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2016 (3) TMI 751 - ITAT MUMBAI

2016 (3) TMI 751 - ITAT MUMBAI - [2016] 46 ITR (Trib) 690 - Sale of software as part of machinery - alleging the same to be income in the nature of “Royalty” within the meaning of section 9(1)(vi) - Held that:- It is clear that if customer makes requisite copies to enable it to use the software for exclusively its own purposes or makes back-up copies purely as a temporary protection against loss, in order only to utilize the computer programme for the purpose for which it was supplied, then sect .....

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not constitute “Royalty” within the meaning of article 12(3) of the Indo-Israel DTAA.

We shall like to clarify and reiterate at the cost of repetition that we have not examined the effect of subsequent amendment to section 9(1)(vi) of the Act and also whether the amount received for use of software would be “Royalty” in terms thereof for the reason that the assessee is covered by tax treaty the provisions of which are more beneficial and also for the reason that in this case transacti .....

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ER For The Assessee : Shri Bomi Daruwala a/w Ms. Priyanka Jain, CAs For The Revenue : Shri Jasbir Chauhan, CIT-DR ORDER PER ASWANI TANEJA, A.M. This appeal has been filed by the assessee against the final assessment order dated 20th January 2015, passed by the Assessing Officer (in short AO ) under section 143(3) r/w section 144C(13) of the Act, for the assessment year 2011-12 and also challenging the order dated 16th December 2014, passed by the Dispute Resolution Panel-III (in short DRP ), Mum .....

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income of ₹ 17,39,01,465/- as against returned income of Rs. Nil. 1.2 That the DRP erred on facts and in law in the affirming the draft assessment order by passing a cryptic and non-speaking order, without judiciously considering the entire material and the submissions/ objections filed by the appellant. 2. That the assessing officer erred on facts and in law in holding the payments received by the appellant towards supply of software to the customers in India, as income in the nature of & .....

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are like the payment for supply of the hardware was in the nature of business profits not liable to tax in India in the absence of permanent establishment of the appellant in India. 4. Without prejudice, the assessing officer erred on facts and in law in not appreciating that the software supplied to the customers in India only resulted in their acquiring a copyrighted article and not a copyrighted right and that the payment was the same did not constitute royalty as defined in Article 12(3) of .....

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same was directed to be allowed in the assessment order. 7. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act. 8. That the assessing officer erred on facts and in law in initiating penalty proceedings under Section 271(1)(c) of the Act. 2. During the course of hearing, arguments were made by the Ld. Counsels Shri Bomi Daruwala, a/w Ms. Priyanka Jain (Chartered Accountants), on behalf of the assessee and Ld. Departmental Representative, Shri J .....

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f Royalty within the meaning of section 9(1)(vi) of the Act. 5. During the course of hearing, it has been submitted by the Ld. Counsel for the assessee that the Assessing Officer has erred in law and facts in bringing to tax the impugned amount as income of the assessee on account of Royalty . Ld. Counsel has divided his arguments in three parts. 6. The first part of the argument of the Ld. Counsel for the assessee is that what has been sold by the assessee is not software as such, but Diamonds .....

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that machine. Pages-222, 223 and 224 of the paper book are the lists showing party-wise details and sales made by the assessee. Page-225 of the paper book is the certificate of Galatea Ltd. certifying that software supplied by it to the end user was integrated with various machine supplied by it and the software had no other independent use as such except to enable such machine to function. Our attention was also drawn on the copy of invoice to show that all the customers purchased machine and s .....

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he transaction done with the customer was that of sale of machine and not of software. It was clarified by him that the software was separately mentioned in the invoice and its payments were also received separately for the purpose of proper assessment of custom duty etc and administrative convenience, but it was a transaction of predominantly sale of machine. He thus argued that it was a case of embedded software and, therefore, the transaction being predominantly sale of machine, the income ar .....

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9(1)(vi) of the Act, he relied upon the following judgments:- i) DIT v/s Ericsson A.B., 343 ITR 470 (Delhi); ii) DIT v/s Nokia Networks O.Y., 358 ITR 259 (Delhi); iii) Bharati Airtel Limited v/s Commissioner of Customs, 286 ELT 270 (Bangalore); and iv) CIT v/s Alcatel Lucent, Canada, 372 ITR 476 (Del.). 7. Second argument made by the Ld. Counsel for the assessee is that even if it is admitted that payments made to the customers of the assessee company towards software is not considered as integ .....

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provisions of the Act or Treaty whichever is more beneficial, shall apply to the assessee. It was submitted that since no amendment had been made in the definition of the term Royalty as envisaged in Article-12 of the treaty, therefore, the case of the assessee was to be examined by interpreting the Articles of the treaty. It was submitted by him that perusal of Article 12(3) of the treaty shows that the term Royalty shall encompass payment of any kind received as consideration for use or trans .....

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n the following judgments:- i) DIT v/s Infrasoft Ltd., 39 Taxmann.com 88 (Del.); ii) CIT v/s Siemens Aklcongesllschaft, 177 Taxmann 81 (Bom.); iii) DIT v/s Nokia Networks O.Y., 358 ITR 259; iv) B4U International Holdings Ltd. v/s DCIT, 148 TTJ 237 (Mum.); and v) WNS North America Inc., v/s ADIT, ITA no.8621/ Mum./2010 (Mum.). 8. The third argument made by the Ld. Counsel for the assessee is that in any case, the impugned transactions could not be covered within the definition of Royalty as envis .....

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case. It was submitted that in this case, no source code was supplied by the assessee. The customer had no right to use or re-use the software elsewhere, the software could not have been re-issued to someone else by the customer, the software could have been used only as integral part of the machine. Under such circumstances, the consideration cannot fall within the scope of the term Royalty . In support of his proposition, he relied upon the following judgments:- i) CIT v/s Dynamic Vertical So .....

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) Aspect Software Inc., ITA no.221/Del./2013 dated 18th May 2015 (Del.); and v) CIT v/s Alcatel Lucent, Canada, 372 ITR 476 (Del.). 9. He finally submitted that viewed from any angle, the amount of consideration received by the assessee was in effect part of sale consideration of the machine sold by it to various customers and, therefore, the same could not have been treated in the nature of Royalty liable to be taxed in India. 10. On the other hand, the Ld. Departmental Representative had also .....

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was in the nature of Royalty liable to be taxed in India in the hands of the assessee company: i) DDIT v/s Reliance Infocom Ltd., 37 CCH 69 (Mum.); ii) CIT v/s Synopsis International Old Ltd., 212 Taxman 454 (Kar.) and iii) CIT v/s Samsung Electronics Co. Ltd., 345 ITR 494 (Kar.) 11. It was submitted by him that after the amendment made by way of Explanation-4 in section 9(1)(vi), the consideration received by assessee for sale of software would now be undoubtedly covered within the definition o .....

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addressed by us is that consideration received by the assessee towards software claimed to have been supplied as part of Diamonds & Gems Scanning Machine would be liable to tax as Royalty in the hands of the assessee or not. 13. Brief background of the case is that the assessee is a company incorporated under the laws of Israel and is tax resident of Israel for the purpose of Indo-Israel Double Taxation Avoidance Agreement (in short referred to as DTAA or tax-treaty). The Ld. Counsel drew ou .....

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tools, supporting software, accessories, equipments, products, parts and materials for the diamond, gems and jewellery industry. It is 100% subsidiary of M/s Sarin Technologies Ltd., Israel. As a part of its business, during the year under consideration, the assessee company sold to its customers machines and operating software. In the invoice issued by the assessee company, the consideration was mentioned separately for the machine and operating software. Some of the customers deducted tax at s .....

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mers. The Assessing Officer treated the same as taxable in the hands of the assessee in India. Being aggrieved, assessee filed its objection before the DRP wherein no relief was given and, therefore, still being aggrieved, the assessee approached the Tribunal. 15. On further analyzing the facts, it is noted that admitted facts on record are that the assessee had no business connection in India and it had no P.E. in India. This fact has not been disputed by the Assessing Officer. Rather we can sa .....

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refully all the arguments made by the Ld. Counsel as well as counter submissions made by the Ld. Departmental Representative and we shall deal with the same hereunder:- 16. The first part of the argument made by the Ld. Counsel for the assessee is that the impugned consideration was received on account of sale of machine along with requisite software which formed integral part of machines sold by it to the customers. The whole dispute arose merely because value of software was separately mention .....

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the Ld. Counsel for the assessee as well as counter arguments made by the Ld. Departmental Representative. The undisputed facts before us are that none of the customers have purchased only machine or only software. There was no customer who purchased only software. Ld. Counsel for the assessee drew our attention on various pages of the paper book to establish that the machine sold by the assessee could not be made operational or functional in the absence of operating software along with the appl .....

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sessee and that this software had no other independent use as such, except to enable such machine to function. We have also gone through the End User License Agreement (EULA) entered into by the assessee with the customers wherein there are various clauses which indicate that the software supplied by the assessee was meant only and exclusively for the purpose of making the said machine functional. Clause 2.1 of the agreement provides that customer is granted non-exclusive, non-transferable limit .....

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as a standalone data base or product, removing any product identification, copyright or other proprietary notice from the software or decompiling, disassembling, reverse engineering, or making any other attempt to reconstruct or discover the source code, etc. This clause clearly lays down that customer shall not reproduce the software or any of the documentation provided in connection with the software or related knowhow. It is further noted that clause 6.2 of the said agreement lays down that .....

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ges that GALATEA may use software and/or hardware locks or other protective mechanisms to regulate the use of software. SARIN INDIA shall not evade or override such software/hardware locks or protective devices and shall immediately inform GALATEA upon learning that any user has defeated such devices. SARIN INDIA agrees to cooperate fully with GALATEA in its efforts to protect Software from unlawful or unauthorized use. 18. From the aforesaid facts and features of the transactions analysed by us .....

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of the hardware. Now, since the hardware and software constituted one integrated system, part of the payment thereof cannot be earmarked towards sale of hardware and the other part towards Royalty for use of software as such. Thus, in our considered view, the dominant character and essence of the transaction was sale of machine by the assessee. The software, independently, had no value for the customer. He was concerned with as only the functioning of the machine and benefits of use provided by .....

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nd fundamental character of the transaction shall not be altered because of these two features only. The break-up of invoice value of hardware and software may be as a result of some other legal requirement or as a matter of convenience or an agreement between buyer and seller. It has been submitted that separate values were given for the purpose of proper assessment of custom duty to be levied at the time of imports of the machines. Further, software has been supplied separately by e-mail for v .....

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e same with or without these two features. 20. The view taken by us is not res-integra. Our view is supported by many judgments brought to our notice. 21. In case of CIT v/s Alcatel Lucent, Canada, 372 ITR 476 (Delhi), Hon'ble Delhi High Court has analyzed this situation in detail and after discussing entire law available, held that supply of embedded software (which was part of the hardware supplied to assessee s customers by it) did not constitute Royalty and, therefore, section 9(1)(vi) w .....

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ly of software embedded in the hardware equipment or otherwise to customers in India amounts to royalty under Section 9(1)(vi) of the Income Tax Act and under Article 13(3) of the Double Taxation Avoidance Agreement (DTTA) between India and France, Canada, Germany, China etc. 4. Re-assessment proceedings were initiated for the year under consideration. The assessee claimed that the income declared originally in the assessment proceedings be treated as return filed in the assessment proceedings. .....

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available the process to its customers, who used it to carry out their business activities. In this view of the matter, the AO felt that the consideration of supply of software amounted to royalty under Section 9(1)(vi) of the Income Tax Act. The CIT(Appeals) - to whom the assessee appealed and later the ITAT to whom the Revenue appealed concurrently held that the supply of embedded software (which was part of the hardware supplied to the assessee s customers by it) under consideration did not .....

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of the revenue, this Court held in Ericsson A.B. (supra) as follows:- 54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellula .....

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ng that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used indepen .....

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ot; as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the p .....

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llectual property has been incorporated on 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 sale of computer software is clearly a sale of "goods .....

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th interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is .....

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ce. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. 6. This Court also noticed that the ITAT had in additio .....

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a Networks O.Y. (Delhi High Court) and (iii) Tata Consultancy Services (SC), etc. 23. Further, on this issue, judgment of CESTAT in case of Bharati Airtel Ltd. v/s Commissioner of Customs, 286 ELT 270 (Bangalore) is very useful. It has been held that embedded software which is meant for making a computer operational has to be considered as part of hardware. If the software is meant for specific performance of machine and forms its integral part, then value of such software cannot be excluded and .....

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cisions relied upon by both sides, in matters relating to classification/valuation, the following important guidelines/principles emerge apart from the meanings of various relevant technical terms: (a) In classification of products, the commercial understanding is more relevant than technical specifications except in respect of commodities for which such specifications are prescribed requiring the assistance of experts in the respective fields. In other words, the method to be adopted for classi .....

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n the value of the computer. (c) It is not as if essentiality is an irrelevant criterion for determining the classification/valuation and at the same time essentiality is not the sole criterion for deciding the classification or determination of value. (d) In the matter of valuation, one of the important aspects to be taken into account is the condition of the goods/product at the time the goods leave the factory (as held by Honble Supreme Court in para 13 of Anjaleem case). Similarly, in respec .....

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of an equipment and if the software loses its identity and the equipment takes over the main objects of the transaction then it has to be treated as transaction of sale and purchase of machine and not as transaction for sale and purchase of software. It has already been established on the basis of facts before us that the transaction involved in this case was that of sale of diamond scanning machine. The customer had no interest in the software except to the extent of effective functioning of th .....

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India. 25. We have also examined second argument of the Ld. Counsel for the assessee wherein it has been submitted in detail that in case there is some conflict between the provisions as contained in articles of tax-treaty and provisions of the Act then whatever course is beneficial to the assessee in terms of determination of its tax liability, the same should be allowed to be followed by the assessee as per well accepted position of law. It has been further submitted that if the amendment has .....

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laining meaning of the term Royalty . 26. We have carefully considered this argument of the assessee also. We find that position of law on this aspect is clear. Recently, Hon'ble Bombay High Court in DIT v/s A.P. Mollar Maersk, ITA no.1306/2013, vide order dated 29th April 2015 reiterated the same position by observing as under:- 12. Our attention is also drawn to the decision of this Court in the case of Commissioner of Income-tax V/s. Siemens Aktiongeselleschaft reported in [2009] 310 ITR .....

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the revenue to unilaterally decide contrary to the provisions of the DTAA. 27. In terms of section 90(2) of the Act, provisions of the Act or the treaty, whichever is more beneficial shall apply to the assessee. Further, amendment to the Act cannot be automatically read into the treaty unless the treaty is also amended. In the case of CIT v/s Siemens Aktiongesellschaft, supra, this proposition has been reaffirmed by the Hon'ble Bombay High Court after analysing the law in detail. 28. In the .....

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mendment made in the Act cannot be given effect to. 30. Further, in the case of W.N.S. North America Inc. v/s ADIT, Mumbai Bench of the Tribunal in ITA no.8621/Mum./2010, held as under:- "...If there is no amendment to the provision of the Treaty but there is some amendment adverse to the assessee in the Act, which provision has been specifically defined in the Treaty or there is no reference in the Treaty to the adoption of such provision from the Act, again the mandate of section 90(2) sh .....

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nd the assessee would be governed by the provisions of DTAA. Hon'ble Delhi High Court followed the judgment of Hon'ble Supreme Court in Azadi Bachao Andolan, 263 ITR 706 (SC), wherein it was laid down that in case of conflict, the provisions of DTAA would override the statutory provisions of the Act so long as these are more beneficial to the assessee. It was further held by the Hon'ble High Court that in the absence of any corresponding amendment in DTAA, there was no need to examin .....

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ade by both the countries in the DTAA, as the DTAA is an agreement of two sovereign countries and one of them cannot unilaterally amendment the terms of the agreement. Merely, on the basis of some amendments made in the domestic law, the Relevant portion of the judgment is reproduced below: DIT vs NEW SKIES SATELLITE BV (Order Dt 08.02.2016 in ITA 473/2012 ) ( Delhi High Court) This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so .....

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ailure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible. The Vienna Convention on the Law of Treaties, 1969 ( VCLT ) is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the gene .....

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the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan39these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in Commissioner of Income Tax .....

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w laid down by the Parliament in our domestic context, even if it were in violation of treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty. In the latter case, while internationally condemnable, the State s power to breach very much exists; Courts in India have no jurisdiction in the matter, because in the absence of enactment through appropriate l .....

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he Parliament is simply not equipped with the power to, through domestic law, change the terms of a treaty. A treaty to begin with, is not drafted by the Parliament; it is an act of the Executive Logically therefore, the Executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unil .....

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ws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalizing domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty it .....

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e made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State s discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable t .....

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under:- (3). The term Royalty 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 film, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 35. Thus, the status of the provisions in the treaty is kept same as was in the pre-amended law as contained in the .....

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n. This position is substantially clarified once we go through various clauses of agreement entered into by the assessee with the customers called as End User License Agreement. We have already discussed and explained effect of the various clauses of these agreements in earlier part of the order and do not find it appropriate to discuss and reproduce the same once again for the sake of brevity. 36. It is further noted by us that the aforesaid position, as contained in the pre-amended law or as c .....

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o be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft s copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of .....

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ithout Infrasoft‟s written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 86. The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software ha .....

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he use of the Software. The software is to be used only for Licensee s own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverseengineer the S .....

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or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copy .....

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se of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the progr .....

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relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpos .....

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in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is .....

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1. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA. 92. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article a .....

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y identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned .....

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m the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is .....

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g the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would .....

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to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a tempo .....

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e that the Income Tax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on grant of licenses for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America. 101. The appeal is accordingly dismissed leaving the parties to bear their own costs. ii) In the case of Ericsson A.B. v/s DIT (supra), Delhi High Court held that consideration for use of computer .....

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Section 2 (o) of the Copyright Act makes it clear that a computer programme is to be regarded as a 'literary work'. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyr .....

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lhi). We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payme .....

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ter analyzing the provisions of Copyright Act and considering the OECD commentary on characterization of income arising from sale of software license held that payment for software license where no right for use of copyright was granted to the licensee such as right to make copies thereof for commercial exploitation does not constitute use of copyright of literary work and is consequently not Royalty under the tax treaty entered into by India. 38. Similarly, Mumbai Bench of the Tribunal in ADIT .....

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tware and Systems Pvt. Ltd. v/s DCIT, 47 Taxman.com, 410 (Chennai), wherein it was held that payment made to non-resident companies for procuring standard and copyrighted software could not be treated as payment towards Royalty . In this judgment, Bench has also considered and distinguished judgment of another judgment of co-ordinate bench in the case of Reliance Infocom Ltd., 39 Taxman.com 140 (Mum.). 40. The Mumbai Bench of the Tribunal in DDIT v/s Solid Works Corporation, 152 TTJ 570 (Mum.), .....

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nefit of tax concession in view of the provisions of DTAA, then the same cannot be denied to it by applying the provisions of the Act. The concluding para of the judgment of the Bench is reproduced hereunder for the sake of ready reference. 14. Following the view expressed by the Hon'ble Dellhi High Court in the case of DIT Vs. Ericsson AB, New Delhi (Supra), which is favourable to the Assessee, we hold that the consideration received by the Assessee for software was not royalty. The receipt .....

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t was held that payment for copyrighted article would not fall within the scope of term Royalty . Relevant Para s of this judgment are reproduced below:- 41. Before us, the Ld. Counsel for the Assessee as well as the Ld. D.R. relied on several decisions of the High Court and Tribunal rendered on the subject. These decisions are not being considered as the issue is extensively dealt by the Hon'ble Jurisdictional High court in the cases of M/s Ericsson A.B. and Infrasoft Ltd (supra) which are .....

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of the Hon'ble Delhi High Court. 42. In view of the above, respectfully following the decision of Hon'ble Jurisdictional High Court in the case of Ericsson A.B. (supra) and Infrasoft Ltd. (supra), we hold that the consideration received by the Assessee for supply of product along with license of software to End user is not royalty under Article 12 of the Tax Treaty. Even where the software is separately licensed without supply of hardware to the end users (i.e. eight out of 63 customers .....

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eceipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/ PE in India as per adjudication on Ground No 5. 42. It is further noted by us that Mumbai Bench of the Tribunal in the case of ADIT v/s Antwerp Diamond Bank, N.V., ITA no.7347/Mum/2007, order dated 14th March 2014, analyzing the effect of provisions of Article 12(3) of Indo-Belgium DTAA held that once the assessee had opted for the benefit of DTAA, then there was no requi .....

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fit of the DTAA, then there is no requirement for resorting to the definition and the scope of royalty as given in section 9(1)(vi). The said amendment cannot be read into the treaty and will not influence the definition of royalty , as given in Article 12(3). This proposition is squarely covered by the decision of the Bombay High Court in Siemens Aktiongesellschaft (supra), the decision of Delhi High Court in Nokia Network (supra) and DIT v/s Ericson AB, [2012] 343 ITR 470. Even the decisions o .....

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lying the provisions of the Act by disregarding and overriding the provisions of the treaty. However, we shall also like to deal with the judgments relied upon by the Ld. Departmental Representative in support of the actions of the lower authorities. 44. Ld. CIT-DR (Departmental Representative) relied upon the two judgment of Hon ble Karnataka High Court in CIT v/s Synopsis International Old Ltd. (supra) and CIT v/s Samsung Electronics Co. Ltd. (supra). 45. We have gone through both the judgment .....

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was not there before the High Court in these judgments. Therefore, this issue has not been addressed by the High Court. 46. Similarly, other case relied upon by the Ld. CIT-DR of DDIT v/s Reliance Infocom (supra), it is noted that this judgment has based its decision mainly relying upon the aforesaid two judgments of Karnataka High Court. Although, an argument was taken before the Bench in the said case that software was integral part of the hardware but on facts Hon ble Bench held that the soft .....

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ave been relied upon by Ld. CIT-DR are not applicable on the facts of this case before us. It is further noted by us that all these judgments have been discussed and considered by Hon'ble Delhi High Court and other Courts in various judgments. We have respectfully followed the latest judgments available before us. 47. Further, for the purpose of appreciating scope and meaning of Article 12(3) of Indo-Israel DTAA in the context of impugned transactions done by the assessee, we have also analy .....

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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 .....

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such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. 48. From the perusal of the above definition what we are able to gather is that none of the clauses is attracted when assessee has sold the machine along with its requisite software to operate and use the machine. The assessee has not given any right, whatsoever, to its customers to resell any copy of the software supplied along with machine, as has been .....

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or deemed to be infringed. Further, section 52 of the Act, carves out exception to section 51 and lists out certain acts not to be considered as infringement of copyright. Section 52 states that the following acts shall not constitute an infringement of copyright, namely- ……. (aa) the making of copies or adaptation of computer programme by the lawful possessor of a copy of such computer programme, from such copy- (i) In order to utilize the computer programme for the purpose for w .....

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was supplied, then section 52 of the Act clearly states that it shall not amount to infringement of the copyright. Thus, in the facts of this case which we have discussed in detail above, neither there was any transfer of copyright or any rights therein nor there was any situation giving rise to any type of infringement of copyright by the customers of the assessee. Thus, in our considered view account of sales consideration received by the assessee on account of sale of machine along with it o .....

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been reiterated by the Hon'ble Supreme Court by making the detailed observations on this aspect. Relevant portion of the judgment is reproduced below:- ……….At the same time, it is also mandated that there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the concerned provision of the taxing statute is ambiguous and vague and is susceptible to two interpretatio .....

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clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons or not, the subject should not be fastened with any liability to pay tax. This principle also acts as a balancing factor between the two jurisprudential theories of justice - Libertarian theory on the one hand and Kantian theory along with Egalitarian theory propounded by John Rawls on the other hand. Tax laws are clearly in derogation of personal rights and property interests a .....

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rold, 198 F. 199, 201, affd 201 F. 918; Parkview Bldg . Assn. v. Herold, 203 F. 876, 880; Mutual Trust Co. v. Miller, 177 N.Y. 51, 57………………." 50. Although, the stand of the Revenue has been that there were two views available on this issue but we find that in the facts of the case before us, the judgments quoted by the Revenue are not applicable and are distinguishable from the facts of the case before us. We further find that latest views coming fr .....

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repetition that we have not examined the effect of subsequent amendment to section 9(1)(vi) of the Act and also whether the amount received for use of software would be Royalty in terms thereof for the reason that the assessee is covered by tax treaty the provisions of which are more beneficial and also for the reason that in this case transaction under consideration was predominantly and essentially of the character of sale and purchase of machine and not that of software. 52. Thus, in view of .....

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