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TMI Blog2018 (4) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... rised Representative(AR)did not press first ground of appeal. Hence, same stands dismissed as not pressed. 2.1. It was brought over notice that the First Appellate Authority (FAA)did not adjudicate two Gs. OA, raised before him, that the assessee had agitated the issue of short grant of credit in respect of tax deducted at source of Rs. 2. 73 crores(GOA-6), that in ground number seven the assessee had raised the issue of addition of Rs. 5. 87 lakhs on account of unexplained credit card expenses as per the AIR report. We find that while filing the appeal before the FAA, the assessee had specifically raised both the above grounds, that he did not adjudicate those grounds. Therefore, we are restoring back both the issues(Gs. AO 3 and 4 raised before us)to the file of the FAA for fresh adjudication. He is directed to afford a reasonable opportunity hearing to the assessee. Third and fourth ground, raised by the assessee, for the year under consideration are decided in its favour, in part. 3. Second ground of appeal is about disallowance of provision of anticipated loss of Rs. 6. 49 crores. During the assessment proceedings, the AO found that assessee got a contract from IOC, in Panip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34, that clause 38 dealt with disclosure the amount of revenue recognised from the contract and the method used for such recognition, that it did not disclose the specific requirement of methods used to determine the stays of completion of contract, that it failed to meet many of the mandatory requirements as per the AS, that once a particular AS was followed then it had to be followed in full, that the assessee had complied some of the clauses, that it did not comply with some other requirements, that AS-7 did not talk about provisions of anticipated losses, that it allowed/recognised the loss in the year itself even though the contract was not completed in the relevant year, that the contract work was completed in the subsequent year without any problem, that the claim of provision for anticip -ated loss could not be allowed, that the cases relied upon by it were distinguishable on facts. Finally, he dismissed the appeal filed by the assessee. 3.2. Before us, the AR argued that the assessee was following AS-7 for its construction activities, that being a company it was mandatory for the assessee to follow the accounting standards. He referred to the provisions of section 211 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the tax liability of a corporate-assesseee. AS-7 recognises theory of anticipated loss and the assessee had made a claim about it. The FAA/AO have not doubted about genuineness of the expenditure. The FAA held that it should be allowed in next year and the expenditure claimed by the assessee in the immediate succeeding year should not be allowed. Thus, in his opinion, the issue was only year of allowability and not the genuineness of the expenditure itself. 3.3.1. We find that in the case of ITD Cementation India Ltd. (supra), the Tribunal, while referring to the earlier orders on the identical issue, has deliberated upon the question of allowability of anticipated loss. We are reproducing the relevant portion of the order and it reads as under: "14. We have considered the rival submissions and perused the orders of the lower authorities. We have also the benefit of going through the AS-7 issued by ICAI. At the very outset, it would not be out of place to consider the provisions of Sec. 145 of the Act. Sec. 145(2) of the Act provides that the Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er/third party has accepted it. In addition, if it is expected that the contract will make a loss, the estimated loss is provided for in the books of account. Contractual liquidated damages, payable for delays in completion of contract work or for other causes, are accounted for as costs when such delays and causes are attributable to the company or when deducted by the client. " 17. A similar issue has been considered by the Tribunal in the case of Mazagoan Dock (supra) wherein the Tribunal has held as under: "The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered into or it was to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in-progress was concerned, it could not be disputed that in view of mandatory requirements of the AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses were allowed irrespective of method of accounting in terms of AS-7. In the case of Dredging International (supra), the issue before the Tribunal was whether u/s. 37(1) of the Act provision for foreseeable loss made in accordance with guidelines of AS-7 and duly debited in audited accounts of company is an allowable expenditure. The Tribunal decided the case in favour of the assessee and held that 'yes' it is an allowable expenditure. The Tribunal while deciding this issue has also considered the decision of Mazagaon Dock (supra). 19. Considering the facts of the case in the light of the accounting standards and the decisions of the Tribunal (supra), and as no distinguishing cases have been brought on records by the revenue, reversing the findings of the Ld. CIT(A), we direct the AO to recompute the business profits by allowing the losses provided by the assessee in its books. The appeal filed by the assessee is allowed. 21. In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed. " In light of the above discussion, ground no. 2 is decided in favour of the assessee. 4. Next effective ground of appeal is abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the copyright had been transferred, the same would give rise to royalty. But where right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material, the same would not give rise to any royalty income and would be business income. 28. We have examined the rival contentions of the parties and are of the view that there is no infirmity in the impugned order and 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. 69. The Tribunal has held and rightly so that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined ta king into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred. 70. The appeal filed by the Revenue against the Judgment of the Special Bench of the ITAT was dismissed by the High Court of Delhi in the case of DIT V. Nokia Networks OY (2012) 253 CTR (Del) 417: (2012) 78 DTR (Del) 41. The bench approved of the findings of the Special Bench of the Tribunal in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Act, 1957, stood vested in this cellular operator as a consequence of art. 20 of the supply contract. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". 60. Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems K. K., In re 229 CTR (AAR) 105: (2010) 34 DTR (AAR) 218. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Expln. 2 below s. 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in art. 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. art. 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the owner of copyright over a literary work grants an exclusive licence to make out copies and distribute them within a specified territory, the grantee will practically step into the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. As the right attached to copyright is conveyed to such licencee, he has the authority to commercially deal with it. In case of infringement of copyright, he can maintain a suit to prevent it. Different considerations will arise if the grant is non-exclusive that too confined to the user purely for in-house or internal purpose. 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 protanto. That is what, in our view, follows from the language employed in the definition of "royalty" read with the provisions of the Copyright Act, viz., s. 14 and other complementary provisions. We may refer to one more aspect here. In the definition of royalty under the Act, the phrase "includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in art. 12 of DTAA. Where the purpose of the licence or the 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 without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty 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. 94. The incorporeal right to the software i. e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cass ette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld like to refer to the order of the Tribunal in the matter of Channel Guide India Ltd. (supra)and it reads as under: "25. In our opinion, the issue involved in the present case however, is relating to disallowance made u/s. 40(a)(i) for non-deduction of tax-at-source from the payment made by the assessee to SSA and as held by Ahmedabad Bench of this Tribunal in the case of Sterling Abrasives Ltd. v. ITO [I. T. Appeals 2243 & 2244 (Ahd. ) of 2008] by its order dated 23. 12. 2010 cited by the Ld. Counsel for the assessee, the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In the said case, Explanation to sec. 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1. 6. 1976 and it was held by the Tribunal that it was impossible for the assessee to deduct tax in the financial year 2003-04 when as per the relevant legal position prevalent in the financial year 2003-04, the obligation to deduct tax was not on the assessee. The Tribunal based its decision on a legal Maxim lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do someth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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