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TMI Blog2017 (3) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... he decisions rendered by the AO by filing appeals before Ld CIT(A). In some of the cases, the Ld CIT(A) has accepted the contentions of the assessee that the payments so made constitutes business income in the hands of the recipient and the same is not taxable in India, since the recipient does not have Permanent Establishment in India. The revenue has filed the appeals in those cases, where the Ld CIT(A) has decided the issue by holding the same as not royalty, but business profits. The assessee has filed appeals, where the Ld CIT(A) has upheld the view of the AO that the payments constitute royalty. 2. In all these cases, the assessee has purchased software from various parties for using the same in its Jamnagar Refinery complex. The case of the Ld A.R is that the software is a standardized software supplied to the assessee on non-exclusive basis and further the assessee does not have right to copy the same except as provided in the agreement for internal use. He further submitted that the source code is not supplied to the assessee and the assessee has been given only license to use the software, which is akin to shrink wrapped software. The Ld A.R submitted that the issue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compared with that of the Income Tax Act, 1961, reveals that the DTAA covers only a part of the items mentioned under sub clauses (i) to (v) to Explanation 2 to section 9(1)(vi). A perusal of the definition of royalty as provided in Article 12 of DTAA' reveals that it is the payment which is received as consideration for the use of' or the right to use' any copyright of literary, artistic, scientific work including .....‟ (emphasis supplied by us). Hence, what is relevant is the consideration paid for the use of' or the right to use' any copyright'. The right to use a computer software/programme has not been specifically mentioned in the DTAA with any country. We may clarify here that the contention of the revenue is that the term literary work' includes software' also, which contention we will discuss in the latter part of this order. Now coming to the relevant provisions of the Income Tax Act,1961, we may mention here that the scope of royalty' under clauses (a), (b), & (c) to section 9(1)(vi) is very broad to cover consideration paid for any right, property or information used or services utilized for the purpose of business or profession. Further, we find that the said cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is in paramateria with that under the DTAA. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken. So far as the reliance of the Ld. D.R. on the decision of the Hon'ble Madras High Court in the case of Vrizon Communication Singapore (supra) and of the Mumbai Tribunal in the case of Viacom 18 Media Pvt. Ltd. (supra) is concerned, we find that the said decisions have been rendered in context of some other item relating to the consideration paid for transponder/band width/telecom services. In that context, the Hon'ble Madras High Court has interpreted the right to use the equipment' and the word process' applying the definition provided under the domestic Income Tax Act as the definition of the same was not available in the DTAA. However, in the case in hand, we have to define the term literary work' and the term copyright; the definitions of the same are not available under the Income Tax Act, but, the same are available under the Copyright Act, 1957. 22. The Hon'ble Delhi High Court in the case of DIT vs Nokia Networks OY [2012] Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. The Parliament is not equipped with the power to, through domestic law, change the terms of a treaty. Amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Hon'ble Delhi High Court concluded in the said decision (supra) that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty prior to the amendment in the Income Tax Act will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties. 23. Further, we find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. However, the Ld. DR has neither stressed nor has advanced any argument as to that software falls in any of the above mentioned other categories. All the contentions of the revenue are concentrated on the point that software is covered under the term copy right in a literary work' and thus included in the definition of 'royalty' as provided under the DTAAs of India with the other countries as detailed in the table above. It has been submitted by the ld. DR that the definition of 'Literary work' as provided under the domestic law viz. Copyright Act, 1957 should be considered while deciding the scope of the term Royalty as defined under the treaty. This issue has been discussed by the Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. & Others (supra) while relying upon Article 3 sub section (2) of the DTAA with US, observing that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that State' concerning the tax to which the convention applies. Hence, the reference is to be made to the respective law of the taxing State (India in this case) regarding the definition of 'literar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt of copyright law, a license is a permission to do an act, that, when the doing of the same without permission, would be unlawful. In Software Licences, the copyright owner retains substantial rights and greater ability to control the use of software. Licence may have provisions relating to the persons who may use the programme, the number of copies that can be made, warranty, limitation of liability, distribution of the software, etc. These are generally biased towards the licensor. Now, the question before us is as to whether the sale of such computer software by the non-resident to the resident assessee amounts to the transfer for the use of or the right to use any copyright in a literary work? 27. The plea raised on behalf of the Revenue is that in case of sale of software, the title to the disk, manual etc. in which the software is embedded may pass to the buyer, but, the title to Intellectual Property in the software does not. The Ld. DR has relied upon the decision of the Hon'ble Karnataka High Court in CIT vs. Samsung Electronics Company Ltd. & Others (2012) 345 ITR 494 wherein it has been observed that under the agreement, what had been transferred was only a license t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a copyrighted article and represents the purchase price of an article and cannot be considered as royalty. The Hon'ble Delhi High Court has further held that what is transferred is neither can be right in the software nor the use of the copyright in the software, but is the right to use copyrighted material or article which is clearly distinct from the rights in a copyright and the same does not give rise to any royalty income and would be the business income' of the non-resident. The Hon'ble Delhi High Court in the case of Infrasoft Ltd. (supra) has also relied upon another decision of the Hon'ble Delhi High Court in the case of DIT vs. Nokia Networks OY‖ (2013) 212 taxman 68 wherein the Hon'ble Delhi High Court has held that the copyright is distinct from material object. It is intangible, incorporeal right in the nature of privilege, quite independent of any material substance such as manuscript. The transfer of the ownership of a physical thing in which copyright exists comes to the purchaser with the right to do with it whatever he pleases, except the right to make copies and issue them to the public. Just because one has the copyrighted article, it does not follow th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m duties under section 12 read with section 2(22)(e) of the Customs Act, 1962, irrespective of what the article may be or may contain. It may be that what the importer wanted and paid for was technical advice or information technology, an intangible asset, but the moment the information or advice is put on media, whether paper or cassette or diskette or any other thing, that what is supplied, it becomes chattel. The Hon'ble Supreme Court, thus, held that the intellectual property such as drawings, license and technical material when put on a media is to be regarded as an article and there is no scope for splitting the engineering drawings or encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other hand. 30. No doubt, the dominant object of sale in such transaction is the computer software and not the disk or the CD upon which such software is loaded. As understood by us, what the computer programme' or the software' is an expression of work/ideas written on a media in a computer programming language and that is why it has been included worldwide in the category of literary work. As per the definition provided in section 2 (ffc) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fair use of the said product and subject to the conditions mentioned in the sale agreement which in fact are restrictions or limitations to the effect that the buyer will not misuse the product which may amount to infringe of copyright in the product. So what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be license to use. The purchaser, thus, is entitled to perform all or any of the activities which is essentially required for the fair use for the purpose for which the product is purchased by him. Section 52 of the Copyright Act expressly recognizes such a right of the purchaser, which we will discuss in later part of this order. Further, the computer software, as generally observed, has a shorter life cycle. When software is sold, the owner gets the price of the copy of the product/work. He in fact receives the price for the expected life of the work and product. In such case the purchaser pays the price for the product itself and not for the license to use. 32. Even if we assume, for the sake of arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statutory rights of the purchaser/user of the software can be curtailed or done away with by the terms of such licenses/agreements. A License Agreement, in spite of the fact that it may fulfill all the requirements of a valid contract, such an agreement may not be enforceable, if, its stipulations conflict with the law governed in the country where such licenses are intended to be enforced, or if it is an unconscionable or unreasonable bargain. In computer software, generally it is the tendency of software producers to do away with the rights and privileges of the user, even which are specifically conferred upon the user by the relevant prevalent laws such as Copyright Act, Contract Act and other relevant laws. The fair use of the purchased article is the other plea which contradicts the license theory. As per the provisions of section 52 of the Copyright Act 1957, which has provisions similar to the provisions of section 117 of the US Copyright Act, the owner of a copyright of computer software is legally entitled to fair use that copy of software even without a license from the software publisher and any condition put in a license restricting the fair or reasonable use of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne whether a copyright in a work is infringed or not or would be deemed to be infringed or not, the most important test is to find out whether the use is likely to harm the potential market or the value of the copyrighted work. When it is not the allegation of the owner/purchaser of the work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it cannot be said that the user has infringed the rights of the purchaser, who in fact has paid the consideration to use the copyrighted work. The use of the product itself' by the purchaser for the purpose for which he purchases such a product/diskette/CD ROM is thus comes within the scope of fair use. Copyright does not protect the fair or exclusive use of the work, rather, the purpose of copyright protection is to regulate the reproduction of the copies of the copyrighted work and distribution thereof. It is pertinent to mention here that the use of information viz. a new technology or invention, though, can be protected under the Patents Act, 1970; yet, under the Patents Act 1970, the computer Software cannot be patented. The computer software, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 37. Section 51 of the copyright Act deals as to when the copyright is infringed, which, for the sake of convenience, is reproduced as under: CHAPTER XI Infringement of Copyright 51. When copyright infringed. -Copyright in a work shall be deemed to be infringed- (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act- (i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or (ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware and had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or (b) when any person- (i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or (ii) distributes either for the purpose of trade or to such an extent as to affect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a work shall have the right- (a) to claim authorship of the work; and (b) to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work which is done before the expiration of the term of copyright if such distortion, mutilation, modification or other act would be prejudicial to his honour or reputation: Provided that the author shall not have any right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub-section (1) of section 52 applies. 40. Hence, as per section 51 of the Act, copyright in a work shall be deemed to be infringed when any person without license granted by the owner of the copyright or in contravention of the conditions of a license so granted does anything, the copyright of the owner is stated to be infringed. However a perusal of the above provisions of the Copyright Act further reveals that even in some cases unauthorized uses of a copyright work is not necessarily infringing. An unlicensed use of the copyright is not an infringement unless it conflicts with one of the specific exclusive rights covered by the copyright statue. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. 42. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Copyright Act has further clarified that the author of the work shall not have right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub section (1) of section 52 applies. 43. Further in case of imported software i.e. if the original work has been published outside India, as per the provisions of the Copyright Act, apart from the work being original and not copied from elsewhere, the work should be first published in India or if the work is published outside India, the author on the date of publication, if the author is dead, at the time of his death, should be citizen of India. In case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has purchased is only a copyrighted work'. It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957. 45. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, such as the use of it for the purpose for which it is supplied and to make backup copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty vis-à-vis computer software in the light of India UK Treaty has been discussed. The Tribunal in para 12.1 of the said order(supra) has observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of royalty' in the relevant India-UK Treaty, there was no specific mention of word computer software' along with other terms such as literary, artistic or scientific work, patent, trade mark' etc. The Tribunal observed that such a language of the India-UK DTAA was in sharp contrast to the specific use of the term computer software' or computer software programme' together with other terms such as literary, artistic or scientific work, patent, trade mark etc. in many other DTAAs such as IndiaMalaysia Treaty, wherein, the term computer software programme' has been separately mentioned along with the words copy right of a literary, artistic or scientific work .... plan, knowhow, computer softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the DTAA with the concerned country viz. Malaysia, Kazakhstan and Turkmenistan. We find that in the cases before us, in the DTAA of India with respective countries (names mentioned in the chart given above), the definition of royalty in none of the respective treaties specifically include any consideration for the use of or the right to use any 'computer software' and therefore, the same cannot be imported or read into it. 48. We may further clarify here that without expressing our opinion or any view in relation to the definition of royalty' vis-à-vis 'computer software' as provided under the Income Tax Act, we have given our findings only in respect of the scope of royality' under the DTAA. 49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD-ROM which can be said to be sale of good' by the owner. The consideration paid by the assessee thus as per the clauses of DTAA cannot be said to be royalty and the same will be outside the scope of the definition of royalty' as provided in DTAA and would be taxable as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the assessee on sale of computer software product is to be treated as income by way of "royalty" or business income. In case, if it is a 'business' income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India and if it is a "royalty", then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within 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, Assessee Company is engaged in the business of development and sale of computer software and also provides "other general services" in relation to the software. For both the activities, it has entered into a "distribution ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "royalty", it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting 'royalty' in Para 4 are for a consideration for the 'use of' or the 'right to use' any copyright.......... The key phrases "for the use" or "the right to use any copyright of"; "any patent.......; "or process", "or for information.........,"; "or scientific experience", etc., are important parameter for treating a transaction in the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-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 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 the purposes of this section, a copy which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty."
6. Accordingly, by following the decisions rendered by the co-ordinate benches of the Tribunal (referred supra), we hold the payments made for purchase of standardized software cannot be considered to be a royalty with the meaning of provisions of sec. 9(1)(vi) as well as India-USA DTAA. The orders passed by Ld CIT(A) holding the above view are upheld and other orders passed by Ld CIT(A) and that of the assessing officer are set aside.
7. In the result, the appeals filed by the revenue are dismissed and the appeals of the assessee are allowed.
Order has been pronounced in the Court on 8.3.2017. X X X X Extracts X X X X X X X X Extracts X X X X
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