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ADIT (IT) -3 (2) , Mumbai and Others Versus M/s Baan Global BV now known as Information Global Solution (Barneveld) BV, and Others

2016 (7) TMI 1135 - ITAT MUMBAI

Taxability of sale of software as “Royalty” - consideration received on sale of computer software programme i.e. C D Rom as business income OR “Royalty Income” - P.E. in India - Held that:- DIT vs M/s Nokia Networks, reported in (2012 (9) TMI 409 - DELHI HIGH COURT) concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. - We uphold .....

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NU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Appellant : Shri Sunil M Lala For The Respondent : Shri Rajendra Kumar ORDER PER AMIT SHUKLA, JM: The aforesaid appeals have been filed by the revenue as well as by the assessee, against separate impugned orders. Since the major issue involved in all the appeals relates to taxability of sale of software as Royalty with similar facts permeating through, therefore, all the appeals were heard together and are being disposed off by .....

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eal, the revenue has raised following grounds: On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that consideration received on sale of computer software programme i.e. C D Rom as business income instead of Royalty Income treated by the AO after detailed reasoning . 3. The facts in brief as culled from the impugned order of CIT(A) are that, assessee-company is a non-resident company registered under the laws of Netherlands. It is engaged in the bus .....

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brand name of INFOR and is sold as off the shelf software in the market used by the customers in various businesses, like in connection with financial accounting, inventory management, HR management etc. The customer in India places an order with INFOR India which in turn passes on the order to the assessee for the purchase of the software. The assessee then has the exclusive right to accept or reject the order. However, once the order is accepted by the assessee, the CD containing the software .....

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3,75,25,291/- as sales consideration for the computer software products supplied by it to IFOR India and sum of ₹ 4,79,36,944/- as other general services (OGS fees) from the said Indian subsidiary. Since the assessee does not have a permanent establishment (PE) in India, therefore, only the amount of ₹ 4,79,36,944/- received as OGS fee was offered for tax in India as fees for technical services , however, so far as the income from sale of software products of ₹ 3,75,25,291/- is .....

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rland. In support, various decisions were relied upon, which for sake of ready reference are reproduced hereunder:- S.No. Case Law Citation 1 Tata Consultancy Services vs State of AP [2004] 271 ITR 401(SC) 2 Samsung Electronics Co Ltd. v ITO [2005] 276 ITR 1(Bang-AT) 3 Hewlett Packard (India) Pvt Ltd v ITO (International Taxation) [2006] 5 SOT 660 (Bang) 4 Sonata Information Technology Ltd v DCIT [2006] 7 SOT 465 (Bom) 5 Sonata Information Technology Ltd v ADIT [2006] 103 ITD 324 (Bang) 6 ACC Lt .....

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etailed order dealing with the various legal aspects like, the meaning of software as defined in Explanation 3 to section 9(1)(vi); explanation to section 80HHE; guide lines under OECD Commentary; etc. He also dealt, whether the sale of software can be treated as sale of goods or not and for this proposition he also distinguished the decision of Supreme Court in the case of Tata Consultancy Services v State of Andhra Pradesh, reported in [2004] 271 ITR 401 as relied upon by the assessee and also .....

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e running from pages 2 to 19 of the assessment order, he concluded that, not only the said payment falls within the ambit of royalty under the Domestic Law but also under the India-Dutch Treaty. 5. However, in the entire assessment order, AO has not uttered a whisper either about the facts of the present case or terms and clauses used in the agreement, scope of work and functions defined between the assessee and the distributor INFOR. Whether under the terms of the said agreement, there was any .....

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of definition of royalty under the Act, commentaries and judgments. He has not examined the scope and definition of royalty under the DTAA and how on facts it is applicable in the case of assessee, when treaty benefit has been invoked. Thus the entire order of the AO is quite general sans any specific finding given on the material facts placed before him. 6. In the First appeal, the assessee has specifically stated that, it is involved purely in sale of Off the Shelf Software to INFOR. It has a .....

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t itself as contemplated in the definition of royalty under the Act. The customer does not have a right to use the copyright embedded in the software. In other words, Indian customer is not permitted to make copies and sell the software except for limited right to access the copyrighted software for his own business purpose and not to acquire any right to exploit the copyright in the said software. The term use of copyright enforces or encompasses the exploitation of a right embedded in the copy .....

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e any right to use copyright. Besides this, the assessee relied upon following decisions: S.No. Case Law Citation 1 Alcatel USA International Marketing Inv v ADIT [2009-TIOL-733-ITAT-MUM 2 Infrasoft Ltd. v ACIT [2009-TIOL-21-DEL 3 Samsung Electronics Co Ltd v ITO 92 TTJ 658 (Bang) 4 Lucent Technologies Hindustan Ltd. v ITO [2005] 82 TTJ 366(Bang) 5 Hewlett Packard (India) (P) Ltd v ITO [2006] 5 SOT 660 (Bang) 6 Sonata Information Technology Ltd v Addl CIT [2006] 103 ITD 324 (Bang) 7 Motorola Inc .....

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have considered the arguments of the AR and I have also examined the facts. The appellant had entered in to distribution agreement with its infor India its Indian subsidiary company for supply of its software to Indian customer on which it has to receive a fixed percentage sum as per agreement. The appellant had entered into an agreement with Infor India for sale and distribution of computer software. The examination of the agreement for the computer software reveals that the software provided t .....

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t, a mere user right is a limited right and consideration paid for such user rights cannot be regarded as consideration for use or right to use a copyright. Therefore, payment / consideration received for sale of software by appellant is for allowing mere use of copy righted article cannot be held as payment for royalty . Xxxxx xxxxx xxxxxxx xxxxxxxx xxxxxxxx He also analyzed the definition and scope of royalty under Article 12(4) of DTAA, which reads as under:- Payment of any kind received as c .....

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is a tax resident of Netherlands and therefore is entitled to the benefit of the India - Netherlands DTAA over the provisions of the Income-tax Act. The definition of royalty in Article 12(4) of the India-Netherlands DTAA states that any payment of any kind received as consideration for the use of or right to use, any copyright of a literary, artistic, or scientific work including cinematographic films, any patent, Trade Mark, design or model, plant secret formula or process or for information c .....

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t for the issue under consideration, copyright mainly consists of following rights (a) to reproduce the work in any material form (b) to issue copies of the work to the public (c) to sell or give on commercial rental or offer for sale or for commercial rental any copy of computer programme. 1.4.9 Examination of the agreement of the appellant with infor India reveals that the agreement forbids the appellant from transferring or modifying the software. The agreement also forbids them from decompil .....

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cannot be considered as the transfer of the copyright either in part or in whole. Thus, consideration record by the appellant for sale and distribution of software computer software is not for the use of copyright or transfer of right to use of copyright. As mentioned above, copyright is different from the work in respect of which copyright subsists, the appellant has only got a copy of software without any part of the copyright of the software. Thus, payment received by the appellant for usage .....

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alty if there is no transfer of copyright partly or wholly. Hence, for reasons stated as above and on the basis of the various decisions cited above, it is held that the Indian customer have acquired only a copy of software and did not acquire any copyright over such software as envisaged by section 14 of the Copyright Act. Under these circumstances, payment / consideration received by the appellant cannot be said to be payment for the use of or right to use of copyright. Thus, payment received .....

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these facts the addition of ₹ 3,75,25,291/- made by the AO is therefore deleted Thus, he held that the consideration received by the assessee on sale of computer software in India cannot be taxed as royalty . 8. Before us, the Ld. DR relying upon the order of the AO submitted that, exactly on the same issue, Hon ble Karnataka High Court in the case of CIT vs Samsung Electronics Co Ltd., reported in [2012] 345 ITR 494 had decided this issue in favour of the Department by holding that, payme .....

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taka High Court in deciding the issue against the assessee. He further submitted that now in wake of new Explanation 4 in section 9(1)(vi) brought by Finance Act 2012 w.r.e.f. 1.06.1976, the scope and definition of royalty has been enlarged to include any kind of software. This definition is to be read into Treaty also, as the definition given in domestic law is to be read into. 9. On the other hand, Ld. Counsel, Shri Sunil M Lala after explaining the facts emanating from the order of the CIT(A) .....

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Netherland, is governed by Indo-Dutch DTAA and accordingly, the definition of royalty in Article 12(4) shall apply. After referring to the definition of Royalty as given in para 4 of Article 12, he submitted that the main criteria for examining the concept of royalty under the article is that, it should be for use of or right to use any copyright etc. For the definition of copyright, section 14 of copyright of 1957 which is an exhaustive definition has to be looked into. The Ld. CIT(A) has exam .....

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ve not only distinguished the same, but have not followed the ratio after detailed reasoning. He also filed a separate compilation of various Delhi High Court and ITAT decisions and submitted that the payments made to acquire software products either independently or embedded in a hardware or any product or sale of any copyrighted article, the consideration received would have to be treated as payment for purchase of the product rather than consideration for the use of the patented or copyright .....

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88 (Del) 5 Commissioner of Income Tax vs Alacatel Lucent, Canada (2015) 372 ITR 0476 (Del) 6 Director of Income Tax vs Ericsson A B New Delhi (2011) 16 taxmann Com 371(Del) 7 Asst Director of Income Tax (Int. Taxn)-I Hyderabad vs Locuz Enterprise Solutions Ltd [2015] 61 taxmann.com 47 (Hyderabad Trib) 8 Infotech Enterprises Ltd vs Addl CIT Range 2, Hyderabad [2014] 41 taxmann.com 364 (Hyd Trib) 9 Sonic Biochem Extractions (P) Ltd. Vs Income Tax Officer [201] 35 taxmann.com 463 (Mum-Trib) 10 Daim .....

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is not in agreement with the decision of Karnataka High Court. Not only once, but in the case of DIT vs. Infrasoft Ltd, and Alacatel Lucent (supra) the Hon ble High Court has given a similar observation. In other decisions also the Hon ble Courts have echoed the same view that payment for license to use copyrighted software which are sold off the shelf or the software which are embedded in the hardware cannot be regarded as payment by way of royalty . Lastly, ld. counsel submitted that it could .....

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r Income Tax [2015] 44 CCH 0370 Cochin Trib. 4 Dy. Commissioner of Income Tax, Circle 52, Kolkata vs Subhotosh Majumdar [2016] 65 taxmann.com42 (Kolkata - Trib) 5 Sterling Abrasive Ltd vs Asst. Commissioner Of Income Tax, Circle 8, Ahmedabad [2011] 44 SOT 652 (Ahd) 6 TTK Prestige Ltd. vs ACIT [TS -555-ITAT-2014(Bang) 10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us .....

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the terms of royalty under Article 12(4) of India-Netherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo- Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the treaty provisions. Briefly recapitulating the relevant facts for the purpose of our adjudication emanating from the impugned order is that, Asse .....

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pute. The dispute is with regard to the payment of ₹ 3,75,25,291/- received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold off shelf which is mainly used by the Indian customer in their business for financial accounting, inventory management, HR management etc. INFOR India carries out marketing and sale of the software in India and places order with the assessee. The software supplied is then distributed to the Indian .....

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are. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT(A) in his order is reckoned as admitted facts. 11. Now, on these facts, we have to decide, whether the payment received by the assessee can be .....

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ustrial, commercial or scientific experience . From the plain reading of the article it can be inferred that, it refers to 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 films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as roya .....

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e nature of royalty . If the payment doesn t fit within these parameters then it doesn t fall within terms of royalty under Article 12(4). The computer software does not fall under most of the term used in the Article barring use of process or use of or right to use of copyrights Here first of all, the sale of software cannot be held to be covered under the word use of process , because the assessee has not allowed the end user to use the process by using the software, as the customer does not h .....

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however, the various Courts have consistently opined that the definition of copyright as given in the Copyright Act, 1957 has to be taken into account for understanding the concept. Section 14 of the said Act defines the copyrights to mean as under:- 14. Meaning of copyright -For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part the .....

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o 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 clause (a); (ii) to sell or give on commercial rental or offer 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 progr .....

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ion to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (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 sound recording, - (i) to make .....

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dle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme .....

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nd agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of shrink wrapped software off the shelf and hence, cannot be considered as a royalty within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright. 12. One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with r .....

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less there is a corresponding negotiation between the two sovereign nations to amend the specific provision of royalty in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the royalty has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of .....

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supra) and other in the case of Samsung Electronics Co Ltd. (supra). Both these decisions, admittedly, are against the assessee. However, we find that Hon ble Delhi High Court in series of decisions have specifically disagreed with the ratio and the conclusion of Hon ble Karnataka High Court. In the case of DIT vs Infrosoft Ltd. (supra), the Hon ble Delhi High Court precisely on similar nature of agreement and the issue before it has dealt and decided the mater in the following manner:- 87. In o .....

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t; and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishab .....

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these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with th .....

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transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein witho .....

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ng him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said 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 paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the lice .....

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ired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of .....

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and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. Xxx xxxx xxxxx xxxxx xxxxxx xxxxx xxx xxxxxx 94. The incorporeal right to the software i.e. copyright rema .....

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e copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the 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 .....

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opyright 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 be business income. 98. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO. LTD (SUPRA) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the pa .....

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ed 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 temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software . The ratio of the above decision clearly clinches the issue which is applicable in the case of the assessee also. This ratio and principle has been followed and reiterated ag .....

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cannot be regarded as payment by way of royalty. The relevant observation of the High Court in Alcatel Lucent (supra) in this regard reads as under: We have noticed, at the outset, that the ITAT had relied upon the ruling of this Court in Director of Income Tax V. Ericsson A.B. (2012) 343 ITR 470 wherein identical argument with respect to whether consideration paid towards supply of software along with hardware - rather software embedded in the hardware amounted to royalty. After noticing sever .....

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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 as the software, therefore, the Tribunal is ri .....

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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 (2004) 271 ITR 401 (SC), 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 &q .....

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tor of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales 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 "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cas .....

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arly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes… In Advent Systems Ltd. v. Unisys Corpn, (925 F. 2d 670 (3rd Cir. 1991)), relied on by Mr. Sorabjee, .....

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al 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 .....

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at the ITAT had in addition relied upon other judgment of this Court i.e. Director of Income Tax V. M/s. Nokia Networks, (2013) 358 ITR 259 (Delhi) . Similar view has been reiterated in other decisions also as relied upon by the Ld. Counsel. Now that there are catena of decisions and case laws in favour of the assessee including that of the Delhi High Court on several occasions, we are inclined to follow the decision and proposition laid down by the Hon ble Delhi High Court. Thus, in view of the .....

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011; The aforesaid appeal is arising against the impugned order dated 25.02.2011 passed by CIT(A)-11, Mumbai in relation to the order passed under section 201/201(1A) in the grounds of appeal the assessee has raised following ground: On the facts and circumstances of the case and in law, the ld. CIT(Appeals) erred in holding that consideration received on sale of computer software programme i.e. C.D. Rom is not a Royalty Income as per the Article 12(4) of DTAA between India and Netherlands ignor .....

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r.w.s. 148 in pursuance of the direction given by the DRP-I, Mumbai under section 144C(5). 17. At the outset, it is noted that appeal filed by the assessee is barred by limitation by 33 days. In the application for condonation of delay, the assessee has stated following reasons:- The Company is a foreign Company based out of the Netherlands with no operations and presence in India; On receipt of the final assessment order, the Company took time to understand the order and to discuss internally t .....

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in India; In view of the above, the Company would like to submit that given the above mentioned situations, the Company, inspite of its best efforts could not obtain the necessary signatures on the appeal documents before the due date for filling the subject appeals . 18. After hearing both the parties and on perusal of the reasons stated in the petition, we find that, there was a reasonable cause for not filing the appeal in time and delay is not on account of any latches on the part of the ass .....

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m the sale of software products at an income taxable in India. The Ld. AO and the Hon ble DRP erred in treating the same as in the nature of royalty as per the provisions of the Income Tax Act, 1961 (the Act ) as well as the Double Taxation Avoidance Agreement between India and Netherlands ( DTAA ). 3. The Ld. AO and the Hon ble DRP failed to appreciate the Appellant s arguments and submissions explaining that the software products sold by the Appellant are goods. 4. The Hon ble DRP erred in hol .....

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ss or copy the unique license key that is required to make the software functional / operative. 6. The Ld. AO and the Hon ble DRP erred in law in treating the software as a secret process and a property similar to patent, invention, design, secret formula, thereby treating the sale of software products as transfer of rights in the software. 7. The Ld. AO and the Hon ble DRP has erred in treating the sale of the software products which is a copyrighted article as use or right to use of a copyrigh .....

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06 wherein the CIT(A) held that the consideration received by the Appellant on account of sale of software products is not in the nature of royalty. The Ld. AO and the DRP failed to appreciate the explanations provided by the Appellant that the facts in the subject year are not different from the facts in the FY 2005-06 and hence the decision of CIT(A) in Appellant s case for FY 2005-06 should be applicable to it in the subject year. 10. The Ld. AO and the Hon ble DRP further erred in passing th .....

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e Appellant undue hardship on a matter already decided in the Appellant s own case. 12. The Ld. AO and the Hon ble DRP did not take reference of facts and legal principles and were purely based on conjectures and surmises and therefore the orders are liable to be quashed as bad in law. 13. The Hon ble DRP erred in making a reference to Explanation 4 to section 9(1)(vi) of the Act for the purpose of determining the meaning of the term royalty without appreciating that a specific definition of the .....

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ions (Barneveld) BV . In this case the disputed amount for taxability of royalty payment is ₹ 4,65,46,164/- received towards sale consideration for computer software products supplied by the assessee to its Indian subsidiary. The said sale consideration of CD Rom has been treated as royalty by the AO by and large on the same footing and reasoning as has been discussed in the appeal herein above and accordingly the same has been taxed under the DTAA. As admitted by the parties the facts rem .....

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to pare 2 of article 3 Indian Netherland DTAA, The said article provides that for interpreting any provision of the convention, when any term is not defined therein, the term shall have same meaning that it carries under the domestic law of the stale applying the convention, concerning the taxes to which the convention applies. Thus, unless the context otherwise requires, for interpreting the DTAA, reference to domestic law is mandated by article 3(2) of the said treaty. Though the term royally .....

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lanation 4 to section 9(1)(vi) of the Act. The term any "right, property or Information in the explanation refers to the various kinds intangible property refereed in pare 4 of article 12 including copyright, Hence, even under the provision DTAA, consideration for the use computer software amounts to use of royalty 6. While these are legal arguments, it is also necessary to refer to the actual software agreement entered into by the assessee. A reference to the agreement shows that the compu .....

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t the case Is not merely of use of software but in fact provides for sharing the source code which could fall within the terms knowhow, secret formula or process. 8. It is also seen that the licensee under para 3 of the licence agreement has right to make a copy of the software of the equipment in the object code form. This itself is adequate to conclude that the assessee has exercised the right which is provided under the Copyright Act as the exercise of a copyright. Under the provision of Indi .....

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nd also the order of the AO, we find that the issue involved herein is exactly same as has been decided in ITA No.7048/Mum/2010, except that the Ld. DRP has decided the issue against the assessee, by taking additional reasoning that now in wake of new Explanation 4 to section 9(1)(vi) that has the enlarged the definition of royalty should be read into DTAA by virtue of Article 3(2). On this aspect we have already dealt with and have given our reasons that, the amendment carried out in the domest .....

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, then the definition given in the domestic law will be considered for analyzing the transaction under the treaty. However, if a particular term has been specifically defined in the treaty, then any reference to the domestic law or any amendment carried out in the definition of such term under such law will have no bearing on the definition of such term in the context of the convention, unless DTAA is also correspondingly amended by the parties. We have already observed above that, one contracti .....

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e are unable to accept the finding and direction of the DRP that in absence of any amendment in the provisions of the treaty the amended act should read into by virtue of Article 3(2). 21. Regarding other observations of the DRP, like sharing of the source code amounts to process, we have already dealt this issue in our earlier part of this order. Moreover, source code refers to computer programmes written in higher level programming languages and readable by humans. Before us, Mr. Sunil M Lala .....

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the Component Systems (including any updates, enhancements or modifications to such Component Systems that Infor provides under the Support Agreement) on the Equipment for Licensee s own, internal computing operations. The computer readable media containing the Component Systems may also contain software programs for which Licensee is not granted a license for use. Licensee may not make any use of any such software programs for which Licensee is not expressly obtaining a license for use under th .....

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ent System. If the Order Form grants Licensee a license to use Source Code for a particular Component System, then Licensee has the limited right to use such Source Code to modify such Component System for its own, internal computing operations. Subject to the foregoing, Licensee will not disclose all or any part of the Source Code for a Component System to any person except Licensee Employees who, before obtaining access to the Source Code, have been informed by Licensee in writing of the non-d .....

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to the terms and conditions of this Agreement, Infor grants Licensee (if licensed to use Source Code hereunder) a perpetual (unless otherwise specified in the Order Form), non40 exclusive, non-transferable license (without the right to sublease or sublicense) to use and copy for use the Derivative Works created by Licensee or created by Infor at Licensee s request and payment, for Licensee s own, internal computing operations. Upon Infor s request, Licensee will provide Infor with a copy (includ .....

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copyright or right to use. Limited right to operate the copyrighted article cannot be reckoned as royalty within the scope of Article 12(4); and Secondly, the use source code is also for a particular component system to modify such component system for its own internal computing operations. This right is again is with the riders and limitations given therein. There is no right given for the use of copyright or any kind of copyright has been given. Thus, nothing turns on with this observation as .....

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