TMI Blog2021 (10) TMI 857X X X X Extracts X X X X X X X X Extracts X X X X ..... liers, 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. - Decided in favour of assessee. - ITA No. 630/DEL/2017 And ITA No. 5814/DEL/2017 - - - Dated:- 1-7-2021 - Shri N.K. Billaiya, Accountant Member, And Shri Sudhanshu Srivastava, Judicial Member For the Assessee : Shri Sachit Jolly, Adv For the Revenue : Dr. Prabha Kant, CIT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, These two appeals by the assessee are preferred against the two separate orders of the Assessing Officer dated 14.12.2016 and 25.05.2017 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] for Assessment Years 2013-14 and 2014-15 respectively. 2. Since the underlying facts in the issues are identical in both the appeals, they were heard together and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring. 5. The sum and substance of the entire grievances is that the Assessing Officer and the DRP have erred in assessing the Revenue s of the appellant from off-shore supply of standardised/shrink wrapped software as income in the nature of Royalty and taxing the same under the provisions of section 9(1)(vi) of the Act r.w Article 12 of the India- Singapore DTAA. 6. The Revenue s stand can be understood from the following findings /observations of the DRP: ARTICLE 16 SOFTWARE. The sale and purchase of PRODUCTS hereunder shall not be construed as a sale and purchase of any pproprietary rights in PRODUCTS which are in the form of software or in software which is embedded in PRODUCTS which are in the form of hardware. Consistent with Article 20 below, and for the sales territory of GE Fanuc Systems, OE Fanuc-NA hereby grants GE Fanuc Systems the right to distribute those PRODUCTS which are in the form of software and to distribute any other software embedded in PRODUCTS which are in the form of hardware. Ad such distributions by GE Fanuc Systems shall be according to terms and conditions approved by GE Fanuc-NA and sufficient to protect the proprietary rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis Centre of Excellence Pvt Ltd in a bunch of appeal in Civi l Appeal Nos. 8733 8734 of 2018 and others. 11. The Hon'ble Supreme Court at para 3 observed as under: 3. One group of appeals arises from a common judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494 , by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to non-resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 [ Income Tax Act ], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [ TDS ] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue. 12. The Hon'ble Supreme Court at para 4 observed as under: 4. The appeals before us may be grouped into four categorie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... py would itself amount to copyright work under section 14(1) of the Act and licence is granted to use the software by making copies, which [would], but for the licence granted, have constituted infringement of copyright and the licensee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent-supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act as referred to above Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software, or off-the-shelf software is not the price of the C.D. alone nor software alone no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident 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 respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and consequences would follow as held by the hon'ble Supreme Court while remanding these appeals to this court. Accordingly, we answer the substantial question of law in favour of the Revenue and against the assessee by holding that on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was not justified in holding that the amount(s) paid by the respondents) to the foreign software suppliers was not royalty and that the same did not give rise to any income taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following order: All the appeals are allowed. The order passed by the Income-tax Appellate Tribunal, Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income Tax Act. 17. Further, at para 105, the Hon'ble Supreme Court considered the submissions of the Additional Solicitor General on application of amendment made vide Finance Act, 2012 w.r.e 01.06.1976 and observed as under: 77. It is equally difficult to accept the learned Additional Solicitor General s submission that explanation 4 to section 9(1)(vi)of the Income Tax Act is clarificatory of the position as it always stood, since 01.06.1976, for which he strongly relied upon CBDT Circular No. 152 dated 27.11.1974. Quite obviously, such a circular cannot apply as it would then be explanatory of a position that existed even before section 9(1)(vi) was actually inserted in the Income Tax Act vide the Finance Act 1976. Secondly, insofar as section 9(1)(vi) of the Income Tax Act relates to computer software, explanation 3 thereof, refers to computer software for the first time with effect from 01.04.1991, when it was introduced, which was then amended vide the Finance Act 2000. Quite clearly, explanation 4 cannot apply to any right for the use of or the right to use 78. Furthermore, it is equally ludicrous for the aforesaid amendment which also inserted e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) 156. It is significant to note that after India took such positions qua the OECD Commentary, no bilateral amendment was made by India and the other Contracting States to change the definition of royalties contained in any of the DTAAs that we are concerned with in these appeals, in accordance with its position. As a matter of fact, DTAAs that were amended subsequently, such as the Convention between the Republic of India and the Kingdom of Morocco for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes On Income,48 [ India- Morocco DTAA ], which was amended on 22.10.2019,49 incorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Collector of Customs, 2000 (1) SCC 727 (see paragraph 21), the former amounting to partin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
