TMI Blog2017 (3) TMI 1888X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of software u/s 40(a)(i) for non deduction of tax at source u/s 195 by the said assessee. Hon ble Bench examined latest legal position in this regard and held that impugned payments were not liable to the taxed as royalty in the hands of payees (i.e. suppliers) and therefore, no tax was required to be deducted at source and thus no disallowance could have been made u/s 40(a)(i). Identical situation came up in the case of CIT vs Vinzas Solutions India (P) ltd [ 2017 (1) TMI 1102 - MADRAS HIGH COURT] wherein the department invoked provisions of section 40(a)(i) by treating the amount of purchase of software as royalty under Explanations 4 and 5 of section 9(1)(vi) of the Act and the assessee in the said case was a dealer engaged in buying and selling of software products in the open market. It was contended on behalf of the assessee before the Hon ble High Court that the transaction in question was one of purchase and sale of product and nothing more. Thus we find that it was rightly held by Ld. CIT(A) that TDS was not required to be deducted in this case. Therefore, disallowance made by AO by invoking provisions of section 40(a)(i) has been rightly deleted by Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was rightly held by the AO that the payments made for software purchased by the assessee amounted to royalty as envisaged in Explanation 3 to section 9(1)(vi) of the Act. Therefore assessee ought to have deducted tax at source since assessee failed in deducting tax at source, the AO rightly invoked the provision of section 40(a)(i) of the Act for making disallowance of the impugned payments made by the assessee on account of import of software. It was submitted by him that the software purchased by the assessee is admittedly a shrink wrapped software which has been purchased off the shelf for the purpose of internal use and also for trading purposes. It was submitted that amendment has been made in section 9(1)(vi) of the Act by Finance Act, 2012 and after the amendment the amount paid for the software will clearly be treated as royalty as defined under the Act and therefore liable to tax. It was further submitted by him that in any case even prior to said amendment the amount was liable to be taxed as royalty as was held in many judgments. Reliance was placed by him on the judgment of Karnataka High Court in the case of CIT vs Samsung Electronics Company Limited 345 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft Limited [2014] 264 CTR 329 (Delhi) viii. Ericsson AB [2012] 343 ITR 470 (Delhi) ix. Nokia Networks (358 ITR 259) (Delhi). 6. It was also argued by him that out of the total amount disallowed by the AO of ₹ 25,11,88,831/- a sum of ₹ 5,59,54,982/- was paid on account of purchase of software for the purpose of resale/ trading. In this transaction assessee did not obtain any licence from the supplier and earned only margin for trading or reselling of such software. Therefore, the payment for the software was clearly on account of purchase of goods and cannot be treated as royalty by any stretch of imagination and therefore no disallowance u/s 40(a) (i) can be made in respect of the same. Reliance in this regard was placed following judgments: i. Vinzas Solutions India(P.) Ltd. [2017] 77 Taxmann.com 279 (Madras) ii. M tech India (P.) Limited [2016] 381 ITR 31 (Delhi) (dt. January 19,2016) iii. Dynamic Vertical Software India P. Ltd. [2011] 332 ITR 222 (Delhi). 7. Ld. Senior Counsel then distinguished the judgment of Hon ble Karnataka High Court relied upon by the Ld. CIT DR in the case of Samsung Electronic Company Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by both the sides, orders passed by the lower authorities and also the judgements relied upon before us. 12. The brief facts are that during the impugned assessment year, the assessee purchased software from local market as well as from abroad. The amounts paid aggregating to ₹ 25.11 crores towards software purchased by way of imports were disallowed by the AO u/s 40(a)(i) on the ground that the assessee failed to deduct tax at source u/s 195 of the Act upon the payments made to the foreign suppliers. On the basis of facts recorded by the lower authorities it is noted that expenditure claimed as deduction on account of purchase of software by the assessee which was disallowed by the AO comprises of following two categories:- Particulars Amount Software for internal use ₹ 19,52,33,849 Software for trading purposes ₹ 5,59,54,982 Total ₹ 25,11,88,831 The admitted case of both the parties before us is that it is a case of purchase of shrink wrapped software . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be limited to those expressly granted in this Section 2. All rights not expressly granted to Customer are retained by VERITAS. 3. LICENSE RESTRICTIONS Customer shall not without VERITAS'S prior written consent, cause or permit the: (a) use, copying, modification, rental, lease, sublease, sublicense, or transfer of the licensed Software or Documentation, except as expressly provided in this Agreement; (b) creation of any derivative works based on the Licensed Software or Documentation, (c) reverse engineering, disassembly, or decompiling of the Licensed software; (d) use of the Licensed Software or Documentation in connection with a service bureau or like activity whereby Customer, without purchasing a license from VERITAS, operates or uses the licensed Software or Documentation for the benefit of a third party who has not purchased a copy of the Licensed Software; or (e) use of the Licensed Software or Documentation by any party other than Customer. In addition, Customer may only use the Licensed Software on a host based device that is the Designated Computer to which such Licensed Software is licensed. In addition, Customer shall use the Licensed So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of software for the purpose of trading cannot be regarded as payment of royalty . 15. Finally, after analyzing the facts of this case and legal possession applicable at that time, it was held by Ld. CIT(A) that the amount paid by the assessee for purchase of aforesaid software would not fall within the definition of royalty as envisaged under the law and was thus not taxable in the hands of the payee in India in absence of there being any PE of the vendors in India. Relevant portion of his findings is reproduced below :- 3.8.16. I have considered the contentions of the appellant, facts of the case as well as the contentions of the Ld. Addl. CIT in this regard. I agree with the contentions put forth by the appellant that the payment towards purchase of software product is payment for copyrighted article and hence, it only represented the purchase price of an article and could not be considered as Royalty either under the Act or under the Act or under the DTAA. It is purely in the nature of Business Income and in the absence of Permanent Establishment (PE) in India of the Non-resident (NRs) payees, the amount to remitted to NRs are not chargeable to tax. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se irrespective of medium through which such right is transferred was not there in the statute. The case of the assessee has been that it has only purchased software for its banking business and license was given only for using the software. There is no transfer of any copyright albeit it was the transfer of the copyrighted article. Without going into the merits whether the said payment will fall within the nature of Royalty under the newly amended provision brought with retrospective effect or not, we are of the opinion that, at the time of making of the payment there was no such provision under the law to tax such payment of computer software as Royalty . In fact, as pointed out by the Id. CIT (A), the decision of Special Bench in the case of Motorola Inc (supra) was there wherein it was held that if the licensees Js not allowed to exploit the computer software commercial]), which they had acquired required under the license agreement and only the copyrighted software which by itself was an article and not any copyright therein, then, the payment made for copyrighted article which represented the purchase price cannot be considered as Royalty under the provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Samsung Electronics Co. Lid. (supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functiona1 and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software. Thus, respectfully following the proposition laid down by the Hon'ble Delhi High Court, we hold that the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is a tailor-made to meet the requirement of a buyers does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefore being regarded as 'royalty' 6. Courts have consistently noted the difference between a transaction of sale of a 'copyrighted article' and one of 'copyright' itself. See Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 LTR 401 [SC]; Sundwiger EMFG [2004] 266 ITR 110; Dassault Systems K.K., In Re, [2010] 229 CTR 125 [AAR]; ISRO Satellite Centre [ISAC], in Re [2008] 307 ITR 59 [AARJ and Asia Satellite Telecommunications Co. v. DIT [20111 332 ITR 340 [Delhi]. 7. The provisions of section 9(1)(vi) as a whole, would stand attracted in the case of the latter and not the former. Explanations 4 and 7 relied by the authorities would thus have to be read and understood only in that context and cannot be expanded to bring within its fold transaction beyond the realm of the provision. The Tribunal has relied on the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out any alteration or conversion of any nature, so as to fall within the definition of adaptation as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of HLL in India and no right was given to HLL for commercial exploitation of the same. It is also noted that the terms of the agreement do not allow or authorise HLL to do any of the acts covered by the definition of copyright . Under these circumstances, the payment made by HLL cannot be construed as payment made towards use of copyright particularly when the provisions of Indian Income-tax Act and DTAA are read together with the provisions of the Copyright Act, 1957. 17. Further, it is also noted by us that DTAAs of few countries make a specific mention that payment made for software would be included within the definition of Royalty . Reference can be made to the DTAA with Malayasia, Romania, Kazakhistan and Morocco. However India Netherlands DTAA does not include software while defining Royalty . Under these circumstances, we find that it would be difficult to characterise the payment received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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