TMI Blog2012 (3) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Following grounds have been raised in this appeal: 1. That the order passed by the Commissioner of Income-tax (Appeals)-IV (hereinafter referred to as the Learned CIT(A) under section 248 r.w.s. 254 of the Income-tax Act, 1961 ( the Act ) is not based on the facts, contrary to the provisions of law and is liable to be quashed. 2. That the Learned CIT(A) erred in holding that the appellant is required to deduct tax at source and pay the same to the Government in respect of payment of USD 58,000 payable to Verisity Design Inc, USA, for purchase of software namely Specman Elite. 3. That the Learned erred in holding that the payment to Verisity Design Inc. USA towards purchase of software are in the nature of royalty. 4. That the appellant denies its liability to deduct tax at source and pay the same to the Government in respect of payment made to Verisity Design Inc. USA towards purchase of software. 5. That the Learned CIT(A) erred in not directing the respondents to grant refund of the tax deposited by the appellant. 6. That the appellant craves leave to add to and/or alter, amend, rescind or modify the Grounds herein above before or at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al has held the issue in favour of the Revenue and against the assessee. (Ref 328 ITR Part 4 initial page 5 News - brief and www. thehindubusinessline.com dated 31.10.2010. Hence, it is held that the appellant was required to deduct tax on its payments made to non-residents on software purchases. Once it is held as royalty payments u/s 9(1)(vi), consequences of Section 195 and 201(1) follow: Accordingly it is held that the appellant s C.A s SSB Associates were correct in holding that the payments made by the appellant to non-residents were liable for tax deduction u/s 195. Even going by the Hon ble Karnataka High court observation in the appellant s own case where in it was held that shrink-wrapped software is liable for deduction of tax, the appellant gets no relief. However, since the matter is now referred back to the Hon ble Karnataka High Court and if the Hon ble court reverses its judgement, the position would be different. For the time being, going by the Hon ble Karnataka High court judgement in the appellant s own case, it is held that the payments made software purchases from non-residents are liable for deduction under section 195. Now the assessee is in appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and copyright continue to be with the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the Software, upon payment of the licenses set forth in Exhibit A to the agreement only to End Users pursuant to a valid Actuate shrinkwrap or other Actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the Software the Documentation or any derivative works based upon the Software or Documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modify the source code for the Software. Distributor shall have no rights to the Software other than the rights expressly set forth in the agreement. Distributor shall not modify or copy any part of the Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppearing for the respondents that in view of the fact that what is supplied by the non-resident to the respondent in India is only a shrink wrapped software/off-the-shelf software, which is not customised to suit the needs of the respondent, the said software is to be treated as goods and there is sale of the software and copy of the software. Therefore, the question of paying any royalty would not arise. In support of the said contention, the learned senior counsel appearing for the respondents has strongly relied upon the decision of the Hon'ble Supreme Court in Tata Consultancy Services' case ( supra ) (hereinafter referred to as the TCS's case), wherein the Hon'ble Supreme Court was considering the question as to whether the canned software sold by the appellants can be termed to be goods and as such assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. Having regard to the broad definition of 'goods' under Section 2(h) of the said Act and also the provisions of Article 366(12) of the Constitution of India, the Hon'ble Supreme Court was pleased to answer the said question for determination by holding that once the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make deduction under Section 195(1) of the Act. 23. It is well settled that in the absence of any definition of 'copyright' in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of 'Copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that literary work includes computer programmes, tables and compilations including computer [databases]. Section 16 of the Copyright Act, 1957 states that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with meaning of 'Copyright' reads as follows:- 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 follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation. It may also be noted that under Section 51 of the Act dealing with When Copyright infringed states that Copyright in a work shall be deemed to be infringed - when any person, without a licence granted by the owner of the Copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under the Act: does anything, the exclusive right to do which is by the Act conferred upon the owner of the Copyright. Section 52 of the Act dealing with Certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely- xxxx ( aa ) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy. ( i ) in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 impugned agreements or licenses cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, commercial or scientific knowledge, experience or skill as per clause ( iv ) of Explanation 2 to Section 9(1)( vi ) of the Act. In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 of the Act and consequences would follow as held by the Hon'ble Supreme Court while remanding these appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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