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TMI Blog2019 (4) TMI 1851X X X X Extracts X X X X X X X X Extracts X X X X ..... explaining that the software licences sold by the Appellant are goods and not services. iii. The learned AO and Hon'ble DRP erred in holding that the Appellant grants right in the copyright of the software licenses instead of treating the grant of software licenses as copyrighted article without any rights in the copyright. iv. The learned AO and Hon'ble DRP erred in holding that the term 'use' or 'right to use' does not presuppose commercial exploitation of software Ground 2 - Initiation of penalty proceedings under section 271(1)(c) of the Act On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. The learned Authorized Representative for the assessee at the outset pointed out that the only issue arising in the present appeal is the income from sale of software license, wherein the assessee was non-resident entity and had received consideration for sale of software products which were taxed as 'royalty' both under the provisions of the Act as well as under Article 12 of DTAA between India and USA. The learned Authorized Representative for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t entity which is a company incorporated under the laws of USA. The assessee in India was engaged in sale of software license relating to information securities and storage technology as well as provision of support and maintenance services with respect to the said software. During the year under consideration, the assessee had earned revenue from sale of software license in India including certification and software by authentication business. The case of assessee was taken up for scrutiny and he was asked to furnish the details of its activities in India. The assessee was also asked to submit details as to why receipts from sale of software license in India should not be taxed as royalty. The assessee in response furnished the reply that it was selling software licenses to the end user customers in India either directly or indirectly through authorized distributors, resellers, etc. It was further pointed out that no customization of Symantec software was done at the customers end except for integration of software with existing system. It was also explained that every end user of software had to accept and abide by the end user license agreement, as per which it was specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ims to have sold standard software to its customers, wherein end users were not allowed to modify, copy, sub-license, rent, lease or transfer any portion of said software. The said article sold by the assessee was a copyrighted article and the assessee claimed that it had not transferred copyright of the literary, artistic or scientific work to the end user. 9. The Hon'ble High Court of Delhi in the case of Infrasoft Ltd. (supra) 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. 10. Further, Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. DDIT (supra) 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 from para 45 onwards and had observed as under:- "65. The Hon‟ble High Court of Delhi in DIT Vs. Infrasoft Ltd. (supra) have noted that under the license agreement, license was non-exclusive, non- transferrable and the software had to be used in accordance with agreement; the licensee was permitted to make only one copy of software and associated su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject 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: --------- It is clear from the above definition that a computer programme mentioned in Clause (b) of the section has all the rights mentioned in Clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15.1.2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in Sub -clause (ii) of Clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in Clauses (a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement is not a copyright but is only a copyrighted article. 159. Clause 20.4 of the supply contract with JTM is as under: 20.4 In pursuance of the foregoing JT MOBI LES shall: (a) not provide or make the Software or Documentation or any portions or aspects thereof (including any methods or concepts utilized or expressed therein) available to any person except to its employees on a "need to know" basis; (b) not make any copies of Software or Documentation or parts thereof, except for archival backup purposes; (c) when making permitted copies as aforesaid transfer to the copy/copies any copyright or other marking on the Software or Documentation. (d) Not use the Software or Documentation for any other purpose than permitted in this Article 20, Licence or sell or in any manner alienate or part with its possession. (e) Not use or transfer the Software and/or the Documentation outside India without the written consent of the Contractor and after having received necessary export or re -export permits from relevant authorities. This clause places stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware) runs counter to Section 14(b)(ii) of the Copyright Act which permits a copyright holder to sell or let out on commercial rental the computer programme. For this reason also it cannot be said that JTM or any cellular operator acquired a copyright in the software. 162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what he has acquired cannot be considered as a copyright. In that case, it can only be said that he has acquired a copyrighted article. A small example may clarify the position. The purchaser of a book on income-tax acquires only a copyrighted article. On the other hand, a recording company which has recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause his clause ropes in "transfer of all or any rights" and is not restricted to "use" or "right to use", the copyright. However, he added that since the basic proposition of the Department has been demonstrated to be wrong, Clause (v) of Explanation 2 below Section 9(1) is not an impediment to accepting the assessee's contention. 165. We may also usefully refer to the Commentary on the OECD Model Convention (dated 28.1.2003) which is of persuasive value and which throws considerable light on the character of the transaction and the treatment to be given to the payments for tax purposes. Paragraph 14 of the Commentary, a copy of which was filed in Paper book No. V is relevant: COMMENTARY ON ARTICLE 12 - PAPER BOOK V " 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. They allow the user to copy the progra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Transfer of a copyrighted article. Paragraph 3 of the Explanatory Note says that if a transfer of a computer programme results in the transferee acquiring any one or more of the listed rights, it is a transfer of a copyright right. 167. Paragraph 4 says that if a person acquires a copy of a computer programme but does not acquire any of the four listed copyright rights, he gets only a copyrighted article but no copyright. 168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are: (a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending. (ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme (iii) The right to make a public performance of the computer programme. (iv) The right to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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." 11. The Tribunal in final analysis held as under:- "90. In conclusion, we hold that purchase of software by the assessee being copyrighted article is not covered by the term "royalty‟ under section 9(1)(vi) of the Act. Where the assessee did not acquire any copyright in the software, is not covered under Explanation 2 to section 9(1)(vi) of the Act. We further hold that amended definition of "royalty‟ under the domestic law cannot be extended to the definition of "royalty‟ under DTAA, where the term "royalty‟ originally defined has not been amended. As per definition of "royalty‟ under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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