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TMI Blog2021 (7) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... software to Indian resellers/distributors/customers is in the nature of 'royalty' chargeable to tax under Section 9(1)(vi) of the Income-tax Act, 1961 (the Act' for short), and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA'). 3. That the AO erred and the DRP further erred in failing to appreciate that notwithstanding the retrospective amendment made to Section 9(1)(vi) of the Act vide the Finance Act, 2012, the definition of 'royalty' under the DTAA has not undergone anyoApp,9e and that, therefore, the beneficial provisions of the DTAA would continue to apply in the Appellant's case. 4. That the AO erred and the DRP further erred in holding against the Appellant on the issue of taxability of the payments received by it for sale of software by merely following the orders passed by the Hon'ble High Court of Karnataka in the cases of Samsung Electronics Co. Limited, Sunray Computers Ltd. and Rational Software Corporation Ltd. as well as the order passed by the Authority for Advance Rulings in the case of Citrix Systems Asia Pacific Proprietary Limited, despite the said orders being under challenge before the Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore or at the time of hearing." 3. The assessee is a company incorporated in the United States of America and is engaged in the business of developing, manufacturing and distribution of software products. It had entered into agreements with distributors/resellers/customers in India for supplying software products and ancillary support services. The AO treated the same as royalty and charged tax both under the Income-tax Act and DTAA. 4. The same was confirmed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in India are common examples of sums chargeable under the provisions of the Act to which the aforestated requirement of TDS applies. The tax so collected and deducted is required to be paid to the credit of the Central Government in terms of section 200 read with rule 30 of the Income-tax Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under section 201 read with section 221. In addition, he would 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 lit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dges that actuate and its suppliers retain all rights, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trademark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of actuate. Distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to 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 well-settled that copyright is a negative right. It is an umbrella of many rights and licence is granted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted in these cases to the assessee to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a backup copy and right to 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 cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarity between the transaction of purchase of the book or pre-recorded music C.D. or the C.D. containing software and in view of the same, the Legislature, in its wisdom, has treated the literary work like books and other articles separately from 'computer' software within the meaning of the 'Copyright' as referred to above under section 14 of the Copyright Act. [Para 24] It is also clear from the abovesaid analysis of the DTAA, Income-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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to arise in India and no deduction of TDS is made under Section 195(1) of the Income Tax Act, or such person has, after applying Section 195(2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in Section 201 of the Income Tax Act, follow, by virtue of which the resident-payee is deemed an "assessee in default", and thus, is made liable to pay tax, interest and penalty thereon. This position is also made amply clear by the referral order in the concerned appeals from the High Court of Karnataka, namely, the judgment of this Court in GE Technology (supra). 47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of Section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in Sections 14 and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referred to Section 30 of the Copyright Act, inasmuch as Section 30 of the Copyright Act speaks of granting an interest in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (S. 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in Section 195 of the Income Tax Act were not liable to deduct any TDS under Section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph-4 of this judgment. 8. In the light of the aforesaid judgment delivered by the Hon'ble Supreme Court, the question of law framed in the present appeal is decided in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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