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TMI Blog2017 (3) TMI 1888X X X X Extracts X X X X X X X X Extracts X X X X ..... software expenses have been treated as capital expenditure, placing reliance on various judicial decisions, which hold that the expenses on software are in the nature of capital expenditure and depreciation is to be allowed on the same. As such, expenses on imported software are also in nature of capital expenditure and depreciation needs to be allowed thereon. The A O, therefore is directed to allow the depreciation on the imported software purchased by the assessee This alternative plea raised by the assessee, hence is accepted." From the above discussion it is clear that the Ground No. 3 raised by the AO i.e. disallowance u/s. 40(a)(i)remained unadjudicated that the alternative plea taken by the assessee was accepted. Therefore, we are of the opinion that matter should be placed before regular Bench to decide the issue(GOA-3) afresh." 2. From the perusal of the above, it is clear that arguments on Ground No 3 of the appeal filed by the Revenue are to be heard and the adjudicated afresh by us. 3. During the course of hearing, ld. CIT(DR) assailed the order of Ld. CIT(A) and supported the order of the AO on this issue. It was submitted by him that it was rightly held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions Pvt Ltd [2013] 23 ITR (T) 447 (Mumbai ITAT) - at page 10; para 35 vii. Motorola Inc. [2005] 95 ITD 269 (Delhi ITAT) (SB) - at pg. 66; para 141 upto para 172. 5. It was further argued by the Ld. Senior Counsel that even under the DTAAs of India with respective countries of the suppliers from whom software was purchased, the payment of purchase of software cannot be regarded as 'royalty' since definition of 'royalty' under DTAA is narrower than the definition given in the Act. In support of this proposition, he relied upon the following judgments:- i. Qad Europe B.V. [2017] 77 taxmann.com 267 (Mumbai ITAT) (dt. December 21, 2016) ii. First Advantage (P.) Ltd [2017] 77 taxmann.com 195 (Mumbai ITAT) (dt. January 11, 2017) iii. Reliance Industries Limited [2016] 159 ITD 208 (Mumbai ITAT) (dt. May 18, 2016) iv. M/s Baan Global BV. [2016] 49 ITR(T) 73 (Mumbai ITAT) (dt. June 13, 2016) v. Capgemini Business Services (India) Limited [2016] 158 ITD 1 (Mumbai ITAT) (dt. February 29, 2016) vi. Quaolcomm India (P.) Ltd [2017] 77 taxmann.com 56 (Hyd. ITAT) (dt. October 28, 2016) vii. Infrasoft Limited [2014] 264 CTR 329 (Delhi) viii. Ericsson AB [2012] 343 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 305 (SC) iv. Infotech Enterprises Ltd. Vs. Additional Commissioner of Income Tax [2014] 30 ITR (T) 542 (Hyderabad ITAT) v. Sterling Abrasives Ltd. Vs. Income Tax Officer [2010] 3 taxman.com 757 (Ahmedabad ITAT) 9. Lastly, it was submitted by the Ld. Sr. Counsel that in case two views are possible, then the view in favour of the assessee should be followed in view of following judgements :- Reliance Industries Ltd [2016] 69 Taxmann.com 311 (Mumbai ITAT) (dt. May 18, 2016) Capgemini Business Services (India) Ltd [2016] 68 Taxmann.com 36 (Mumbai ITAT) (dt. February 29, 2016) CIT vs. Vegetable Products (88 ITR 192) (SC) Mysore Minerals vs. CIT (239 ITR 775 (SC) UOI vs. Onkar S. Kanwar (258 ITR 761) (SC) Pradip J Mehta vs CIT (300 ITR 231) (SC) Mahindra & Mahindra vs DCIT (58 TTJ 567 (Mumbai ITAT) 10. The Ld. Senior Counsel requested for upholding the order of Ld. CIT(A) in view of the aforesaid arguments and facts and circumstances of the case. 11. We have gone through the arguments made 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e worth noting:- 1. "LICENSE GRANT 2.1 VERITAS grants Customer, subject to the terms and conditions of this Agreement, a perpetual, non-exclusive, nontransferable license to use the Licensed Software in accordance with the Documentation, on the Designated Computers in the Territory, solely in support of customers internal business operations. 2.2 Customer may make a single copy of the Licensed Software and documentation for archival purposes. All copies made pursuant to this section shall be complete copies, and shall include all copyright, trademark, and other notices in the original. Customer may not otherwise copy the Licensed Software or Documentation without VERITAS'S prior written consent. 2.3 Customer's rights to use the Licensed Software and documentation shall 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (v) of Explanation 2 to section 9(1)(vi) under 'copyright' since computer software is a 'literary work' under the Copyright Act, 1957 of India. * No Copyright right is given within the meaning of section 14 of the Copyright Act since the Appellant does not have any right to reproduce, issue copies of the program to the public to sell the program or give it on commercial rent, etc. * All the title and rights in the software remain with the seller. The Appellant has a perpetual license which is akin to a purchase of a product/goods. * The amount payable by the Appellant to the seller is for transfer of a copyrighted article and not transfer of a copyright per se. * In any case, payment for purchase 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o "M/s. Comas Inc" for procurement of software has been treated as "Royalty" by the AO. Revenue's stand before us is that, now in the wake of Explanation 4 to section 9(1 )(vi) the payment on account of computer software including granting of license which has been brought in the statute by the Finance Act, 2012 with retrospective effect from 1.6.1976 brings such type of payment within the scope and ambit of enlarged definition of "Royalty". Admittedly, at the time of payment to "M/s. Comas Inc' for the software charges in May 2008 by the assessee there was no such provision under the Act that transfer of any right for use or right to use the computer software included granting of license 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 effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re inclined to follow the same. The findings of the Honble Delhi High Court in the case of Infrasoftware Ltd. (supra) are reproduced below: "97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the Karnataka High Court in the case 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 faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the produce reserved to the owner for permitting another to exploit and use the property; a share of the profit, reserved by the owner for permitting another to use the property; the amount reserved or the rental to be paid the original owner of the whole estate." 5. The Madras High Court in CIT vs Neyveli Lignite Corporation Ltd., reported in 243 ITR 458 states thus explaining the concept of Royalty:- 'The term 'royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right 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 Consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Mumbai Bench of the Tribunal in the case of Qad Europe B.V. vs. DDIT (Supra) which has been authored by one of us (i.e. Accountant Member) wherein detailed discussion has been made on the issue before us and after analysing the law, it was held that the payment made for purchase of software for internal use would not amount to payment for 'royalty' as envisaged under the law. It is noted that following observation of the bench may be useful here:- "Now, if we analyse and compare various provisions of the Copyright Act with the relevant clauses of the master agreement, it is noted that the said agreement does not permit HLL to carry 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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