TMI Blog2010 (11) TMI 1023X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty free, worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, including use of software for ASP Services and web housing services. The parties from whom the assessee acquired the software do not have a PERMANENT ESTABLISHMENT in India. 3. The assessee purchased the software for Seismic Data Processing/Interpretation Software for O G Division from M/s Paradigim Geophysical Pty Ltd., Australia. 4. The learned CIT(Appeals) in order dated 30-10-2007, has considered an agreement for purchase with M/s Paradigm Geophysical Pty Ltd. The facts are brought out at para 1.1 to 1.5 of her order which are extracted below for ready reference : 1.1 M/s Reliance Industries Limited (appellant), is a public limited company. The appellant has entered into an agreement with M/s Paragidm Geophysical Pty. Ltd., Austrelia (hereinafter Paradigm) for purchase of certain Geological and Seismic Data Interpretation Software for the purposes of the appellant s Oil Gas Exploration Project. The AR has submitted that in terms of the agreement a Purchase Order was placed with M/s Paradigm bearing no. 2001-GENL-E1-GG-S-111-MB dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only if M/s Paradigm, has a PE. 5. The special conditions of purchase are brought out at para 1.6 of the order of the CIT(Appeals) which are extracted below for ready reference : 1.6. On the other hand, the AO has examined the issue. He has referred to Para 1 of the Special terms of purchase order and has held that the appellant has only got a license and has not purchased the software and thus the transaction does not amount to sale. I find that the AO has taken the same arguments as taken by him in respect of appeal No.CIT(A)XXXI/DDIT(IT)2(1)(IT-303/02/03, dated 29/10/2007 in the appellant s own case. I have also examined the Special Conditions of Purchase between the appellant and M/s Paradigm. The appellant has entered into Special Conditions of Purchase for sale and purchase of software with M/s Paradigm. General terms and conditions of purchase are prescribed in the agreement. Clause 1 of the special terms of purchase order provide for the Software License. The same read as under : 1.1 Softwares / hardware LICENSOR shall supply license(s) of its proprietary software tools and third party hardware as per ANNEXURE-A. 1.2 Software Licence agreement Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware except as specifically provided in the agreement. iii) The assessee cannot make more copies of the software than what is specified in the agreement. iv) The assessee cannot provide access to the software to any one, other than assessee s employees, contractors or consultants under a written contract by which all of them would be bound by the terms and conditions as are applicable to the assessee on purchase of software. v) The assessee cannot sell license, distribute, pledge, lease, rent or commercially share (including timeshare) the above software or any rights therein. vi) The assessee cannot use the software for purposes of providing a service bureau, including without limitation, for providing third party hosting or third party application, integration or application service provider or any other similar service. vii) The assessee cannot modify, translate, reverse, engineer, decrypt, decompile, disassemble, create directive works based on, or otherwise attempt to discover the above mentioned software source code or underlying ideas or algorithms. 9. Another important fact is that the software has been supplied to the assessee on a computer disk, from a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to the assessee. Otherwise, the provisions of the Double Taxation Avoidance Agreement had to be followed. Therefore, the provisions of the Double Taxation Avoidance Agreement had to be followed for the purpose of deciding the issue whether payments made by the assessee was royalty or not. The primary condition for bringing within the definition of royalty in the Double Taxation Avoidance Agreement is payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work, etc. The right to use a copyright is totally different from the right to use the programme embedded in a cassette or CD or it may be a software. In this case, what the assessee had acquired was only a copy of the copyrighted articles, that is software, whereas the copyright remained with the owner, that is the foreign parties. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which was called software . Therefore, the remittance made by the appellant for purchase of software was not an income in India, hence no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clause (i) to (iv); (d) in the case of cinematograph film,- (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale 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 For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein. 168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are: (a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending. (ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme (iii) The right to make a public performance of the computer programme. (iv) The right to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfringement of the copyright, the payment therefor would not amount to royalty. Therefore, under the OECD model commentary also payments for acquiring a copy of a computer programme would not be treated as payments for right to use the copyright in the computer programmes. Accordingly such payments are to be considered s commercial income under article 7 and not as royalty under article 12 of the India-USA DTAA [paras 6.2 and 6.3]. Further, the computer programme may be copyright as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the programme is tangible, movable and available in the market place. The fact that some programmes may be tailored for specific purposes need not alter their status as goods because the code definition included specially manufactured goods . In the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 / 141 Taxman 132 the Apex Court after citing several decisions of the Courts of the USA has noted that acquisition of a copy of computer programmes, which is a copyrighted article, amounts to sale of such article [para 6.7]. Therefore, the payment made by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c); (e) the use of, or the right to use: (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; (f) total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e); or (g) the rendering of any services (including those of technical or other personnel) which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made; (h) for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; (i) for s ..... 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