TMI Blog2018 (4) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty, that it had not deducted tax at source for such payment - Held that:- We find that the assessee had purchased copyrighted software. In our opinion, payments made on account of copyrighted software is not payment of royalty. Therefore same is not chargeable to tax in India. We would like to refer to the case of Infrasoft Ltd. (2013 (11) TMI 1382 - DELHI HIGH COURT) as held the right to make a backup copy purely as a temporary protection against loss, destruction or damage does not amount to acquiring a copyright in the software - What has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income - The consideration received on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America – Decided against Revenue. - I.T.A./6219/Mum/2014 And I.T.A./6916/Mum/2014 - - - Dated:- 4-4-2018 - Sh. Rajendra,Accountant Member And Ravish Sood, Judicial Member For The Revenue : Shri M.V. Rajguru Sr.DR For The Assessee : Shri M.P. Lohia and Nikhil Tiwari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 668/-, that it had referred to the provisions of Accounting Standard(AS)7, the AO held that assessee was following the Mercantile system of accounting as per section 145 of the Act, that the anticipated losses had not accrued to it, that as per the matching principles income accrued during the previous year only could be taxed, that future losses could not be set off with the present income, that losses accrued during the year only were allowable and not the future losses. He further observed that the cases relied upon by the assessee, namely, Woodward Governer(312 ITR 354) and Triveni Engineering Industries Ltd. were of no help to decide the issue, that the facts of the case under consideration were different from the facts of the above referred two cases, that in the case under consideration contract was yet to be executed, that the losses were uncertain. He disallowed the claim made by the assessee. 3.1. Aggrieved by the order of the year, the assessee preferred an appeal before the FAA and made elaborate submissions. It also relied upon certain case laws. After considering the order of the AO and the submissions of the assessee, he held that the annual report of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount in the succeeding year. He relied upon the cases of Woodward Governor (312 ITR 254), Jacobs Engineering India Private Ltd. (14 taxmann. com 186), Dredging International NV (48 SOT 430) and ITD Cementation India Ltd. (146 ITD 59). The Departmental Representative(DR)supported the order of the FAA. 3.3 . We have heard the rival submissions and perused the material before us. We find that vide its letter is dated 11/10/2012, 01/11/201 and 29/01/2013, the assessee had made detailed submissions about applicability of AS-7, that it had argued that the main reason for the anticipated loss was a highly budgeted cost in excess of the budgeted revenue on the project, that it had submitted budgeted revenue, budgeted expenses, revenue recognised till the end of the year along with the total expenses recognised till 31/03/2009, that the AO and the F AA rejected the claim made by it and held that under the percentage of completion of contract method revenue and expenses could be provided to the extent of percentage of project compl -eted, that the also held that future profit for balance contract/Project could not be charged to tax, that future losses also could not be sort of for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fact that AS-7 has not been notified by the Central Government. This does not mean that the assessee is precluded from following AS-7. A perusal of the provisions of Sec. 145 show that Accounting Standards which have been notified by the Central Government have to be mandatorily followed by the assessee. But this does not mean that the assessee cannot follow the other Accounting standards issued by ICAI. ICAI being the highest accounting body of the country, created by an Act of Parliament, Accounting Standards issued by it cannot be brushed aside lightly. On the contrary, if an assessee is following the Accounting Standards issued by ICAI, it would give more credibility and authenticity to its account. AS 7, inter alia, provides : When the outcome of a construction contract cannot be estimated reliably ( a) Revenue should be recognized only to the extent of contract costs incurred of which recovery is probable and ( b) Contract costs should be recognized as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35. 15. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omptroller Auditor General of India. Therefore, the observation of the Commissioner (Appeals) that the assessee had booked bogus loss was not correct. As far as the basis of estimation was concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable. It was not disputed that the department in earlier years had allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it was not disputed that the estimated loss under the present circumstances was an allowable deduction. However, merely because the change in method of accounting was bona fide, it could not lead to the inference that the income was also deducible property under the Act. This aspect is very evident from the first proviso to section 145 as it stood prior to the amendment by the Finance Act, 1995 with effect from 1/4/1997. It could not be disputed that from the method adopted by the assessee, the assessee's income could not be deducted property in the year in which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al is about disallowance made about expenditure incurred for purchasing software. The AO and the FAA held that payment made by the assessee for purchasing software was royalty, that it had not deducted tax at source for such payment. Invoking the provisions of section 40(a)(ia)the AO disallowed the expenses and the FAA confirmed his order. 4.1. Before us, the AR contended that the assessee had acquired the software for its own use, that it was shrink shaft software, that payment made by it was not amount of royalty, that the amendments introduced in the year 2012 were not applicable to the assessee, that no action was to be taken in case of the payee if the other party had paid the taxes. He relied upon the cases of Haliburton export Inc. (152 ITD 803), Reliance Industries Ltd. (47 CCH 94), B 4U International Holdings Ltd. (32 CCH 151 and 374 ITR 453) and Red Hat India Private Ltd (ITA. s/1805-1806/Mumbai/2014, dated 24/03/2017) 4.2. We have heard the rival submissions. We find that the assessee had purchased copyrighted software. In our opinion, payments made on account of copyrighted software is not payment of royalty. Therefore same is not chargeable to tax in India. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial Bench of the Tribunal in the Motorola case supra that Copyright is distinct from the material object, copyrighted. It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) 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 that one has also the copyright in it. 71. In the case of DIT v. Ericsson A. B. (2012) 66 DTR (Del) 1: (2012) 246 CTR (Del) 422: (2012) 343 ITR 470(Del), one issue that the Delhi High Court was considering was whether the consideration for supply of software was payment by way of royalty and hence assessable both under s. 9(1)(vi) and the Double Taxation Avoidance Agreement between the government of India and Sweden? The High Court relying on the Judgment of the Supreme Court of India in Tata Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty. 72. The Delhi High Court further in Ericsson Case (supra) further held that once it is held that payment in question is not royalty which would come within the mischief of clause (vi), the Explanation will have no application and that the question of applicability of the Explanation would arise only when payment is to be treated as royalty within the meaning of clause (vi) or fee for technical services as provided in clause (vii) of the Act. 73. In the case of Dassault Systems K. K., In re (2010) 229 CTR (AAR) 105: (2010) 34 DTR (AAR) 218: (2010) 322 ITR 125 (AAR) the Authority on Advance Ruling has held as under: Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of royalty under the Act, the phrase including the granting of a licence is found. That does not mean that even a non exclusive licence permitting user for inhouse purpose would be covered by that expression. Any and every licence is not what is contemplated. It should take colour from the preceding expression transfer of rights in respect of copyright . Apparently, grant of licence has been referred to in the definition to dispel the possible controversy a licence whatever be its nature, can be characterized as transfer. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting 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 para because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 s. 9(1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright 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 (sic-Karnataka) High Court in the case of Samsung Electronics Co. Ltd (supra) that right to make a copy of the software and storing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform and relied on the decision of Hon'ble Supreme Court in the case of Krishnaswamy S. Pd v. Union of India [2006] 281 ITR 305 / 151 Taxman 286 wherein the said legal Maxim was accepted by the Hon'ble apex court. 26. In view of the above discussion, we are of the view that the amount in question paid by the assessee to SSA was not taxable in India in the hands of SSA either u/s. 9(1)(vi) or 9(1)(vii) as per the legal position prevalent at the relevant time and the assessee therefore was not liable to deduct tax at source from the said amount paid to M/s. SSA and there was no question of disallowing the said amount by invoking the provisions of sec. 40(a)(i). In that view of the matter, we delete the disallowance made by the AO u/s. 40(a)(i) and confirmed by Ld. CIT (A) and allow ground no. 1 of the assessee's appeal. Considering the above, we decide ground no in favour of the assessee. ITA/6916/Mum/2014, AY. 2010-11 : The solitary ground of appeal is about anticipated loss of ₹ 2. 89 crores. Following our ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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