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M/s. Tejas Networks Ltd Versus Dy. Director of Income Tax,

2015 (11) TMI 923 - ITAT BANGALORE

TDS u/s 195 - payments made for acquiring the copy righted shrink wrapped software amount to ‘Royalty’ under Section 9(1)(vi) - Held that:- Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (2011 (10) TMI 195 - KARNATAKA HIGH COURT ) and Synopsis International Ltd. [2012 (10) TMI 980 - ITAT BANGALORE] we are of the opinion that the contentions raised by the assessee are not acceptable for the reason that the payment in question w .....

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t to "royalty" within the meaning of article 12 of the DTAA with the respective country, it is clear that 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 SH .....

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sment 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 taxes at source. On being queried, the assessee submitted that it remitted the above payments without withholding taxes as it was of the view that the said payment for purchase of software would not qualify as Royalty under the India-Irelan .....

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(1A) of the Act dt.14.3.2013. 21. Conclusion : From the above discussion, it is proved that the payments made by the assessee to Cadence, Ireland during the F.Y. 08-09 & 09-10 & 10-11 in terms of a license, constitute Royalty, both under section 9(1)(vi) of the Income Tax Act, 1961 and under the DTAA between India and Ireland, and is chargeable to tax in India. As per section 195 of the Income Tax Act, the assessee was liable to deduct tax at source on the royalty payments to Cadence, Ir .....

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x deductible in this regard along with the interest under Section 201(1A). 22. Tax Liability of the assessee : 22.1 The tax liability of the assessee, Tejas Networks Ltd., under Section 201(1) and 201(1A) for the Assessment Year 2009-10 (FY 08-09) is determined as under : Month Amount in Rs. Tax deductible u/s.201(1) Rs. Interest u/s. 201(1A) Rs. 8.7.2008 537,500 53,750 30,638 14.10.2008 593.750 59,375 32,063 11.12.2008 617.500 61,750 32,110 26.3.2009 637,500 63,750 31,238 Total : 2,386,250 238, .....

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ss 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 before this Tribunal raising the following grounds :- 1. Payments towards purchase .....

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r purchase of a copyright. 1.3 The learned CIT (Appeals) erred in not considering the fact that the consideration is being paid for the use of the product and not for any right in respect of the coyright, or in the patent, invention, model, design, secret formula or process or trademark or similar property. 1.4 The learned CIT (Appeals) erred in contending that the right to use the copyrighted software has been transferred to the appellant. 1.5 The learned CIT (Appeals) erred in contending that .....

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holding the order of the Assessing Officer that the payments made by the assessee to Cadence a non-resident foreign supplier for use of copyrighted shrink wrapped software are Royalty , without appreciating that the payments were made towards purchase of copyrighted software and not for purchase of a copyright. It was further contended that the learned CIT(A) erred in holding that the said payments are taxable as royalty under Section 9(1)(vi) of the Act and under Article 12 of the India-Ireland .....

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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 .....

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wherefore, a literary work is entitled to be registered as copyright. In India, the provisions of section 2(o) of the Copyright Act, 1957, defines "literary work" as under : "'literary work' includes computer programmes, tables and compilations including computer databases ;" Therefore, "computer software" has been recognized as copyright work in India also. Having regard to the above said definition of "royalty", we have to consider the contents .....

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on the terms and conditions enumerated in the agreement. It is further averred that the customer-Samsung Electronics-shall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under .....

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end users pursuant to a valid Actuate shrinkwrap or other actuate licence agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the software the documentation or any derivative works based upon the software or documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modify the source code for the software. The distributor shall have no rights to the sof .....

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r 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 an .....

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nresident 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 im .....

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the absence of any definition of "copyright" in the Income-tax Act or the DTAA with the respective countries, in view of article 3 of the DTAA, reference is to be made to the respective law regarding the definition of "copyright", namely, Copyright Act, 1957, in India, wherein it is clearly stated that "literary work" includes computer programmes, tables and compilations including computer (databases). Section 16 of the Copyright Act, 1957, states that no person sha .....

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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 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 circulati .....

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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 itself is not the essential object of the rental. (c) in the case of an artistic work, (i) to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work ; (ii) to communicate the work to the p .....

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le or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions ; (iii) to communicate the film to the public ; (e) in the case of a sound recording, (i) to make any other sound recording embodying it ; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions ; (iii) to communicate the sound recording to the public. Explanation. .....

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d by a competent authority under the Act does anything, the exclusive right to do which is by the Act conferred upon the owner of the copyright. Section 52 of the Act dealing with certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely : "52.(1)(aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy (i) in order to utilise the .....

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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 co .....

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ich the owner of the copyright, i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. The decision of the Delhi High Court in CIT v. Dynamic Vertical Software India P. Ltd. [2011] 332 ITR 222 (Delhi) relied upon by Sri Aravind Dattar, learned senior counsel appearing for the respondents in some of the cases in support of his contention that by no stretch of imagination, paym .....

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uld be termed as royalty." Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licences cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under .....

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It is also to be noted that what is supplied is the copy of the software of which the respondent-supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the n .....

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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 user and the purpose of the C. D. is only to enable the end user to take a copy of the software and to store it in the .....

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oks and other articles separately from "computer" software within the meaning of the "copyright" as referred to above under section 14 of the Copyright Act. It is also clear from the abovesaid analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute "royalty" within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) of the Act as the definition of "royalty" under clause 9(1)(vi) .....

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w of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident companies would amount to "royalty" within the meaning of article 12 of the DTAA with the respective country, it is clear that 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 ther .....

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he 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 t .....

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India and Ireland. 4. The assessee is a non-resident incorporated under the laws of Ireland. The assessee is engaged in the business of sale & marketing of software licences. During the previous year, the assessee sold and marketed software licences to customers who are mainly software companies in India. According to the assessee, the software sold in India were shrink-wrapped software and were like any other goods. The sale of such goods will give rise to income from business. Since the a .....

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between India & Ireland. 6. It is not in dispute before us that an identical issue has been considered by the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics co. Ltd. & others 245 CTR (Kar) 481 has held that Payment to non-resident foreign software suppliers for purchase ITA No.550/Bang/2011 of shrink wrapped software was in the nature of royalty. The Hon'ble Court held that what is granted under the licence is only a licence to use the software for inter .....

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ocumentation in whole or in part. Thus, licence is granted for making use of the copyright in respect of shrink wrapped software/off- the-shelf software under the respective agreements which authorizes the end-user i.e., customer to make use of the copyright in the said software. Hence, the contention of the assessee that there is no transfer of copyright or any part thereof under the agreements entered into by the assessee with the non-resident was held to be not acceptable. The Hon'ble Cou .....

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