TMI Blog2018 (5) TMI 1807X X X X Extracts X X X X X X X X Extracts X X X X ..... ration of the assignment and the territorial extent of the assignment. In none of the agreements, it can be seen that there is any kind of assignment of copyright. In view of the OECD commentary also such a consideration received on the sale of copyrighted software product without any kind of transfer or assigning of fully or partially copyright therein to the end user does not amount to royalty. Such guideline of OECD can well be taken note of, since the treaty which is subject matter of consideration is India-Ireland treaty, which is based on OECD Model Convention, therefore, the interpretation of the term ‘royalty’ as given in the OECD Model Convention have some pervasive value. In any case, we have already held that in terms of Section 14 of the Copyright Act, none of the rights enshrined therein have been parted with the assessee in favour of the assessee or the end customer inasmuch as they can enjoy the right in the same manner in which the assessee can; and no such specific right concerning the use of copyright have been conferred by the assessee to these persons or end user. Assessee has not been given any of the authority to do any of the act as contemplated in various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be Systems Software Ireland Ltd. (hereinafter referred to assessee ) is a company incorporated under the laws of Ireland and is engaged into the licensing and distribution of computer software (Adobe products) outside of North America including India. Since, it is a tax resident of Ireland, therefore, assessee has claimed beneficial treaty provision of India-Ireland DTAA. The assessee had entered into non exclusive distribution agreements with Indian companies, namely, Ingram Micro India Private Limited; and Redington (India) Limited, wherein they have been appointed as distributor to distribute Adobe products in India. These products are delivered by the assessee to the Indian Distributors ex-warehouse from the warehousing facility of the assessee outside India. For the Assessment Year 2008-09, the assessee has filed its return of income on 31st March, 2010 declaring Nil income from the consideration paid by the Indian distributors to the assessee towards the purchase of Adobe products on the ground that the same is not taxable in India either as business income in absence of PE or as a royalty under Article 12 of the Treaty. The arrangement and conduct between the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyright in a literary, artistic or scientific work alone are covered within the definition of royalty . Here the payment made is for acquiring the right to use the product itself without allowing any right to use the copyright in the product and the same is not covered within the scope and definition of royalty . Strong reliance was placed on the definition of copyright as given in Section 14 of Indian Copyright Act, 1957 and also placed reliance on Article 12 of OECD Model Tax Convention. Apart from that, various decisions were also relied upon which have been incorporated in the impugned assessment order. It was further submitted that the receipts from supply of software by the assessee does not qualify royalty because; The software distribution agreement entered into by Adobe Ireland does not grant the distributor/ end user any right in the copyright (which remains with Adobe Ireland), but merely a copy of the computer program i e. a copyrighted article/ a shrink wrap product. This is evident from the following clause of the attached agreement between Adobe Ireland and Ingram: Software Products means copies of the Software and the User Documentation supplied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept as provided herein, Distributor is not granted any rights to any Intellectual Property or any rights, franchises or licenses with respect to the Software, the User Documentation, the Software Products or the Trade Marks. The Indian distributor acts only as a channel/ intermediary between the owner/ exclusive right holder, to circulate copies to public which are not in circulation (i.e., not sold to public earlier) and the Indian distributor by itself does not have the 'right to issue copies'. In view of the above, it is evident that the software distribution agreement entered into by Adobe Ireland does not grant the Indian distributors/ customers in India with any right in the copyright (which remains with Adobe Ireland), but merely a copy of the computer program i.e. a copyrighted article/ a shrink wrapped product. Accordingly, no portion of the payment for sale of software by Adobe Ireland to Indian distributors can be construed to be in the nature of royalty and subject to tax in India. 5. The learned Assessing Officer rejected the assessee s contention on following grounds:- * Firstly, software is a license and is not sold and there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) The Software owned by the assessee is patented software. Consideration for allowing the use of the patented article falls within the definition or royalty payment Even if it is considered that the software owned has not been patent, there is no denial of the fact that it is essentially an invention. The development of such software requires highly technical manpower, with highly sophisticated infrastructure and huge investments. Similarly the software can also be considered as a scientific work. Therefore, the software can also be said to be information developed out of scientific experience. (iii) The payment is also qualified for the use of secret formula or process. The software of Adobe when installed in a computer responds to every instruction in a specific way. It recognizes the command and as per its programming yields the desired result and reflects the same on the output devices. This argument is further strengthen from the fact that cost of the medium viz., computer discs, floppy etc.., on which the programme is written is negligible as compared to the overall price of software. Had it not been a secret programming, anybody could have written these types ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rather than distribution, and shall exclude distributor, dealers, resellers, VARs, OEMs, third party vendors, systems integrators, commission agents, or other parties who have licensed the product for distribution. (ii) End User License Agreement' or EULA means Adobe's current Software Product End User License agreement(s) for the relevant Software Product that is included with each Software Product generally in electronic form as part of a product installer. (iii) Intellectual Property means all intellectual property rights, similar and/or neighboring rights and sui generis rights inter alia, database protection, of whatever nature anywhere in the world and all rights pertaining thereto including but not limited to all present and future title to and/or interests therein, whether recorded or registered in any manner or otherwise, including without prejudice to the foregoing generality, trade-marks and service marks and applications there for, patents and patent applications, copyright, designs, design rights both registered and unregistered, design right applications, trade secrets, know-how, information, data source codes and object codes, technology, sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice to the foregoing, Adobe reserves the right to: deal directly in the Software Products in the Territory, including the right to license End Users directly, via Internet distribution or otherwise; license other distributors for the Software Products in Ihe Territory; provide technical support in the Territory, and to enter into arrangements or agreements with third parties inducing but not limited to End Users, Dealers, OEMs, systems integrators or VARs in connection with the Software Products in the Territory. Eligibility and Distribution Rights: Without prejudice to the provisions of Clause 2 2 (Nature of Appointment), Adobe grants Distributor a non-exclusive, non-transferable license to distribute the Software Products in the Territory, and Distributor acknowledges that each Software Product, including each TLP Product, is to be licensed to End Users in accordance with the terms and conditions of its current EULA The terms of the EULA are not negotiable and shall not be amended or modified for any End User Distributor shall distribute the software Products solely in the form and packaging in which they were obtained from Adobe. Distributor shall not alter the design or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of end user as given in the said agreement, the DRP held that license fees includes the fee for license to supply the software products in the Territory which comprises the larger part of license fee. The DRP has further noted the following facts before holding that both registered under the domestic law as well as the treaty. The said amount is to be taxed as royalty:- (i) The Software is licensed not sold. (ii) The license is for use of the software. (iii) The End User pays both for the software as also the Disk in which the software is enshrined. Larger part of the license fee is for the software. (iv) The End User; can use the software only if it binds itself to the terms and conditions prescribed as per the End User Licensing Agreement (EULA). (v) On acceptance of EULA, the End User can use the software but he can use the software only after he is granted Activation Code . Unless Activation Code is given, the computer programme cannot be used. (vi) As a result of entire exercise, End User can make use of the software which is protected by the Intellectual Property Rights. 10. Before us learned counsel for the assessee, Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts or using them for any purpose other than that set out in the agreement. There is no separate consideration payable by the Indian distributors for any right granted to distribute the software products in India. The payment at the most can be reckoned for acquiring the right to use the product itself without allowing any right in the copyright product. After referring to the Section 14 of the Copyright Act and various exceptions carved out in Section 56 of the said Act, he submitted that none of the activities as enshrined in various clauses of Section 14 would apply. Thereafter, he referred to paragraphs 12 to 14 of OECD Model Tax Convention of 2010 and also UN Model commentary of Article 12, especially as given in paragraph 3 clause (12) and (13) and submitted that even under these commentaries; the nature of payment received by the assessee would not be treated as royalty . The relevant extracts of the said commentaries were also filed before us. Thus, he submitted that now in the wake of plethora of judgment including that of the Hon'ble Jurisdictional High Court, the said payment cannot be treated as royalty, and therefore, same cannot be brought to tax in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erated hereunder:- End User means a licensee of Software Products who acquires such products for use rather than distribution, and shall exclude distributors, Dealers, resellers, VARs, OEMs, third party vendors, systems integrators, commission agents, or other parties who have licensed tire product for distribution. End User License Agreement or HULA means Adobe s current Software Product End User license agreement for the relevant Software Product that is included with each Software Product generally in electronic form as part of a product installer. ............. Intellectual Property means all intellectual property rights, similar and/or neighboring rights and sui generis rights inter alia, database protection, of whatever nature anywhere in the world and all rights pertaining thereto including but not limited to all present and future title to and/or interests therein, whether recorded or registered in any manner or otherwise, including without prejudice to the foregoing generality, trademarks and service marks and applications therefore, patents and patent applications, copyright, designs, design rights both registered and unregistered, desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to license End Users directly, via Internet distribution or otherwise; License other distributors for the Software Products in the Territory; provide technical support in the Territory, and to enter into arrangements or agreements with third parties including but not limited to End Users, Dealers, OEMs, systems integrators or VARs in connection with the Software Products in the Territory. 2.3 List of Software Products , future Adobe Software Products may be added to the License Fee List and Adobe shall use reasonable efforts to notify' Distributor within thirty (30) days of any such addition. Adobe reserves the right to discontinue the distribution or availability of any Software Product upon thirty (30) days prior notice to Distributor. If Adobe discontinues a Software Product so that it becomes an End of Life Software Product, Adobe shall provide Distributor with thirty (30) days prior notice. Returns of such End of lifc Software Products shall be governed by Clause 5.9 (New Versions). Notices by Adobe under this Clause 2.3 (List of Software Products) maybe made by Adobe s on-line sales portal at http://partners.adobe.com or similar partner communication web sites ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercially reasonable efforts should know, will distribute Software Products outside the Territory. Any distribution by Distributor of Software Products outside the Territory shall be a material breach of this Agreement for which Adobe may terminate this Agreement under Clause 16.3 (Termination for Cause). Distributor is obligated to advise Dealers and other customers of this restriction, if Adobe makes Education Versions of the Software Products available to Distributor, such products are to be distributed to Educational Establishments only. Distributor shall not supply Education Versions of the Software Products to customers who are not Educational Establishments, or to customers who will distribute such products to customers who are not Educational Establishments. Distributor is obligated to advise Dealers and other customers of this restriction. 3.2 Restrictions on Copying and Decompiling. DISTRIBUTOR AGREES NOT TO TRANSLATE THE SOFTWARE INTO ANOTHER COMPUTER LANGUAGE, IN WHOLE OR IN PART. Distributor shall not make copies or make media translations of the Software Products including, without limitation, the User Documentation, in whole or in part without Adobe s p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or contents of the said product. Further, the distributor is prohibited from translating the software in any other computer language in whole or in part. Thus, it is a clear cut sale of shrink-wrap software product from the assessee company to the Indian distributors and then to the end users. Now under this agreement, whether the payment received from sale of such a copyrighted software product can be reckoned as royalty under the India-Ireland DTAA? The relevant paragraph 3(a) of Article 12 of the said treaty reads as under:- 3(a) 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 or films or tapes for radio or television 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, other than an aircraft, or for information concerning industrial, commercial or scientific experience. 16. The main emphasis is on payment for the use of or right to use any copyright of various nature, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the licensee/customer is what has been contemplated in the phrase, use and right to use the copyright in the treaty. 17. Since copyright has not been specifically defined under the treaty, therefore, the courts have held that the definition as enshrined in Indian Copyright Act, 1957 has to be seen. The relevant section of the copyright Act reads as under: 14. Meaning of copyright - For the purpose of this Act, copyright means the exclusive right to the provisions of this Act, to do or authorize 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 my 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 that had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or 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 prejudicially the owner of the copyright, or (iii) by way of trade exhibits in public, or (iv) imports into India, any infringing copies of the work: Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer. Explanation - For the purposes of this Section, the reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an infringing copy ... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht (1) The owner of the copyright in an existing work or the prospective / owner of the copyright in a future work may assign to any person the copyright either wholly or partially and either generally or subject to limitations and either for the whole of the copyright or any part thereof: Provided that in the case of the assignment of copyright in any future work, the assignment shall take effect only when the work comes into existence. (2) Where the assignee of a copyright becomes entitled to any right comprised in the copyright, the assignee as respects the rights so assigned and the assignor as respects the rights not assigned, shall be treated for the purposes of this Act as the owner of copyright and the provisions of this Act shall have effect accordingly. (3) In this section, the expression assignee as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence. 19. Mode of assignment: (1) No assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorised agent. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puter software transactions. In most cases, the revised analysis will not result in a different outcome. 12.1 Software may he described as a program, or series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape or disk, or on a laser disk or CD-Rom. It may be standardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent from available for use on a variety of hardware. 12.2 The character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protects rights in computer programs ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be regarded as a royalty there may be difficulties in applying the copyright provisions of the Article to software payments since paragraph 2 requires that software be classified as a literary, artistic or scientific work. None of these categories seems entirely apt. The copyright laws of many countries deal with this problem by specifically classifying software as a literary or scientific work. For other countries treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of the copyrights or refers specifically to software. 14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer of computer software is the more unusual case where a software house or computer programmer agrees to supply information about the ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques. In these cases, the payments may be characterised as royalties to the extent that they represent consideration for the use of or the right to use, secret formulas or far information concerning industrial, commercial or scientific experience which cannot be separately copyrighted. This contrasts with the ordinary case in which a program copy is acquired for operation by the end user. 15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving: * exclusive right of use during a specific period or in a limited geographical area; * additional consideration related to usage; * consideration in the form of a substantial lump sum payment. 16. Each case will depend on its particular facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Article 12(3). The Hon'ble High Court has also held that amendment in the domestic law even from retrospective effect cannot be rad into the treaty. The relevant observation and ratio laid down in sum and substance is summarised hereunder:- To be taxable as royalty income covered by article 12 of the DTAA the income of the assessee should have been generated by the use of or the right to use of any copyright. The Licensing Agreement shows that the license is nonexclusive, non-transferable and the software has to be used in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensees own business as defined within the Infrasoft Licence Schedule. Without the consent of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with article 7 of DTAA. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer 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 Article 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 att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r transfer the copy of software to any third party without the consent of Infrasoft. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee Company and its customers stipulates that all copyrights and intellectual property 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 licensee shall return the software including supporting information and licence authorization device to Infrasoft. 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 cassette 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be examined keeping in view these findings. Moreover, another finding of fact is recorded by the Tribunal that the Cellular Operator did not acquire any of the copyrights referred to in Section 14 (b) of the Copyright Act, 1957. 55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income- Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livered, stored, possessed etc. The software programmes have all these attributes. In Advent Systems Ltd. v. Unisys Corpn., (925 F. 2d 670 (3rd Cir. 1991)), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which applied to transactions in goods , The goods therein were defined as all things (including specially manufactured goods) which are moveable at the time of the identification for sale , It was held: Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a good, but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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