TMI Blog2016 (5) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... M: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 23rd October 2012 passed by the Assessing Officer in the matter of assessment under section of 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 for the assessment year 2009-10. 2. Grievances of the appellant are as follows: 1. On the facts and the circumstances of the case and in law, the learned AO has erred in holding that the income from sale of shrink wrap software is taxable in India, being in the nature of royalty under the provisions of Section 9(1)(vi) as well as article 12(3) of the Double Taxation Avoidance Agreement between India and USA. 2. On the facts and the circumstances of the case and in law, the learned AO and the DRP have erred in not appreciating that the payments received on sale of shrink wrap software is for sale of copyrighted article and not transfer of copyright as the end users in India obtained only a right to use the software product as against any copyright right. 3. On the facts and the circumstances of the case and in law, the learned AO and the DRP have erred in holding that the payment received on sale of shrink wrap sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication software developed and sold by assessee is called 'Solidworks 2003' which is used for 3D modeling. The software creates 3D models either from scratch or from existing 2D data. The designed data prepared by Solidworks 2003 software provides data which is 100% editable. The software is provided in a packed form to the customers in India alongwith and pursuant to an end user license agreement (EULA). The agreement is not physically signed but built in as part of the installation process. The license agreement pops up on computer screen and must be accepted by the user before the user can operate the software. The software provided to the user is a single user license whereby the software can be loaded in one computer or can be used many times (called multiple user license) which can be loaded on several computers. Solidwork owns and will retain all copyright, trade mark, trade secret and other proprietary rights. The end user is not permitted to make any modification or make works derivative of the software and user is not entitle to reverse engineer, decompile, disassemble or otherwise discover the source code of the software. 4.For the purposes of marketing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for use of the product by the ultimate consumer clearly provides that distributor cannot disassemble, decompile or in any way attempt to reverse engineer any of the product or to modify or make works derived from the products. It also provides that license to use cannot be construed as a right to make copies of the product. When the ultimate consumer uses the product he has to subscribe the end user license agreement (EULA). This only provides facility to ultimate consumer to install software on his computer and use it personally without allowing any right to the consumer of disassemble, reverse engineer, decompile the software. Customer is also not entitled to sell, license, sub-license, transfer, assign, lease or rent the software. It is thus clear neither the distributor nor end user has any right over the copyright of the software. 7.The Hon'ble Supreme Court in the case of Tata Consultancy Services Pvt. Ltd. Vs. State of Andhra Pradesh (2004) 271 ITR 401 has held as follows :- 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 program ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 270 ITR (AT) 62 Sonata Information Technologies Ltd., ITA No. 1561 to 1580/Bang/2004 dated 31.1.2006. 9. Computer programme cannot also be treated as patent and invention. Computer programme cannot said to be an invention and therefore cannot be said to be covered by the Patient Act. Computer software cannot also be treated as process. End user of the software in the case of shrink-wrap software does not have any access to source code. He has only right to use the software for his personal or business use. For all the above reasons, we are of the view that learned CIT(A) was right in concluding that payment received by the assessee was not in the nature of royalty and cannot therefore be brought to tax. We uphold the order of learned CIT(A) on this issue and dismiss Ground No. 1 2 raised by the revenue. 4. Despite the aforesaid orders on identical facts, the learned D.R. however submitted that the decision rendered by the Tribunal in the earlier years requires reconsideration and made the following submissions. The Assessee distributes its software to the end user through its distributors and sub distributors in India. The Distribution agreement contains term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hard disk and to take a backup copy and right to make a copy Itself is a part of the copyright. Therefore, when licence to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right which 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 COMMISSIONER OF INCOME 'TAX DELHI-V Vs. M/s. DYNAMIC VERITCAL SOFTWARE INDIA PVT. LTD in ITA No.1692/2010 DATED 22.02.2011 relied upon by Sri Aravind Dattar, learned senior counsel appearing for the respondent in some of the cases in support of his contention that by no stretch of imagination, payment made by the respondents to the non-resident suppliers can be treated as royalty is not helpful to the respondents in the present cases as in the said case, Delhi High Court was considering the provisions of Sections 40(a)(1) of the Act and the order of the High Court r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... music CD can be used once they are purchased, but so far as software stored in dumb CD is concerned, the transfer of dumb C.D. by itself would not confer any right upon the end user and the purpose of the CD is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that. behalf and in the absence of licence the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music C.D. or the C.D. containing software and in view of the same the Legislature in its wisdom, has treated the literary work like books and other articles separately from computer software within the meaning of the 'Copyright' as referred to above under Section 14 of the Copyright Act. 25. It Is also clear from the above said analysis of the DTAA income Tax Act, Copyright Act that the payment would constitute royalty within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of the Act as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty, and hence was not assessable both u/s.9(1)(vi) of the Act and the relevant clause of DTAA with Sweden. The facts of the aforesaid case were that the assessee company was incorporated in Sweden and was one of the leading suppliers of telecommunication equipment comprising of both, hardware and software. The assessee company had entered into agreements with ten cellular operators in India for supply of hardware and software. The Assessing Officer was of the view that the income of the assessee was taxable in India, both, under the Income-tax Act, 1961 as well as under the treaty between India and Sweden. He held that it was business income and Assessee had a PE in India. The CIT(A) held that the receipts in respect of license to use software which is part of the hardware alone could be taxed in India as royalty. The Assessee argued before Tribunal that the payment made by the assessee for the use of software in the equipment does not amount to royalty. The Tribunal in the aforesaid context examined the issue as to whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right, whether partially or entirely. 52.We find that the Tribunal has held that there was no payment towards any royalty and this conclusion is based on the following reasoning:- (i)Payment made by the cellular operator cannot be characterized as royalty either under the Income Tax Act or under the DTAA. (ii)The operator has not been given any of the seven rights under S.14 (a) (i) to (vii) of the Copyright Act, 1957 and, therefore what is transferred is not a copyright but actually a copyrighted article (iii)The cellular operator cannot commercially exploit the software and therefore a copyright is not transferred. (iv)Further, the parties to the agreement have not agreed upon a separate price for the software and therefore it is not open for the income tax authorities to split the same and consider part of the payment for software to be royalty (v)The bill of entry for importing of goods shows that the price has been separately mentioned for software and that this was only for the purposes of customs. There is no evidence to show that the assessee was a party to the fixation of value for the customs duty purposes (vi)The software p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any of the copyrights referred to in Section 14 (b) of the Copyright Act, 1957. 55.Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well asthe software, therefore, the Tribunal is right in holding 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 independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 produced by the artistry of musicians and in itself is not a good, but when transferred to a laser- readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work. 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 Copyright Act,1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . 60.Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t levy of tax on the Assessee should be preferred, should not be applied to non-resident assesses. 8.On the argument of the learned D.R. that where two views are available on an issue one favourable to the Assessee should be preferred, should not be applied to non-resident assesses, we are of the view the same cannot be accepted in view of Article 24 of the DTAA between India and USA which provides for Nondiscrimination. Article 24(1) lays down that Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of article 1, also apply to persons who are not residents of one or both of the Contracting States. Therefore where two views are available on an issue one favourable to the Assessee and the one against the Assessee, the view which is favourable to the Assessee and does not support levy of tax on the Assessee should be preferred, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht the advance ruling of the Authority on the question Whether on the facts and circumstances of the case and in law the payment received by Dassault Systems K. K. (hereinafter referred to as 'the applicant') from sale of software products to independent third party resellers will be taxable as business profits under article 7 of the India-Japan Double Taxation Avoidance Agreement ('India Japan DTAA' or 'Treaty') and will not constitute 'royalties and fee for technical services' as defined in article 12 of India-Japan DTAA ? On the facts stated, the Authority ruled on the question whether the payment would amount to royalty as follows: (i)That the computer programme forming part of the software fell within the description of literary or scientific work. A copyright in or over the computer software produced by the applicant was in the nature of an intangible, incorporeal right belonging to the category of intellectual property rights. All intellectual property rights in the licensed programs exclusively belonged to the applicant or its licensor and they were retained by the applicant. (ii)That passing of a right to use and facilitating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the consideration is for granting of rights to use the programme in a manner that would, without such licence, constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted programme, or to modify and publicly display the programme. In these circumstances, the payments are for the right to use the copyright in the programme (i.e., to exploit the rights that would otherwise be the sole prerogative of the copyright holder). In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the programme, for example, where the transferee has limited rights to reproduce the programme. This would be the common situation in transactions for the acquisition of a programme copy. The rights transferred in these cases are specific to the nature of computer programmes. They allow the user to copy the programme, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programmes under copyr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermitting him to download the computer programme and storing it in the computer for his own use. The copying/ reproduction or storage is only incidental to the facility extended to the customer to make use of the copyrighted product for his internal business purpose. As admitted by the Revenue's representative, that process is 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. Apart from such incidental facility, the customer has no right to deal with the product just as the owner would be in a position to do. In so far as the licensed material reproduced or stored is confined to the four corners of its business establishment, that too on a non-exclusive basis, the right referred to in subclause (i) of section 14(a) would be wholly out of place. Otherwise, in respect of even off-the- shelf software available in the market, it can be very well said that the right of reproduction which is a facet of copyright vested with the owner is passed on to the customer. Such an inference leads to unintended and irrational results. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. 13.The ruling of the AAR in the case of Dassault (supra) was approved by the Hon'ble Delhi High Court in the case of DIT Vs. Ericsson AB, New Delhi (supra). It can therefore be said that the Hon'ble Delhi High Court has held that consideration paid merely for right to use cannot be held to be royalty. This ratio laid down by the Hon'ble Delhi High Court would also apply when shrink wrap software is sold. 14.Following the view expressed by the Hon'ble Delhi 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 receipts would constitute business receipts in the hands of the Assessee. Admittedly the Assessee who is a non resident does not have a permanent establishment and therefore business income of the Assessee cannot be taxed in India in the absence of a permanent establishment. 5. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. There is nothing much that we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd Lohen, in case of ambiguity, a taxing statute should be construed in favour of a tax-payer does not apply to a provision giving tax-payer relief in certain cases from a section clearly imposing liability . This exception, in the present case, has no application. The rule of resolving ambiguity in favour of the assessee does not also apply where the interpretation in favour of assessee will have to treat the provisions unconstitutional, as held in the matter of State of M.P. vs. Dadabhoy s New Chirmiry Ponri Hill Colliery Co. Ltd. AIR 1972 (SC) 614. [Tej International Pvt Ltd Vs DCIT (2000) 69 TTJ 650 (Del)] 52. Even otherwise, the Revenue has not cited any direct case law of the jurisdictional High Court of Bombay before us. In the case laws cited by the Revenue of the Hon ble Karnataka High Court in the matter of CIT vs. Samsung Electronics Company Ltd. (supra) and CIT vs. Synopsis International Old Ltd. (supra) though a view in favour of the Revenue has been taken, but, the Hon ble Delhi High Court in the case of DIT vs Infrasoft Ltd. (supra) which is a latter decision and has discussed the Samsung case also has taken the view in favour of the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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