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TMI Blog2020 (9) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Deputy Commissioner of Income-tax, Circle 3(1)(2), International Taxation, New Delhi (hereinafter referred to as 'AO') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, New Delhi (hereinafter referred to as 'DRP') dated 17 October 2016 under section 143(3) of the Income-tax Act, 1961 ('Act') read with section l44C(13) of the Act on the following grounds, which are independent of and without prejudice to each other. Ground 1 - Consideration from sale of software licenses of Rs. 2,37,63,86,143 taxed as royalty i. On the facts and in the circumstances of the case and in law, the learned AO and the Hon'ble DRP has erred in treating the consideration received from sale of software license taxable as 'Royalty' both under the provisions of the Act as well as Article 12 of the Double Taxation Avoidance Agreement ('DTAA') between India and Singapore. ii. The learned AO and the Hon'ble DRP failed to appreciate the Appellant's arguments and submissions explaining that the software licences sold by the Appellant are goods and not services. iii. The learned AO and the Hon'ble DRP erred in holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 (Del.). The DRP vide directions dated 17.10.2016 upheld the order of the Assessing Officer on the ground that the Department has filed SLP before the Hon'ble Apex Court against the decision of Hon'ble Delhi High Court in DIT vs Infrasoft Ltd. (supra) and the matter needs to be kept alive in view thereof. The Assessing Officer passed final assessment order against which the assessee is in appeal before us. 4. The Ld.AR for the assessee points out that the issue raised vide Ground of appeal No.1 is against the taxability of consideration received on sale of software. Further, he pointed out that the assessee was a non-resident in India and it is noted by the Assessing Officer that there is no Permanent Establishment (in short "PE") in India and hence, the receipts are not to be taxed as Royalty either under the provision of DTAA or under the provisions of the Act. Our attention is drawn to various parts of assessment order wherein major reliance was placed on the decision of Delhi Bench of Tribunal in Gracemac Corporation vs ADIT 42 SOT 550 (Del.). The Ld.AR for the assessee points out that the issue stands covered by the order of Hon'ble High Court in DIT vs Infrasoft Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the assessee. Further, the transaction merely involves supply of the products on a license basis and not the grant of rights (including any rights towards the copyright) in the software/computer programme embedded within the product. 10. Another plea raised by the assessee is that the payments received on supply of software to the end users or through the distributor do not fall within the definition of "Royalty" under Article 12 (3) between India and Singapore Tax Treaty, where such definition is narrower in ambit, as compared to the Act. On the other hand, the case of the authorities is that the sale of software is taxable as 'Royalty' in the hands of the assessee. For this proposition, reliance was placed on the ratio laid down by the Delhi Bench of the Tribunal in Gracemac Corporation vs ADIT (supra). 11. The question which arises is whether the receipts on sale of licensed software to the end user customers in India, which was an application software, can be covered under the term 'Royalty' income arising on sale of such software as provided in Section 9(1)(vi) of the Act and/ or under Article 12(3) of the India Singapore Treaty. 12. We have already adjudicated simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license agreement, license was non-exclusive, nontransferrable and the software had to be 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. 21. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant authorities. This clause places 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 ada ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted 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 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 ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogramme. (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 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft." 23. The Hon'ble High Court concluded by holding as under:- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh: (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty'. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright." 26. The Hon'ble High Court has thus, made distinction between the cases where consideration is pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any right contemplated under section 14 of the Copyright Act, 1957, stood vested in this cellular operator as a consequence of article 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 KK 229 CTR 125. 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 Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Income Tax Act and are more beneficial and the definition of 'Royalty' having not undergone any amendment in Tax Treaty, the assessee was not liable to be taxed on aforesaid receipts of Licensing software and also on sale of Hardware. Accordingly, we hold so. The Ground of appeal Nos. 3 to 6 are thus allowed." 13. We may also refer to the decision of the Pune Bench of the Tribunal in the case of sister concern of the assessee i.e. Symantac Corporation wherein also similar issue arose and the only difference was that assessee therein was based in USA as against the assessee, who is based in Singapore. It may be pointed out that the provisions of DTAA between India and Sweden; also between India and USA; & India and Singapore in Article 12(3) are similar. The Tribunal vide paras 5 onwards had considered the factual aspects of the case and had relied on the ratio laid down by the Hon'ble Delhi High Court in Infrasoft Ltd. (supra) and Pune Bench of the Tribunal in John Deere India Pvt. Ltd vs DDIT in ITA Nos. 905 & 906/PUN/2015 vide order dated 23.01.2019 and held as under:- 8. "The assessee is non-resident entity and is recipient of consideration on sale of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 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. 65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of MOTOROLA INC VS DEPUTY CIT (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under: 155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the Assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation. 158. Secondly, under the definition of "copyright" in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the Assessee is expressly stated in Clause 20.1 as a "non exclusive restricted license". This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the public domain is totally prohibited, which is evident from the use of the words in Article 20.1 of the agreement, "restricted" and "not otherwise". Thus JTM has a very limited right so far as the use of software is ITA No.387/PUN/2017 Symantec Corporation concerned. It needs no repetition to clarify that J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts which cannot be considered as infringement of copyright. The particular clause permits the making of copies or adaptation of a computer programme by the lawful possessor of the copy and the computer programme in order to utilize the public programme for the purpose for which it was supplied or to make backup copies purely as a temporary protection against loss, destruction or damage. Therefore, merely because the cellular operator has been permitted to take ITA No.387/PUN/2017 Symantec Corporation copies just for backup purposes, it cannot be said that it has acquired a copyright in the software. 160. Clause 20.4(c) makes it mandatory for the cellular operator, while making copies of the software for backup purposes, to also mark the copied software with copyright or other marking to show that the rights of the Assessee are reserved. This is one more indication that what the cellular operator acquired is not a copyright. 161. Clause 20.4(d) says that the cellular operator cannot use the software for any other purpose than what is permitted and shall not also license or sell or in any manner alienate or part with its possession. This has to be read with Clause 20.5 which sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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" (underline is ours). The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objection cannot be accepted. 164. It is not necessary, therefore, to consider the alternative argument of Mr. Dastur, namely, that even assuming that the Department is right in saying that if you have the copyrighted article, you also have the copyright right therein, still it would mean that the copyright rights are transferred (acquired by JTM) and it would not be a case of merely giving th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 types of transactions would be dealt with as commercial income in accordance with Article 7." 166. We may also usefully refer to the proposed amendments to the regulations of the Internal Revenue Service (IRS) in the USA. Again these regulations may not be binding on us but they have a persuasive value and throw light on the question before us, namely the difference between a copyright right an d a copyrighted article. These regulations have been placed at pages 136 to 157 of Paper book No. II. The actual regulations as well as the explanatory Note explaining the object and the purpose of the proposed regulations have also been given. In paragraph 1 of the Note titled "Background", it has been stated that the proposed regulations require that a transaction involving a computer programme may be treated as being one of the four possible categories. Two such categories are the transfer of copyright rights and the transfer of a copyrighted article. The U.S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 "Beneficial ownership of royalties in Bilateral Tax Treaties." He has opined that articles such as Books and Records are copyrighted articles and if they are sold, the user does not obtain the right to use any significant rights in the underlying copyright itself, which is what should determine the characterization of the revenue as sale proceeds rather than royalties. He has further opined that consideration relating to sale of software can amount to royalty only in limited circumstances. 172. For the above reasons, we are of the view that the payment by the cellular operator is not for any copyright in the software but is only for the software as such as a copy righted article. It follows that the payment cannot be considered as royalty within the meaning of Explanation 2 below Section 9(1) of the Income- tax Act or Article Article of the DTAA with Sweden. -------- 184. In view of the foregoing discussion, we hold that the software supplied was a copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 definition of 'royalty' under DTAA between India and USA. Accordingly, the assessee is not exigible to tax on the said consideration received in its hands. We reverse the orders of authorities below in this regard." 14. The issue raised in the present appeal is similar to the issue raised in the decision of Hon'ble High Court in Infrasoft Ltd. (supra) and sister concern of the assessee in Symantec Corporation (supra) and also in the case of the Nagravision S.A. (supra). The Hon'ble High Court of Delhi in DIT vs Nokia Networks OY [2013] 358 ITR 259 (Delhi) had held that Explanation 4 was added to section 9(1)(vi) of the Act by the Finance Act, 2012 with retrospective effect from 01.06.1976 to provide that all consideration for use of software shall be assessable as "Royalty". However, the definition in the DTAA has been left unchanged. It is an admitted fact that though Explanation 5 has been inserted in section 9(1)(vi) of the Act but no amendment has been made to the definition under the DTAA and since the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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