TMI Blog2017 (1) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court ), a similar provision existed in the DTAA between India and Sweden. Interest payments and Section 234B is concerned, the court is of the opinion that the issue is covered by GE Packaging (2015 (1) TMI 1168 - DELHI HIGH COURT ). This question of law too is answered against the revenue, and in favour of the assessee. - ITA 904 to 909/2016, CM APPL.46510-46515/2016 - - - Dated:- 24-1-2017 - MR. S. RAVINDRA BHAT MR. NAJMI WAZIRI JJ. Appearance: Mr. Ruchir Bhatia, Sr. Standing Counsel with Mr. Puneet Rai, Jr. Standing Counsel, on behalf of Revenue, in all the appeals. Mr. Deepak Chopra with Mr. Harpreet Singh Ajmani and Mr. Rohan Khare, Advocates for the assessees in all the appeals. S.RAVINDRA BHAT, J. 1. In these appeals, the following questions of law arise for consideration: - (i) Are the ITAT s findings with respect to interpretation of Article 12 (3) of the Indo-China Double Taxation Avoidance Agreement (DTAA), in the light of Explanations 5 6 to Section 9 (1) (vi), erroneous in law. (ii) Is the impugned order correct in its interpretation of Section 234B of the Income Tax Act, 1961, in the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers separately, or software supplied to the various customers in India should not be treated as royalty under Section 9(1) (vi) of the Act and also under Article 12 (3) of the DTAA. The assessee had argued that: a) Software is sold in the same manner as telecom equipment, b) The software is an integral part of the telecom equipment, which facilitates running of the said equipment. c) The subject software has no independent value of its own. d) No copyrights in the software are transferred to the customers. e) No access to the source codes in the software is granted to the customer. f) Payment for software is not related to the productivity, use or number of subscribers. g) Customers do not have the right to commercially exploit the software. h) Software supply is in the nature of transfer of copyrighted article and not transfer of a copyrighted right . 6. The assessee also relied on the definition of copyright under Section 14 of the Indian Copyright Act, 1957. It also relied on the decision of Delhi Special Bench Tribunal in Motorola India vs DCIT (95 ITD 269). It was therefore stated that the receipts from sale of computer soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that it would meet the ends of justice if 35% of net global profits as per published accounts out of transactions of assessee with India are attributed to PE in India in respect of both hardware and software supplied by assessee to Indian customers. At this juncture we may point out that while deciding the department's appeal in subsequent part of this order, we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. We are not inclined to accept this mode of computation resorted by AO, particularly in view of Rule 10 of the IT Rules, which mandates the AO to go by the published accounts of assessee. In the result assessee's ground no. 6 in AY 2009-10 stands allowed. We may further clarify that our decision does not amount to enhancement of income because overall tax effect will be less as compared to tax computed by AO/CIT(A). 10. On the two surviving issues, i.e., applicability of Section 234-B and whether amounts paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DTAAs in those cases. Counsel emphasized that the software has not been sold but licensed to the customers and there is separate consideration for the software. This was the reason why the assessee could submit details of payments received in lieu of supply of software for F.Ys. 2006-07, 2007-08, 2008-09 and 2009-10. Mr. Bhatia urged that the software is sometimes independently supplied to the customer, who is given the right to use the software for the purpose of its business thereby assigning the user the right to commercially exploit the software. 13. It was urged on behalf of the revenue that the term copyrighted article is not defined in the Indian Copyright Act. The assessee has assigned the customers the right to use the software . Such assignment meant that the customers were given the right to use the copyrighted right in the software. It was urged, furthermore that right and title passed to the customer in the case of hardware but not in the case of software. In terms of the contract between the assessee and the customers, the buyer has no title or ownership rights. The buyer could neither license nor sell nor alienate or part with its possession. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware supplied. The software so supplied is not independent, but necessary for the hardware supplied by it, under the contract. The assessee also provides upgrades for the software. The AO held that the payments made for the right to use the software was royalty as per clause (i), (iii) and (v) to Explanation 2 to section 9(1)(vi) of the Act. According to him, the software is a secret formula or process for the purpose of Explanation 2 (i) and (iii) and was also a copyright in terms of Explanation 2 (v). Further, such payments were also royalty under Article 12(3) of the DTAA between India and China. The assessee s plea that the payments for supply of software along with hardware are in the nature of business profits and not royalty, was rejected and it was held that the revenue was in appeal against the decision of the ITAT in Motorola (supra). It was therefore held that payment received against supply of software was in the nature of royalty under Section9(1)(vi) of the Act and also under Article 12(3) of India-China DTAA. 18. Before proceeding further, it would be necessary to extract the relevant provisions of the DTAA. Article 12, which is pertinent in this context, reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Indo-Sweden DTAA provided, by Article 13, as follows: Article 13: ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services the tax so charged shall not exceed 20 per cent. of the gross amount of the royalties or fees for technical services. 3. The term royalties as used in this article means 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, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wherein it was held: A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra). 20. The misconception that the revenue harbors stems from its flawed appreciation of a copyright license. True, copyright is not defined; yet what works are capable of copyright protection is spelt out in the Copyright Act. Sections 13 and 14 of the Copyright Act flesh out the essential ingredients that make copyright a property right. More particularly, Section 14 states 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 following acts in respect of a work or any substantial part thereof, namely :- (a) In the case of a literary, dramatic or musical work not being a computer programme- (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of computer programs, copyright would mean the doing or authorizing the doing- in respect of work (i.e. the programme) or any substantial part thereof (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 programme itself is not the essential object of the rental. 21. The reference to clause (a) and (b) means that all the rights which are in literary works i.e. (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) 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 sp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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