numbers. The Court refused to accept in such a case that embodiment in a ROM made to program patentable, where it would not be if expressed purely in mathematical terms or was contained on a floppy disk for insertion in a computer. 4.7.6 The distinction between the securing of a technical effect in the `nature of a new invention and the mere production and manipulation of information has been made for the purpose of deciding patentability but the fact remains that all these software involve a process, the term which is much wider in scope than patent It was introduced in order to confine the exclusion of computer programs as such within a limited compass, itself an approach founded on a belief that the patent system should be open to 'innovative technology' in a broad sense. Programming include specialized skills such as mathematical procedure for the calculation of square roots; the conversion of binary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is acquired along with equipment, then consideration paid for the software will not be royalty if the agreement is approved by the specified authority of the Govt of India. In other words, if the agreement is not approved then payment for acquisition of such software would be taxable. It is also important to note here that the legislation has not used the word "copyright" as used in clause (iv) of the explanation defining royalty. In this regard, circular no 621 dated 19/1211991 issued by the Central Board of Direct Taxes explains the circumstances as under - 34.3 At present, the value of software in a physical form such as magnetic tape or disc imported into India is subjected to custom duty on the ground that what is imported is commodity. At the same time. since import of software is generally under a license from the foreign licensor, the lump sum payments made for using the software are regarded as payment of royalty within the meaning under Explanation 2 of section 9(1)(vi) of the Income-tax Act and taxed accordingly. 34.4 In order to prevent this dual levy, the Income-tax Act has been amended to provide that any lump sum payment for obtaining use of systems software sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of copyright' whereas in case of software it simply says transfer of 'any right in respect of software'. The word copyright has not been used in the case of software. Rightlyso, as discussed earlier, a book is a tanalble property whereas software is an intannible property. As per section 9(1)(vi) defining royalty, in case of Intangible property consideration for mere use of such property will be in the nature of royalty whereas in case of tangible property (other than equipment), royalty would arise only for transfer of copyright right. 4.10.3 Section 80HHE was introduced in the Act w.e.f 1.4.1991 for granting deduction in respect of profits from export of software. The need arose mainly because such profits were not entitled for deduction u/s 80HHC as the software was not considered as goods or merchandise. 4.11. Meaning of Copyright 4.11.1 If you create an original work that people can see or hear, you can get copyright. Having copyright means that you own that work and you can control its commercial use. Your copyright can protect your work from being copied or reproduced without your permission. If you have an original idea, you cannot have copyright in it. You must pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on commercial rent is included in the software. In the A.A.R. case of Factset Systems (AAR No.787 of 2008) these rights appear to be not considered, It may be worthwhile to .point out that, similar rights were also introduced in the US Copyright Act. Sec. 109A of the US Copyright Act [as amended in 1990] states: "Notwithstanding the provisions of the Sub-sec.(a), unless authorised by the owners of the copyright in the sound recording or the owner of copyright in the computer Program (including any tape, disk or other media embodying such Program), and the case of sound recording in the musical works embodied therein, neither the owner of the particular phonorecord nor any person in possession of a particular copy of a computer Program (including any tape, disk or other media embodying such Program), may for the purpose of direct or indirect commercial advantage, dispose of, or authorise the disposal of the possession of that phonorecord or computer Program (including any tape, disk or other media embodying such Program), by rental, lease, or lending, or by any other Act or practice in the nature of rental, lease or lending. Nothing in the preceding sentence shall apply to the ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation cannot be accepted. 4.12.4 At this juncture, it would be appropriate to borrow from the Commentaries by Eminent Authors before arriving at a finding in this matter. OECD Commentary vide para 15 states that where consideration is paid for the transfer of the full ownership, the payment can not represent a royalty and the provisions of the article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving - - exclusive right of use during a specific period or in a limited geographic area; - additional consideration related to usage; - consideration in the form of a substantial lumpsum payments. Reference to Klaus Vogel's Commentary on Double Taxation Conventions shows that in Canada, payment for using of software by virtue of contract, where the Program is kept confidential, amounts to payment for use of secret formula and hence amounts to royalty payment. A similar view is taken in United States as referred to in para 29 of the Commentary by Vogel which states as under: "29. The United States believes that in interpreting the definition of 'royalties' in para 2 of the article, with respect to payments fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fering for sale or for commercial rental any copy of the computer programme regardless of whether such a copy has been sold or given on hire on earlier occasion constitute the grant of a right to use copyrights. The said definition makes it clear that copy of legally obtained software constitutes grant of exercise of the copyright. Article 3(2) of the Indo-US DTAA makes it mandatory to adopt the definition of the word 'copyright' as given in the law of the state applying the provisions of the treaty and therefore, definition as given in Indian Copyright Act, 1957 shall be applicable in the present case. Neither Indian Copyright Act, 1957 nor any Circular issued by the CBDT makes any distinction between Copyright and Copyrighted article and such distinction made in US regulations cannot be extended to Indian territories and only laws promulgated by the Indian sovereign have to be applied. Further, the 'Royalty is a very wide term under the Income Tax Act and under the DTAA and it covers other aspects of the intellectual property also besides the transfer of the copyright right like process, equipment covered by explanation 2(iva) to sec.9(1)(vi). 4.13. Conclusion under Domestic La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enterprise described in paragraph I of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8. 4.14.2 Basic structure of the term royalty in the treaty is same as in the domestic law. For instance it refers to the following categories which are also there in domestic law- i) patent, trademark, design or model, plan, secret formula or process ii) information concerning industrial, commercial or scientific experience ii) industrial, commercial or scientific equipment iv) literary, artistic, or scientific work, including cinematograph films. 4.14.3 Similar to domestic law, mere use of first three categories is royalty and in the case of fourth category it is the copyright right. The minor differences are- i) In case of first category, instead of 'transfer of any right', the treaty uses the word "right to use" ii) The treaty uses specific words 'copyright of literary, artistic or scientific work' whereas domestic law says "copyright, literary, artistic or scientific work". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion on the issue while deciding the first ground we find that what is taxed as royalties is the amount paid as consideration for the use or the right to use and not outright purchase or the fight to use as an asset Royalty is thus consideration for the transfer of all or any right including the granting of a license in respect of a copyright, patent, trade mark, design and modal or secret formula, the use or right to use any industrial, commercial or scientific equipment (section 9(1)(vi), explanation 2. (iva)) transfer of the 'fight in the property' is not the subject matter. It is the transfer of the 'fight in respect of the property'~ The two transfers are distinct and have different legal effects. In one right are purchased which enables use of those fights, while in the other the purchase is involved, only the 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 complex of rights all of which rights are tights in pm petty being good against all the world and not merely against a specific person and such rights are indeterminate in duration and residuary in character. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of such agreements, even knowledge derived from his own experience and technical know-how for the most economical and efficient user of the patents, inventions, etc. are parted with by the licensor to the license. Payments of this kind are known as royalties. This is also evident from several double taxation avoidance agreements between the Govt. of India and foreign countries such as Sweden in which the term 'Royalty' has been defined. That such payments are royalties is also evident from the definition of the word 'Royalty' in section 9(1)(vi), Explanation 2, which was subsequently introduced by the Finance Act, 1976, with effect from June 1, 1976) (Relevant head note)." 23. In OECD commentary it is stated that the character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the pro gram. The rights in computer programs are a form of intellectual property. Research into the practices of OCED member countries has established that all but one protects rights in computer programs either explicitly or implicitly u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are" The transaction clearly, falls under the definition of 'Royalty' as defined in section 9fl)(vi) Explanation 2 (iva). The assessee acquired only right to use of 'True Dial Software". It is 'Royalty' and royalty payment to NRI is deemed to accrue and arises in India and therefore, payment is subject to tax deducted at sources. We them fore, confirm the orders of the lower authorities. 4.17.2 Recently Karnataka High Court in CIT vs. Samsung Electronics Co. Ltd. (2009) 185 Taxman 313 (Kar) held that for the import of software the tax as 'Royalty" has to be deducted and answered in para 90 of the order Q.No. 2, 3, 4 as below:- Sr. No. Substantial questions raised Answers 1 .. 2 Whether the Tribunal is correct in holding that the payments made by the Assessee Company for purchase of software from Aaymetrix Asia Pacific, Singapore; Peritus Software Service Inc., USA and Astral Computers Pvt. Ltd., Singapore for the amounts of Rs. 3,43,095, Rs. 47,89,419 and Rs. 8,89,611 was not liable to Incometax in India and consequently no TDS as held by the Assessing Officer and confirmed by the Appellate Commissioner needs to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05, A.Y. 2005-06 and A.Y. 2007-08 dated 19 August 2010 and thereby not accepting the Appellant's claim for refund of Rs.4,60,83,230 alongwith interest. Taxability of Income 2. On the facts and in the circumstances of the case and in law the Learned AO and the Dispute Resolution Panel (hereinafter referred to as "the DRP") have erred in holding that the amounts received by the Appellant from supply of software to Reliance Communications Limited (previously known as Reliance Infocomm Limited) (hereinafter referred to as "Reliance") are "Royalty" in nature under the provisions of the Act and under Article 12 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as "DTAA") and thus liable to tax in India. 3. On the facts and in the circumstances of the case and in law the Learned AO and the DRP authorities have erred in holding that Lucent Technologies Hindustan Private Limited becomes a permanent establishment (hereinafter referred to as "PE") for the Appellant in India. 4. On the facts and in the circumstances of the case and in law, the Learned AO and the DRP authorities have erred in holding that that the sale of software is effecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit rate of 40% on their own surmises and conjectures and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in computing the profits attributable to the PE @ 32%, which is very high as compared to the actual activities carried out in India in relation to the supply of software. 11. Without prejudice to the above, the DRP authorities have erred in not appreciating that all the critical activities in relation to the sale of software were carried on by the Appellant outside of Indian and all risks resided outside of India and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in higher amount of profits being attributed to the PE in India. 12. On the fact and in the circumstances of the case in law, the DRP authorities and consequentially, the Learned AO have erred in not considering and not taking cognizance of the profit attribution study filed before the DRP to substantiate the profit attribution ratio. 13. Non-granting of TDS Credit- i On the facts and in the circumstances of the case and in law, the DRP has erred in not directing and conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe of work in the agreement (Clause 3.1). He referred to various terms to submit that the sale and supply was outside India, only goods were supplied at unit prices on fixed price basis and there is no separate license fee and this software is specified for running the equipment (equipment specific) and so part of supply of Network agreement. He referred to the main General Terms and Conditions and Assignment agreement to stress that the Lucent was acting for supply of hardware and software for Network establishment and the products are only sold. He relied on the decision of the Special Bench of ITAT in Motorola 95 ITD 269 (Del) wherein it was considered that supply of software cannot be considered as Royalty. It was also further submitted that the software supplied is custom work and no standard software agreement were entered into. He reiterated the principles laid down by the decision of Motorola (supra) which were in fact approved in the cases of: - 1) DIT vs Nokia Networks OY, 25 taxmann.com 225 2) Seimens Aktiengesellschaft 19 ITR (TRIB) 336 (Mumbai) 3) DIT vs Ericson AB 204 Taxmann 192. 4) Lucent technologies 28 SOT 98 He admitted that there is clear conflict in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different. He reiterated the same arguments on use of copyright/use of equipment/ intangible equipment, etc. 24.3 With reference to the issue of PE, he reiterated the AO's arguments and referred to 'assignment agreement', clause 7.3.2 for commissioning of software and Indian company is responsible for installing and commissioning of the software along with hardware, so agency PE exists. He relied on the orders on the issue of attribution of profits and levy of interest. 25. We have heard the contentions in detail and perused the paper books, various case law placed on record. There is no dispute with reference to the fact that Reliance purchased various equipments for establishing network and acquired software from various sources on various agreements which generally are considered as End User License Agreements (EULA). It was submitted that the software supplied were standard software which could be supplied to any other person in Telecommunication business with wireless telecommunication network. Reliance was granted the right to use the software for its own business purpose and is permitted to validly use the software for its wireless network. Pursuant to the supply of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various contentions and held that those assessee companies were leading suppliers of the said communication equipments comprising both hardware and software. Software could not be effective without hardware, which was also supplied together. The Special bench of the ITAT on those facts was of the view that the crux of the issue is "whether the payment is for copyright or for a copyrighted article". If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and they proceeded to address the issue. After noticing the definition of copyright as given in the copyright Act, 1957 in section 14 of the said Act and referring to the various clauses in the agreement entered into between the parties and after referring to the various judgments relied on, on behalf of the parties, it was held that the payment by the cellular oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, USA but also from various other non-resident companies, for use in the Reliance Network by virtue of separate agreements do indicate that software is not supplied alongwith hardware. As seen from the copies of agreements placed on record, some agreements are only for purchase of license/ granting of license only. But majority of agreements are standard in their format, which was discussed by Ld CIT(A) in the case of agreement with Lucent. It was admitted that the software works on the hardware, but the supply was not integral part of purchase of equipment required/ nor embedded software. Therefore, the facts as stated before the Special Bench of ITAT and Hon'ble Delhi High Court are entirely different when compared to the facts before us almost in all the cases, where the software agreements are stand-alone agreements, not with purchase of equipment and not supplied along with equipment as embedded software. The delivery was separate, as stated in the form of CD's, mostly abroad and was installed in India separately. As already stated, the Lucent has not been supplying software as part of equipment purchased but as a stand-alone software agreement entered into as the 'end user l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty. All the appeals are allowed. Impugned orders passed by the Income Tax Appellate Tribunal, Bangalore Bench, is hereby set aside. The order passed by the Commissioner of Income Tax (Appeals) affirming the order passed by the Assistant Commissioner of Income tax, Circle 19 (1), Bangalore, with modification is restored." 31. The Karnataka Hon'ble High Court in a batch of appeals, in the case of Samsung electronics and Other case( 345 ITR494 Kar) , on being restored by the Hon'ble Supreme Court, has considered the issue which is as under: - "The question which the High Court will answer is whether on the facts and circumstances of the case, the ITAT was justified in holding that the amount(s) paid by the appellant(s) to the firm of software suppliers was not royalty and that the same did not give rise to any income taxable in India and therefore the appellant was not liable to deduct any tax at source." On this question the Hon'ble Karnata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961, if the provisions of the DTAA are more beneficial to the assessee. The definition of "royalty" is restrictive in the DTAA whereas the definition of "royalty" under the Act is broader in its content. (iii) Under the DTAA with the U. S. A., the necessary ingredient to be satisfied to find out whether the payment would amount to "royalty" is that it is received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work. A literary work is entitled to copyright. In India, section 2(o) of the Copyright Act, 1957, defines "literary work" as including computer programmes, tables and compilations including computer database. Therefore, "computer software" has been recognised as copyright work in India also. The Legislature has treated literary work like books and other articles separately from computer software within the meaning of the "copyright" under the Copyright Act. There is a difference between a purchase of a book or a music CD because while these can be used once they are purchased, software stored in a dumb CD requires a license to enable the user to download it upon his hard disk, in the absence of which there would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear from the wordings in section 9 of the Act, which reads as under :- "(1) The following incomes shall be deemed to accrue or arise in India:- (vi) income by way of royalty payable by- .................................. (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 income from any source outside India; .................................. [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] Explanation 2 - For the purposes of this clause, "royalty" means consideration (including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso and the consideration paid thereon falls within the mischief of 'Royalty' as defined in the said proviso. It is in this background, we have to look into clause (v) of Explanation 2. Under Explanation 2, for the purpose of clause (v), 'Royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains"). In other words, one of the tests to be applied is whether the consideration : paid would fall within the definition of capital gains. If the consideration paid do not fall within the definition of capital gains and do not fall within the second proviso, then the said consideration would be 'Royalty' for the purpose of this clause, as defined in Explanation 2. 22. Similarly, clause (v) deals with copyright, literary, artistic or scientific work and the consideration for the transaction of all or any rights (including granting of licence) in respect of any copyright, literary, artistic or scientific work as 'Royalty'. Similarly, what is excluded from the definition of Royalty' are consideration for the sale, distribution or exhibition of cinematographic films. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gar Mills Ltd. and anotehr, reported in AIR 1960 Page 695, held as under:- "We do not propose, however, to rest our decision on this narrow question of haulage from the station platform to point A, as in our view the assumption made above as regards the definition of terminals in S. 3(14) is not justified. The definition as has already been stated is in these words. "Terminals" includes "'charges in respect of stations, sidings, wharves, depots, warehouses, cranes and other similar matters, and of any service rendered thereat". Thus two classes of charges are included in the definition. The first is "charges in respect of stations, sidings, wharves, depots, warehouses, cranes and other similar matters." The second is "charges in respect of any services rendered thereat". Whether or not therefore any services have been rendered "threat" that is, at the stations sidings, wharves, depots, warehouses, cranes and other similar matters the other class of terminals in respect of these stations, sidings, wharves, depots, warehouses, cranes and similar other matters remain. A further question thus arises as regards the interpretation of the phrase "in respect of". Does it mean charges for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nition viz., "of any services rendered threat". For from being there any reason to cut down, the consequence of the generality of language used viz., "in respect of, there is thus good ground for thinking that the legislature used this language deliberately to cut across the difficulty of distinguishing in a particular case as to which of these things had been used or whether any of them had been used at all. Innumerable people corry goods over the Railways and many of them for the purpose of the carriage make use of the stations, sidings, wharves, depots, warehouses, cranes and other similar matters, while many do not. Though at first sight it might seem unreasonable that those who had not used would have to pay the same charge as those who had made use of these, it is obvious " that the interminable disputes that would arise between the Railway Administration and the Railway users, if the fact of user of stations, sidings and other things mentioned had to determine the amount payable, would be unhelpful not only to the Railway Administration but also to the using public. The sensible, way was therefore to make a charge leviable for the mere provision of these things irrespective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by him. It is made payable in order to mitigate or reduce the hardship caused by reason of unemployment or temporary loss of employment. Consequently, it cannot be said to be a payment "in respect of employment or work done in such employment." 25. The High Court Patna in the case of Commissioner of income tax vs. Chunnilal Rameshwar Lal, reported in AIR 1968 Patna page 364 held as under : "It is well known that the expression "in respect of is of wider connotation than the word "in" or "on". Hence, a class of municipal tax, though not a tax on the premises or buildings, may nevertheless be a tax in respect of the premises or building used for the business. Hence, the payment of the impugned amount of Rs. 125 as professional tax under section 150A read with (section 82(1)(ff) of the Municipal Act is in substance a municipal tax in respect of the business premises, and is covered by clause (ix) of sub-section (2) of section 10 of the Income-tax Act. The assessee is entitled to get allowance for the same under section 10(1) of the Indian Income-tax Act, 1922. The Appellate Tribunal was right in giving allowance to the assessee for a sum of Rs. 125 paid by him under the Bihar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. The words 'in respect of admit of a wide connotation, than the word "in" or "on". The expression "in respect of" "means attributable to" If it is given a wider meaning "relating to or with reference to", it has been used in the sense of being 'connected with'. Whether it is a fiscal legislation or any legislation for that matter, the golden rule of interpretation equally applies to all of them. i.e., the words in a statute should be given its literal meaning. In respect of fiscal legislation those words should be strictly construed. If those words are capable of two meanings that meaning which is beneficial to an assessee should be given. However, when the meaning of the words used are clear, unambiguous, merely because it is a fiscal legislation, the meaning cannot be narrowed down and it cannot be interpreted so as to give benefit to the assessee only. Then it would be re-writing the section, under the guise of interpreting a fiscal legislation, which is totally impermissible in law. When the legislature has advisedly used the words 'in respect of', the intention is clear and manifest. The said phrase being capable of a broader meaning, the same is used in the section to brin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary, 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 electronics 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 work; (v) to make any translation of the work;' (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clause (i) to (vi)." 30. The object of a definition is to avoid the necessity of frequent repetitions in describing all the subject-matter to which the word or expression so defined is intended to apply. The Legislature has power to define a word even artificially. So the definition of a word in the definition section may either be restrictive of its ordinary meaning or it may be extensive of the same. When a word is defined to 'mean' such and such, the definition is prima facie restrictive and exhaustive whereas the word defined is declared to 'include' su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expressly state that "for the purposes of this Act". The intention of the parliament in expressing the meaning of the word in that manner and not defining the said term in the definition section cannot be lost sight of. Further, the legislature has chosen to employ the word 'means' in defining the meaning of the word 'copyright' which again makes the intention very clear that the said meaning to the word "copyright" is restrictive and exhaustive. Then the further words, 'exclusive right subject to the provisions of this Act' further imposes a rider on the meaning of the word 'copyright'. Though the word used is "exclusive right", in section 30 of the Act, the Parliament has provided what are the rights which the owners of a copyright may part with. It expressly states the owner of the copyright in any existing work may grant any interest in the right by licence in writing signed by him or by his duly authorised agent. Therefore, when if comes to the question of granting licence it need not necessarily be the exclusive right, a may be any interest in the right. Therefore, when the word 'copyright' has not been defined in the definition section of the Act and the meaning of the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understood. When in the Act itself after using the word exclusive right in section 14, when it comes to the question of licence of a copyright, if need not necessarily be an exclusive right, but any interest in the right, the word exclusive has to be restricted firstly to the Act itself and secondly to situations which fall outside the scope of section 30 of the Act. Therefore, the expression 'copyright' used in the Act cannot be the same as used in the Income-tax Act. In the Income-tax Act, when the legislature advisedly used the word 'in respect of a copyright' it cannot be construed as a right in the copyright and assign the meaning assigned in the Copyright Act to the second explanation, line language in Explanation (2) explicitly makes it clear for the purpose of clause (vi) of sub-section (1) of section 9 royalty means consideration for transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work. Therefore, the word exclusive right used in section 14 of the Act do not fit into the meaning of the word 'royalty' in Explanation 2 because royalty means the consideration for the transfer of all or any rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm a particular task or achieve a particular result." 34. It is also worth mentioning that some routines may be written in assembly code, essentially a set of memories for object code which another program translates directly into that code. This is normally done when the programmer needs to drive the hardware directly, or where speed is required, as it gives very precise control over the program's operation. Once all sections are complete, they are fitted together to produce a complete version in source code, i.e., in human- readable form that gives the user as little information as possible about the details of the program (thus reducing the danger of copying), the source code is used as input for another program, the compiler. This compiles the program into object code, a machine-readable form which will have linked to it the standard pieces of code for the program to run as a stand-alone or executable file. This version will be run to test it, and any errors which are discovered will be fixed in the source code and the whole recompiled. The final process is to produce the documentation which the user will need to operate the program. The completed product is the package of ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight is the usefulness of intellectual property embedded in such copyright. One of the ways of exploiting a copyright is by re-production for commercial use. But that is not the only use to which a copyright could be made use of. It could be used for their personal use and that is the reason why consideration is stipulated even for such personal use. Though the rights that are transferred in such a transaction may be limited as compared to transfer of a copyright for commercial use. In particular, a software or a computer programme is such a sophisticated goods that it may be sold of the shelf, it may be sold looking into the needs of the customer, it may be even prepared keeping the requirement of end-user in mind. In all these cases copyright as such is not transferred. It is not necessary for the end-user also. The end-user wants permission to have the benefit of such intellectual property in carrying on his business which is a commercial venture. It facilitates his business. It is for that he pays consideration. Without such transfer or permission, the end-user cannot use the said intellectual property. If he does it amounts to infringement. Therefore, the right to use the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , picture or other object. Hence, the sale or other transfer of the material object does not, of itself, constitute a transfer of the copyright therein. An assignment carries with it the whole interest in the thing assigned, including the right of reassign, while a licence is personal and not assignable without the grantor's consent. An exclusive licence is a leave to do a thing, and a contract not to give leave to anybody else to do the same thing, It confers no interest, or property in the thing but only makes an action lawful, which, without it, would have been unlawful. 43. A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use confidential information, and in virtually in all cases it will be a permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software licence will be akin to a licence of confidential information or know-how. The owner or licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to writing and designated as confidential in writing within thirty (30 days; and (vi) the terms and conditions of this Agreement; provided, however the "Confidential Information" will not include information that; (a) is or becomes generally known or available by publication, commercial use or otherwise through no fault to the receiving party; (b) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (c) is independently developed by the receiving party without use of the disclosing party's Confidential Information; (d) is lawfully obtained from a third party who has the right to make such disclosure or; (e) is released for publication by the disclosing party in writing 1.4 "Design" means the representation of an electronic circuit or device(s), derived or created by License through the use of the Licensed Product in their various formats including, but not limited to, equations, truth tables, schematic diagrams, textual descriptions, hardware description languages and netlists. 1.5 "Design Techniques" means the Synopsys-supplied data circuit and logic elements, libraries, algorithms, searc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout right of sub-license, of use the Licensed Software and Design Techniques only: (i) in the quantity authorized by a License Key; (ii) in accordance with the Documentation; and (iii) in the Use area. Licensee may make a reasonable number of copies of the licensed Software for backup and/or archival purposes only. 2.1.1 Term of License The term of the license granted herein shall be continuous until non- renewal of the Support Agreement, (unless the license is sooner terminated in accordance with section 8 of this Agreement), whereupon Licensee shall be granted a twenty-(20) year key to use the Licensed Software at the last supported level, provided that if Licensee and Synopsys have agreed that Licensee may obtain time- based licenses for the Licensed Products, as indicated in the applicable quote, purchase order and/or License Key, the term of the license shall be as set forth in the applicable Licensee key. 2.2 Design Ware License If Licensee has purchased a license to Design Ware, Syncpsys hereby grants Licensee the following non-exclusive, non-transferable rights to Design Ware, with no right to sub-license (except as provided below): (i) licensee may use Design Ware ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) distribute, lease, lend, use for timesharing, service bureau, and/or application service provider purposes the Licensed Product; (iii) use the Licensed Product for the benefit of third parties, or allow third parties to use the Licensed Product; (iv) modify, incorporate into or with other software, or create a derivative work of any part of the Licensed Product; (v) disclose the results of any benchmarking of the Licensed Product (whether or not obtained with Synopsys' assistance) to third parties; (vi) use the Licensed Product to develop or enhance any product that competes with a Licensed product; or (vii) employ the Licensed product in, or in the development of, life critical applications or in any other application where failure of the Licensed Product or any results from the use thereof can reasonably be expected to result in personal injury. 3. Ownership 3.1 Synopsys Ownership. Synopsys and/or its licensors own and shall retain all rights, title and interest in and to the Licensed Product, Design Techniques and Documentation, including all Intellectual Property Rights embodied therein, and Licensee shall have no rights with respect thereto other than the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... License Key and/or Documentation, as appropriate. 6. Support Services Support services shall be provided by Synopsys under the terms and conditions set forth herein and of the Support Agreement. 7. Confidentiality Each party will protect the other's Confidential Information from unauthorised dissemination and use with the same degree of care that each such party uses to protect its own like information. Neither party will use the other's Confidential Information for purposes other than those necessary to directly further the purposes of this Agreement. Neither party will disclose to third parties the other's Confidential Information without the prior written consent of the other party. 8. Termination of License 8.1 Termination. Either party has the right to terminate this Agreement if the other party breaches or is in default of any obligation hereunder, which default is incapable of cure or which, being capable of cure, has not been cured with fifteen (15) business days after receipt of written notice from the non-defaulting party or within such additional cure period as the non- defaulting party may authorize, except that the Licensed Product's failure to substantiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablished by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed (i) to give either party the power to direct or control the day-to-day activities of the other or (ii) to constitute the parties as partners, joint ventures, co-owners or otherwise as participants in a joint a common undertaking. 13.9. Injunctive relief. The parties agree that a material breach of this Agreement adversely entitled affecting Synopsys' Intellectual Property Rights in the Licensed Product, Design Techniques or Documentation would cause irreparable injury to Synopsys for which monetary damages would not be an adequate remedy and Synopsys shall be to equitable relief in addition to any remedies it may have hereunder or at law." 45. As is clear from the description of the agreement it is an end-user software licence agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques only in the quantity authorized by a licensee in accordance with the documentation in the use area. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one such income is the income from royalty 35. Expressing similar view, the Hon'ble High Court of Karnataka has held similarly in the case of Samsung( supra) as under: (para 20) Having regard to the above said definition of "royalty", we have to con-sider the contents of software licence agreement entered into by the non-resident with Samsung Electronics and also the respondents in the case represented by Sri Ganesh, learned senior counsel and Sri Aravind Dattar, wherein 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 rever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement, as referred to above, and the non- resident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, 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. 36. The principles laid down by the two judgements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was received from Taiwan. Only after receipt of both the software and the hardware, had they been integrated by the assessee in India and thereafter supplied to the Department of Telecommunications as an end product in terms of the assessee's independent contract. Therefore, the finding recorded by the Tribunal was erroneous. Consequently, the payments made by the assessee amounted to royalty and were liable to be taxed in India under section 9(1)(vi) read with the Double Taxation Avoidance Agreement. Order of the Appellate Tribunal in Lucent Technologies Hindustan Ltd. v. ITO [2004] 270 ITR (AT) 62 (Bang) set aside. 38. In the light of the above principles laid down by the Hon'ble Karnataka High Court, that too in group case itself on same terms of agreement as that of with Reliance for supply of software, we are inclined to follow the judgements of the Hon'ble Karnataka High Court over the decision of the Special Bench of the ITAT in the case of Motorola (supra) which was rendered in a different fact situation. 39. In the cases before us, the learned counsel for Lucent fairly admitted that the issue is to be decided in the light of the judgement of the Hon'ble Delhi Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. Sweden: Article 12(3)(a) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 5. Singapore: Article 12(3) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: a. any copyright of literary, artistic or scientific work, including cinematograph film, or films or tapes used for 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, property or information; b. any industrial, commercial or scientific equipment, other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y; i. for services that are ancillary and subsidiary to the rental of ships, aircraft containers or other equipment used in connection with the operation of ships or aircraft in international traffic; j. received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience; 9. Canada: Chapter III Article 12(3) The term "royalties' as used in this Article means: a. payment of any kind received as a 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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or process, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. Therefore, we do not see any substance in the said contention. Further the Ho'ble High Court in the case of Samsung electronics also considered similarly as under: In view of the abovesaid observations and the contents of the DTAA with different countries, wherein the definition of "royalty" is common in all the agreements, it is necessary to reproduce the said definition of 'royalty' in article 12 of the DTAA, which reads as under : "Article 12 of DTAA with the USA (see [1991] 187 ITR (St.) 102, 115) : 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is a literary work and the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the intellectual property right in the software. It is not possible to divorce the software from the intellectual property right of the creator of the software embedded therein. Even the right to sell or give on rental, would amount to a copyright and would be a right to be dealt with as a copyright. The definition of "royalty" in the Income-tax Act, 1961 is, consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, innovation, model, design, secret formula or process or trade mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work. License is not confined to an exclusive license. When a software, ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right". The definition is wider than that contained in the Act. It also ropes in payment of consideration for the use of a copyright in addition to the consideration paid for the right to use a copyright, covered by the definition in the Act. Consideration paid for use of a copyrighted software is also payment for use of the copyright embedded in the software. There cannot be a use of software, over which exists a copyright, without a use of the copyright therein. The payment for such use can only be royalty. The sale or licensing for use of a copyrighted software amounts to the grant of a right to use a copyright. P. No. 30 of 1999, In re [1999] 238 ITR 296 (AAR) relied on a ruling by the Authority is based on the facts involved in the application leading to that ruling. The doctrine of precedent cannot be applied to a ruling under section 245R(4) of the Act. The Act has itself made it clear that the ruling is binding on the applicant in the application and the Revenue, in respect of that application and the transaction involved therein. The applicant, a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received by the applicant from the distributor for the Citrix subscription advantage programme, was in the nature of "royalty" within the meaning of the term in article 12 of the DTAA and in the light of the declaration provided by the applicant that it did not have a permanent establishment in India in terms of article 5 of the DTAA, whether the payment received by the applicant was chargeable to tax in India and would the receipts by the applicant from the distributor suffer withholding tax under section 195 of the Income-tax Act, 1961, and at what rate. The Authority on the stated facts, ruled : (i) That the payments received by the applicant from the distributor for sales of the software products were in the nature of royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961. (ii) That the payments concerned would be royalty as defined in article 12 of the DTAA between India and Australia. (iii) That the payment received by way of subscription for the updates would also be payment received for grant of a right to use the copyright embedded in the subscription advantage programme and it will be royalty. (iv) That it was not necessary to rule on the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under various agreements, what is transferred is only a licence to use the copyright belonging to the non-resident, subject to the terms and conditions of the agreement, as referred to above, and the non- resident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, 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. 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 that there is no transfer of copyright or any part thereof under the agreements entered into by the Reliance with the non-resident supplier of software cannot be accepted. Under these circumstances, payment made by the Reliance to LTGL/ other suppliers can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated services (ITA Nos 4283/M/08, 4244/M/08, 4247/M/08, 4306/M/08, 4877/M/07, 4905/M/07, 4910/M/07). 9. Motorola Inc, USA (PB 1113-1154) vide various purchase orders with annexure specifying software License. (ITA Nos 4878/M/07, 4904/M/07, 4247/M/08, 4306/M/08, 4877/M/07, 4908/M/07, 4675/M/07). 10. Mantra Communications Inc, USA (PB 784-793) vide purchase orders dt. 30/11/01 specifying software License for source code license also. (ITA Nos 729/M/09). 11. Green Hills Software Inc, USA (PB 1660-1667) vide agreement dt. 14/12/05 specifying software License and management agreement. (ITA Nos 5072/M/08). 12. Venturi Wireless Inc, USA (PB 241-289) vide agreement dt. 23/11/05 specifying License and Annual maintenance agreement. (ITA Nos 5082/M/08, 5075/M/08). 48. The agreement with M/s Neura Communications Inc USA ( PB 214- 240) vide agreement dt. 19/10/2005 is termed as Purchase and Reselling agreement, terms of which are different ( ITA Nos. 5081/M/08). Similarly agreement with New Skies Satellites NV, Netherlands is for hiring transponder which will be dealt with later separately ( ITA Nos 5374/m/08, 6093/M/08). 49. Therefore, we hold that Ld. CIT(A) erred in treatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. ITA Nos.7001 to 7004/ M/10. Lucent Technologies GRL LLC 51. These appeals pertain to Lucent Technologies, GRL LLC. As briefly stated above, the issue in these appeals is with reference to the taxability of the amounts received from supply of software to Reliance. The AO held the same as royalty in nature and in the alternate, also considered that there is a PE in India and so the business profits are attributable to the PE. Along with the above two issues there are issues on non-granting of TDS credited, levy of interest also. 52. The issue of royalty was considered above in detail and consequent to the findings therein, it is considered that amounts paid by Reliance for supply of software under a licence agreement is to be considered as royalty under the provisions of the Act and also under DTAA and liable to tax in India. Accordingly, the grounds raised by Lucent from Ground No.2 to 5 are rejected. 53. The next issue to be considered is attribution of business profit to the PE. Vide para 4.18 of the order of the AO for the impugned year,, the AO gave a finding that payment made for software would be termed as royalty payments and necessary tax rates have been mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate Bench in the case of Western Union Financial Services Inc. vs. ADIT (104 ITD 34)(Del.) to submit that mere use of software for the purpose of business in India need not lead to an agency PE as assessee was not rendering any service in India nor LTHPL is authorized to deal with outsiders on behalf of assessee Lucent. Further, it was submitted that the co-ordinate Bench in the case of Lucent Technologies International Inc. vs. DCIT, Non-resident Circle (28 SOT 98) considered the facts in the case to hold that there is a service PE in that case. It was submitted that mere existence of a PE to a group company does not lead to a finding that the assessee also as a PE in India. It was further submitted that AO's reliance on a document i.e., subsequent restructured agreement for payment by the group companies does not indicate that any one of them is authorized to enter into contract on behalf of the assessee Lucent and further, agreement was dated 06.09.2008 does not pertain to any of the impugned assessment years. Nothing was brought on record by the Revenue that there is a PE except relying on the so called agreement which was entered on a principle to principle basis. 56. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est on the shoulders of the assess. There was no dispute in that the assessee had completed part of its contract, i.e., the supply of the hardware and the software. The installation, commissioning, testing and bringing up to operational state of the hardware and the software supplied by the assessee had been undertaken by the Indian Subsidiary, LTIL. For said purpose, LTIL had also taken the assistance of the employees of the affiliates of the assessee. Thus, the parent company, being the assessee had made personnel available to the LTIL, the subsidiary in form of the employees of the affiliates of the assessee at certain remuneration. Further, a perusal of the agreement between Escotel and the assessee clearly showed that the warranty provided by the assessee-company was in relation to the defects in the hardware. That warranty clause in identical form was also found in the agreement entered into between Escotel and LTIL. Normally, the warranty for a particular product to be supplied by one person is the responsibility of that person alone, but in the instant case, that burden was also shifted to the subsidiary, being LTIL. Though LTIL had certified that it did not keep any spares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was on Indian company there is no evidence of either deputing personnel of assessee Lucent to India nor there is any evidence in the record for invoking Service PE as in other case. Moreover for invoking Agency PE , facts do not support AO's contentions. The agreement entered is an independent agreement, entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken any responsibility of the assessee Lucent. On the facts of the case we are of the opinion that there do not exist any PE, more so of agency PE. It is also not the case of the Revenue that the assessee deputed its personnel to India so as to invoke Service PE as per Indo-US DTAA. In view of the above, we hold that there is no PE to the assessee company in India and as there is neither any office in India nor it has any business connection in India nor carried out any business activities in India. Assessee's company is a standalone legal independent entity. Therefore, assessee's ground nos. 6 to 12 are upheld, as there is no PE in India, so attribution of profits does not arise. 59. Non granting of TDS credit:- AO did not give credit to the TDS claimed by assessee. At the outset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment of India. [Para 7] It was also an undisputed position that such a refund to tax deductor, as had been granted in the instant case, was not prescribed under the scheme of the Act but appeared to be an administrative exercise. Department could not point out any provisions of law under which such a refund could be made particularly as TDS certificates were already issued by the tax deductor, and no fault was found in the certificates so issued. [Para 8] The rights were granted to the person, from whose income taxes were so deducted and who is issued the tax deduction certificate in the prescribed manner, by the statute and those rights could not be abridged by an administrative action on the part of the revenue authorities and particularly when the person, whose rights were being sought to be abridged, was not even a party to the administrative exercise or was known of refund being granted to 'R' 'Ltd. Refund granted to 'R' Ltd. By revenue authorities could not have adverse impact on the rights of the assessee. That was a matter between the tax authorities and 'R' Ltd., one was sure that the revenue authorities, while granting the refund, must have safeguarded their interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .15 is allowed. 61. Ground No.17 is with respect to penalty. The assessee is contesting the initiation of penalty proceedings u/s. 271(1)(c). There is no right of appeal on initiation of proceedings and since proceedings are not yet finalized, it is little pre-mature to contest. This ground does not require any adjudication. 62. In the result, four appeals of Lucent are partly allowed. ITA No.5374/M/07 and ITA No.6093/ M/ 08. 63. The issue in these two appeals of the Revenue is with reference to the payments made to M/s. New Skies Satellite N.V., Hague, Netherland for purchase of satellite Band width capacity, as per agreement dated 12.12.2002, subsequently amended on 18.12.2002. Reliance approached Assessing Officer for making payment without deduction of tax. Assessing Officer examined the issue and held that the payment being made was royalty and tax was required to be deducted at source. After deducting the tax, Reliance approached ld. CIT(A) in appeal to submit that the amount paid cannot be considered as royalty and since the said company did not have a PE in India there is no tax. It relied on the decision of DCIT vs. Pan Amsat International Systems Inc. (103 TTJ 861 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) on the above grounds be set aside and that of the AO restored." 64. These two cases were also argued along with other group cases. On this set of facts, the issue is not purchase of software but purchase of bandwidth for providing transponder capacity to telecommunication companies. The case was decided by Special Bench of ITAT, in New Skies Satellite N.V. vs. ADIT (Intl. taxation) in 319 ITR (AT) 269 (Del.)(SB), wherein it was held that service rendered amounts to royalty. The facts and decision of the Special Bench of the ITAT is as under :- The assessees were non-resident satellite companies and earned income from telecasting companies in India for providing them transponder capacity. The assessee were engaged in operating telecommunication satellites which were called geostationary satellites and were placed at the distance of around 36,000 kms. From the equator. A satellite could typically consist of 20 to 30 trnasponders, each operating on a particular frequency within a frequency range allocated to that satellite. Through such transponders installed at satellite, the assessee's provided transponder capacity of data transmission to their customers, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and the nature of programme, all depended upon the telecasting companies and, thus, they were using that process. The term "secret" appearing in the phrase " secret formula or process" in Explanation 2 to section 9(1) (vi) and in the relevant article of the Double Taxation Avoidance Agreement does not qualify the work "process". Therefore, to fall within the meaning of royalty as envisaged in these provisions, it is not necessary that the services rendered must be through "secret process" only. The consideration received by the assessee for the use of the "process" in transponder, even if it was not protected, would be covered within the definition of "royalty" as the provisions do not specify the process to be protected. Even services rendered through simple process will be covered within the meaning of royalty. The payments received by the assessee from their customers were on account of use of process involved in the transponder and they amounted to royalty within the meaning of clause (iii) and (vi) of Explanation 2 to section 9(1)(vi) of the Income tax Act, 1961. they also amounted to royalty within the meaning of the respective articles of the Double Taxation Avoidance Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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