TMI Blog2019 (4) TMI 1851X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The Hon'ble High Court of Delhi in the case of Infrasoft Ltd. [ 2013 (11) TMI 1382 - DELHI HIGH COURT] had held that sale of standard software is not covered under the realm of 'royalty' as defined under the Income Tax Act or as per DTAA. Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. DDIT [ 2019 (3) TMI 458 - ITAT PUNE] while deciding the issue of tax deduction at source under section 201(1) of the Act on payment made for purchase of software has elaborated on the settled legal propositions In the hands of recipient had held that where the purchase of software was copyrighted article, then the same was not covered by the term 'royalty' under section 9(1)(vi) of the Act and it was further held that the amended definition of 'royalty' under the domestic law could not be extended to the definition of 'royalty' under DTAA, where the term originally defined had not been amended. Applying the said ratio to the facts of the present case, we hold that in the hands of assessee, the consideration received on sale of software is not 'royalty' under Explanation 2 to section 9(1)(vi) of the Act and is also not covered by the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as under Article 12 of DTAA between India and USA. The learned Authorized Representative for the assessee pointed out that the assessee had sold standard software and not customised software and hence consideration received could not be held as 'royalty' under the provisions of the Act or under the DTAA. In this regard, he pointed out that the Hon'ble High Court of Delhi in the case of Infrasoft Ltd. reported in 264 CTR 329 (Del) had adjudicated the issue in relation to purchase of standard software. He then, stressed that the issue raised in the present appeal is squarely covered by the order of Tribunal in the case of John Deere India Pvt. Ltd. Vs. DDIT (IT) in ITA Nos.905 to 908/PUN/2015, relating to assessment years 2007-08 2008-09, order dated 23.01.2019 and he placed special reliance on paras 45, 65, 68 and 90 of the said order. After referring to the factual aspects of the said case and arguments made by the learned Authorized Representative for the assessee and the learned Departmental Representative for the Revenue, he then invited our attention to the draft assessment order at para 2, wherein the revenue receipts of assessee are mentioned. He then, poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software had to accept and abide by the end user license agreement, as per which it was specifically prohibited to modify, copy, sub-license, rent, lease or transfer any portion of software; reverse engineer, decompile, disassemble, modify, translate, make any attempt to discover the source code of the software and create derivative work of the licensed software except permitted by the applicable laws. The assessee thus, stressed that receipts from sale of software license was not taxable as 'royalty'. The Assessing Officer was of the view that the argument of assessee was primarily based on the software sold by it did not fall within definition of 'copyright' on the following reasons given by assessee:- a. There is neither transfer of copyright right or right to use the copyright but only the right to use the copyrighted article (software) b. Copies made by end user for the purpose of utilizing the software internally (including backup copies) does not tantamount to use of copyright in the software. 6. However, the Assessing Officer did not accept the said reasoning of the assessee in turn, relying on the ratio laid down by Delhi Bench of Tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in accordance with agreement; the licensee was permitted to make only one copy of software and associated support information and that also for backup purpose. All copies of software were the exclusive property of Infrasoft‟ and it was stipulated that copy shall include Infrasoft‟ copyright and all copies of software also; and without consent of the licensor, the software could not be loaned, rented, sold, sub-licensed or transferred to any third party. The Hon‟ble High Court further went on to hold that distinction had to be made between acquisition of copyright and copyrighted article; copyrighting was distinct from material object. 66. The Hon‟ble High Court in DIT Vs. Infrasoft Ltd. (supra) vide its decision dated 22.11.2013 was of the view that where the assessee was governed by Indo-US DTAA, the income of assessee would be chargeable to tax in terms of provisions of Indo-US DTAA and if the same was more advantageous or beneficial, then definition of the word royalty‟ as defined in Explanation 2 to section 9(1)(vi) of the Act could not be applied. The Hon‟ble High Court vide paras 64 and 65 held as under:- 64. To be taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the Assessee. 157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title License , says that JTM is granted a non - exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aces stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellular operator cannot make the software or portions thereof available to any person except to its employees and even with regard to employees it has to be only on a need to know basis which means that even the employees are not to be told in all its aspects. What the Assessee can do is only to tell the particular employee what he has to know about the software for operational purposes. The cellular operator has been denied the right to make copies of the software or parts thereof except for archival backup purposes. This means that the cellular operator cannot make copies of the software for commercial purposes. This condition is plainly contrary to Section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. We may also notice Section 52(1)(aa) of the Copyright Act which lists out certain acts which cannot be considered as infringement of copyright. The particular clause permits the making of copies or adaptation of a computer programme by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein. 163. We may now briefly deal with the objections of Mr. G.C. Sharma, the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar's Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point: (h) 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. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these type ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a computer or in any other medium. 170. So far as the transfer of copyrighted articles and copyright rights are concerned, the regulation goes on to say (page 148 of the paper book) that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred. Several examples have been given below these regulations to find out whether a particular transfer is a transfer of a copyright right or a transfer of a copyrighted article. 171. The Commentary of Charl P. du TOIT on this question has been placed at pages 202 to 204 of Paper book No. II. The Commentary is titled Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot fall in realm of royalty‟. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of royalty‟ having not undergone any amendment in DTAA, the assessee was not liable to deduct tax for payments made for purchase of software. In such scenario, the assessee cannot be held to be in default and the demand created under section 201(1) and interest charged under section 201(1A) of the Act is thus, cancelled. 12. The Tribunal thus, in the hands of recipient had held that where the purchase of software was copyrighted article, then the same was not covered by the term 'royalty' under section 9(1)(vi) of the Act and it was further held that the amended definition of 'royalty' under the domestic law could not be extended to the definition of 'royalty' under DTAA, where the term originally defined had not been amended. Applying the said ratio to the facts of the present case, we hold that in the hands of assessee, the consideration received on sale of software is not 'royalty' under Explanation 2 to section 9(1)(vi) of the Act and is also not covered by the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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