TMI Blog2016 (5) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of assessee - I.T.A. No. 8721/Mum/2010 - - - Dated:- 31-3-2016 - Pramod Kumar AM and Pawan Singh JM For The Appellant : Ajit Kumar Jain, and Pranith Golecha For The Respondent : Jasbir Chauhan ORDER Per Pramod Kumar, AM: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 18th October 2010 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 2007-08. 2. Grievances of the appellant are as follows: 1. On the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP erred in holding that the payment received by the company from resellers in India, for acquisition of computer software, are royalty in nature and hence chargeable to tax in India @ 15% as per Double Taxation Avoidance Agreement between India and USA 2. On the facts and in the circumstances of the case and in law, the AO and the DRP erred in levying interest under section 234B of the Act, inspite of the fact that the appellant is a non-resident assessee. 3. Learned representatives fairly agree that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense 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 the shrink wrap software, the assessee had entered into agreement with various distributors/resellers in India. Copy of a software distribution agreement was filed before the Assessing Officer. All distribution agreements are identical. As per the software distribution agreement, the distributor gets right to market distribute and support the product. However, distributor does not get any exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sale tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become 'good'. We see no different between a sale of a software programme on a CD/floppy disc from a sale of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrink-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 terms and conditions subject to which the software distributor is to distribute the software to the end user. The distribution agreement also contains an end users licence agreement (EULA). The Learned DR drew out attention to the EULA and submitted that the end user is granted only a license to use the software. He also pointed out that the EULA in clause 1-C provides for a security mechanism bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pyright 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 reads as follows: - What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold it further in Indian market. By no stretch of imagination, it would 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the definition of royalty under clause 9(1)(vi) of the Act is broader than the definition of royalty under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for Internal business, and payment made in that regard would constitute royalty for imparting of any information concerning technical, industrial, commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. The Tribunal after referring to definition of Royalty under the Act and the definition copyright under the Copyright A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 provided under the contract is goods and therefore no royalty can be said to be paid for it. 53.Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Supply Contract uses the term licence and the same term is used in the context of software throughout the three Agreements, indicating that it is not an outright sale of goods, or a full transfer of rights from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as the 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 these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services Vs. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- In our view, the term goods as used in Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sc 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 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. 57.It is also to be borne in mind that the supply contract cannot be separated into two viz. hardware and software. We would like to refer the judgment of Supreme Court in CIT Vs. Sundwiger EMFG Co., 266 ITR 110 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, should be applied to non-resident assesse in this case. 9.On the other submission of the learned D.R. that the decision rendered by the Hon'ble Delhi High Court was in respect of use of software embedded in an equipment supplied and therefore the same should not be applied to the case of shrink wrap software, we are of the view that the Hon'ble Delhi High Court after re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the use of a product for which the owner had a copyright was not the same thing as transferring or assigning rights in relation to the copyright. Where the purpose of the licence or the transaction was only to establish access to the copyrighted product for internal business purpose, it was not legally correct to say that the copyright itself had been transferred to any extent. Mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 copyright law may differ from country to country. In some countries the act of copying the programme onto the hard drive or random access memory of a computer would, without a licence, constitute a breach of copyright. However, the copy right laws of many countries automatically grant this right to the owner of software which incorporates a computer programme. Regardless of whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We may in this context refer to section 52(aa) of the Copyright Act (extracted supra) which makes it clear that the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such programme, from such copy (i) in order to utilize the computer program, for the purpose for which it was supplied or (ii) to make back up copies purely as a temp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 can add to such a well researched and erudite order either. The decisions of non jurisdictional High Courts, in favour of the revenue on this point, have already been dealt with in this order. As to what should be done in a situation in which there are conflicting views of Hon ble non jurisdictional High Courts and in which we do not have the benefit of guidance from Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour 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. The Hon ble Delhi High court has taken the identical view favouring the assessee in the case of DIT vs Nokia Network (supra) and in the case of DIT vs. Ericson A.B. (supra) also. The Hon ble Bombay High Court in the case of The Addl. Commissioner of Sales Tax vs. M/s Ankit International, Sales Tax Appeal No. 9 of 2011 vide order dated 15 September, 2011 while relying u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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