TMI Blog2010 (11) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... ies who are resident of U.K.. The software in question are undisputedly operational softwares, purchased for the internal use of the assessee. The assessee was granted non-exclusive , perpetual, irrevocable, royalty 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. We list out herein appeal-wise, the party from whom the assessee has purchased the software and the nature of software. Sr. No. ITA No. Name of the Party Name of the Country Brief description of software supplied 1 1133/Mum/2008 M/s Petroleum Experts Ltd.. UK Supply of proprietary software which can be used to accurately perform Material Baalance analysis related to.. 2. 1186/Mum/2008 M/s Independent Technology Systems Ltd. UK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the DTAA. The AR has submitted that M/s. PEL, being a tax resident of UK, provision of the Income-tax Act, 1961 would apply, if they are more favourable to it over the provisions of the DTAA as per section 90(2) of the I.T. Act, 1961. 1.4 The AR has submitted that the AO has examined the special terms of purchase and has referred to para 2 of the special terms and has concluded that for the reasons given by him in the order that the payment made by the appellant to M/s. PEL is royalty within the meaning of Article 13 of the DTAA and also u/s.9(1)(vi) of the I.T. Act, 1961. 1.5 The AR has also submitted that the same has been examined by me in my order No. CIT(A)XXXI/DDIT(IT)2(1)/IT-303/02-03/06-07, dated 29/10/2007 in the appellant s own case. The AR has submitted his written submissions dt.23/10/2007 and has reiterated all the argument taken by him in that appeal which have been considered in my above stated order. The AR has submitted in conclusion that the above payment made for purchase of software is no royalty but only business income and is accordingly taxable in India, only if M/s. PEL, has a PE. 5. The terms and conditions of purchase are brought out at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials is expressly forbidden except that the LICENSEE or Authorized User is permitted to make one (1) copy for backup and archival purposes. The LICENSEE may be held legally responsible for any infringement, which is caused or encouraged by its failure to abide by the terms of this License. The LICENSOR will distribute the software Licenses and relevant technical documentation (User Manuals) on electronic media. The documentation will be in a readable format. The LICENSEE and Authorised User are entitled to make electronic or printed copies (hard copies) of the documentation as is reasonably required for the internal use of the LICENSE. 2.2.2. OWNERSHIP OF THE SOFTWARE The Licensor retains title and ownership of the software recorded on the original disk copy(ies) and all subsequent copies of the software, regardless of the form or media in or on which the original or the other copies may exist. This License is not a sale of the original software or any copy. 2.2.3. LIABILITY The Licensor will at its sole expense defend and hold the Licensee and Authorized User harmless from any claims including legal fees which may be made against the Licensee. Authorized User an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event may the LICENSEE transfer, assign, rent lease, sell or otherwise dispose off the software on a temporary or permanent basis except as expressly provided therein. 6. The general terms and conditions of agreement of purchase can be summarized as under: i) The assessee is not entitled to use the software for ASP Services on behalf of third party. ii) The assessee has no right to use, copy, duplicate or display the software 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 appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia, business profit is not taxable in India as per Article-5 7 of DTAA. In view of this appeal on ground No. 1 to 7 is allowed. 9. This Bench of the Tribunal, on similar issue, in the case of purchase of software from USA in assesee s own case in ITA Nos. 116,119,1123, 1125, 1126,1127,1129, 1131, 1134,1181,1183,1184,1185,1187, 1188 1190/Mum/2008 vide its order dated 29th Oct., 2010 has held as follows 12. The Bangalore Bench of the Tribunal in the case of Samsung Electronic Company Ltd. vs. ITO reported in 276 ITR (AT) 1 held as follows : Held, allowing the appeals, that the provisions of the Income-tax Act would be applicable to the extent they were more beneficial 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 lit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in Cl. (a); (ii) to sell or give on commercial rental for sale or for commercial rental any copy of the computer programme; Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental, (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two-dimensions of a three-dimensional work; (ii) to communicate the work to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired cannot be considered as a copyright. In that case, it can only be said that he has acquired a copyrighted article. A small example may clarify the position. The purchaser of a book on income-tax acquires only a copyrighted article. On the other hand, a recording company which has recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use the copyright of such literary/artistic/scientific i.e., copyrighted work [para 6]. Further, as per clause 13.1 of the OECD model commentary, payments made for acquisition of partial rights in copyright would represent a royalty where the consideration is for the right to use the programmes in a manner that would, without such license, constitute an infringement of the copyright. In other words, the payment can constitute royalty only if the transferor grants to the transferee the right to use the copyright of the product. If, on the other hand, the use of the programmes by the transferee (by acquiring a copy of such programme) is in a manner which does not constitute infringement 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying the propositions to the facts of the case, we uphold the order of the first appellate authority wherein it is held that : a) It is now established law that Computer software after being put on to a media and then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the AO is wrong in holding that Computer software on a media, continues to be an intellectual property right. b) That the assessee has purchased a copyrighted article and not the copyright itself. There is no transfer of any part of copyright. c) The present computer software cannot be treated as a patent or an invention. 13. In view of the above discussion, we respectfully follow the decision of the Special Bench of the Tribunal in the case of Motorola Inc. (supra) and hold that the software supplied was a copy righted article and not a copy right and that the payment received by the assessee in respect of the software cannot be considered as royalty under the Income-tax Act. Once it is not royalty under the Income-tax Act, the question of examining whether it is Royalty under the Double Taxation Avoidance Agreement with UK does not arise once it is not Royalty, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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