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TMI Blog2021 (7) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... irmed by the CIT(Appeals) by following the judgment of the Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics, 345 ITR 494 (Karn), wherein it was held as follows:- "The Supreme Court, in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 705/ 132 Taxman 373, has laid down that provisions of the DTAA prevails over the provisions of the Act if the provisions of the DTAA are more beneficial to the assessee. It is clear on perusal of the definition of 'royalty' under the Act and the DTAA that the definition of 'royalty' is restrictive in the DTAA, whereas the definition of 'royalty' under the Act is broader in its content. Therefore, the definition of 'royalty' in the DTAA is more beneficial to the assessee as according to the assessee, payment is not royalty and, therefore, the royalty in the restricted meaning under DTAA is more beneficial to the assessee and, hence, it is to be found out as to whether the payment made by the assessee would amount to royalty under the clause in the DTAA. Even otherwise, it is clear that if the payment is held to be royalty within the restricted meaning given to the term in the DTAA, naturally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be liable under section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Therefore, if the amount is held to be royalty, the other consequences as referred to above would follow. [Para 17] In view of the definition of 'royalty' given in article 12 of the DTAA, it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to 'royalty' is as follows:- - payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work. It has been universally accepted that a literary work is entitled to copyright and, wherefore, a literary work is entitled to be registered as copyright. Under section 2(o ) of the Copyright Act, 1957, computer software has been recognized as copyright work in India also. [Para 19] In the instant case, in the software licence agreement, it is averred that customer accepts an individual, non-transferable and nonexclusive licence to use the licensed software program(s) program(s) on the terms and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the assessee with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement as referred to above and the non-resident supplier continues to be the owner of the copyright and all other intellectual property rights. If is wellsettled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make a copy itself is a part of the copyright. Therefore, when licence is granted to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. [Para 24] Therefore, the contention of the assessee that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back-up copy would itself amount to copyright work under section 14(1) of the said Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) as the definition of 'royalty' under section 9(1)(vi) is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the instant case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi). In any view of the matter, in view of the provisions of section 90, agreements with foreign countries (DTAA) would override the provisions of the Act. Once it is held that payment made by the assessee to the nonresident companies would amount to 'royalty' within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the assessee to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly these grounds are dismissed as not pressed. 7. Coming to the ground on merits relating to taxation on sale of software as royalty income, it was brought to our notice that similar issue for AY 2011-12 in assessee's own case came up before the Hon'ble High Court of Karnataka in ITA No.7/2019 and vide judgment dated 26.3.2021 it was held as under:- "7. The controversy involved in the present case, as informed by the learned Counsel for the parties stands concluded on account of the judgment delivered by the Hon'ble Supreme Court in the case of ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOME TAX & ANOTHER - AIR 2021 SC 124 / 432 ITR 471 (SC). The Apex Court in the aforesaid case has held in paragraphs 27, 47, 52, 168 & 169 as under: "27. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, "chargeable under the provisions of [the] Act", to a non-resident, shall at the time of credit of such amount to the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 52. There can be no doubt as to the real nature of the transactions in the appeals before us. What is "licensed" by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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