TMI Blog2015 (11) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... at the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and consequences would follow - Decided against assessee. - I.T.(I.T) A. No.31/Bang/2015 - - - Dated:- 5-6-2015 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER Appellant By : Shri K.R. Vasudevan, Advocate. Respondent By : Shri P.Dhivahar, JCIT (D.R) ORDER Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.5.11.2014 for Assessment Year 2009-10. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is an Indian Company engaged in developing optical telecommunication equipment. In the period relevant to Assessment Year 2009-10, the assessee purchased shrink wrapped software from Cadence Designs Systems Ltd., Ireland ( Cadence ) amounting to ₹ 59,46,245. The Assessing Officer noticed that the assessee remitted the above amounts to Cadence without withholding tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 617.500 61,750 32,110 26.3.2009 637,500 63,750 31,238 Total : 2,386,250 238,625 126,049 2.2 Aggrieved by the order passed under Section 201(1) and 201(1A) of the Act for Assessment Year 2009-10, the assessee preferred an appeal before the learned CIT(A)-IV, Bangalore. The learned CIT(A) dismissed the assessee's appeal vide order dt.5.11.2014 following, inter alia, the decision of the Hon'ble High Court of Karnataka in the case of CIT V Samsung Electronics Co. Ltd. (245 CTR 481) (Kar), holding at para 8.2 of the impugned order that it is very clear from the express terms of the agreement that the right to use copyrighted software has been transferred to the assessee and that the amounts in question paid as consideration for the right to use copyrighted software amounts to Royalty within the meaning of the Act read with the India-Ireland DTAA. 3. Aggrieved by the order of the CIT (Appeals) IV, Bangalore dt.5.1.12014 for Assessment Year 2009-10, the assessee is in appeal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt of Karnataka in the case of Samsung Electronics in 245 CTR 481. 4.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that the issue before us, i.e. regarding payments made for acquiring the copy righted shrink wrapped software amount to Royalty under Section 9(1)(vi) of the Act and the respective DTAA and therefore tax is required to be deducted/withheld thereon as per the provisions of section 195 of the Act, has been held in favour of Revenue and against the assessee by the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. (supra). 4.3.2 The Hon'ble High Court in its decision in Samsung Electronics Co. Ltd. (supra) while examining the term royalty vis-a-vis computer software has observed as under :- In view of the abovesaid definition of royalty , it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to royalty is as follows -payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work. It has been universally accepted that a literary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or modify the source code for the software. The distributor shall have no rights to the software other than the rights expressly set forth in the agreement. The distributor shall not modify or copy any part of the software or documentation. The distributor may not use subdistributors for further distribution of the software and documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the distributor of the software as enumerated in exhibit A to the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges that actuate and its suppliers retain all right, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trade mark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. The distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely : (a) in the case of a literary, dramatic or musical work, not being a computer programme, (i) to reproduce the work in any material form including the storing of it in any medium by electronic means ; (ii) to issue copies of the work to the public not being copies already in circulation ; (iii) to perform the work in public, or communicate it to the public ; (iv) to make any cinematograph film or sound recording in respect of the work ; (v) to make any translation of the work ; (vi) to 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-clauses (i) to (vi) ; (b) in the case of a computer programme, (i) to do any of the acts specified in clause (a) ; (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme : Provided that such commercial rental does not apply in respect of computer programmes where the programme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied. It is clear from the abovesaid provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under section 51 of the Act. However, if such copying of computer programme is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back-up copy and right to make a copy itself is a part of the copyright. Therefore, when licence to make use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software, or offthe-shelf software is not the price of the C. D. alone nor software alone nor the price of licence granted. This is a combination of all and in substance, unless licence is granted permitting the end user to copy and download the software, the dumb C. D. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music software as book and prerecorded music C. D. can be used once they are purchased, but so far as software stored in dumb C. D. is concerned, the transfer of dumb C. D. by itself would not confer any right upon the end use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in the circumstances of the case, the Income-tax Appellate Tribunal was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software suppliers was not royalty and that the same did not give rise to any income taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following order : 4.3.3 We also find that a similar issue on identical facts was before the co-ordinate bench of this Tribunal in the case of Synopsys International Ltd. in ITA No.550/Bang/2011 for Assessment Year 2006-07. The co-ordinate bench, following the decision of the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. (supra) held as under at paras 3 to 7 thereof :- Ground No.3 raised by the assessee is with regard to the issue as to whether the payments received by the assessee on sale marketing of software licence to the customers is 'royalty' within the meaning of section 9(1)(v) of the Income-tax Act, 1961 [hereinafter referred to as the Act in short ] as well as Article 12 of the DTAA between India and Ireland. 4. The assessee is a non-resident incorporated under the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court further held that for the licence granted to the assessee to make copy of the software into the hard disk of the designated computer and to take a copy for back up purposes, the end-user has no other right and the said back up would have constituted an infringement of copyright. That right to make copy of the software itself is a part of copyright. It was further held that what is transferred is the right to use the software, an exclusive right which the owner of the copyright i.e., the supplier owns. Thus, the amount paid to the non-resident supplier towards the supply of shrink wrapped software or off-the shelf software is not the price of CD alone or software alone or the ITA No.550/Bang/2011licence but a combination of all. Therefore, the payments constitute 'royalty' within the meaning of art. 12(3) of the Indo-US DTAA and also as per the provisions of s. 9(1)(vi) as the definition of 'royalty' under s. 9(1)(vi) is broader than that under the DTAA. Consequently, assessee was under obligation to deduct tax at source under s. 195 from the amount paid to the foreign software suppliers. 7. In view of the aforesaid decision of the Hon'ble High Court o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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