TMI Blog2015 (10) TMI 2853X X X X Extracts X X X X X X X X Extracts X X X X ..... orities treated the receipt from sale of software product as royalty solely relying upon the nomenclature of the product given in the invoice as intellectual value which is also the case in the impugned assessment year. Tribunal, taking into consideration such fact has given a categorical finding that the amount received by the assessee towards sale of software products cannot be treated as royalty and thereby accepted assessee s claim of business income. As there is no material difference in the facts considered by the Tribunal in assessment year 2007 08 and the impugned assessment year, we accept assessee s claim that the amount received from sale of software product cannot be considered as royalty but is the business income of the assessee, hence, as per the provisions of India USA treaty it is not taxable in absence of a P.E - Assessee appeal allowed. - SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER For the Assessee : Shri Rahul Mitra a/w Shri Paras S. Savla For the Revenue : Shri Jasbir S. Chauhan ORDER PER SAKTIJIT DEY, J.M. These two appeals by the assessee are against the assessment orders passed under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Article-5 of India USA DTAA as the assessee is not having a P.E. in India. When the Assessing Officer called upon the assessee to justify its claim, it was stated by the assessee that as per the terms of the distribution agreement, the Indian subsidiary i.e., Onward Novell Software India Pvt. Ltd. (ONSIL) receives the product software on mediums like CDs, DVDs, etc. and the Indian company does not carry out any other task on the product other than distributing them to the customers. It was submitted, it is sale of a copy righted article and not right to use copy right in the article. The Assessing Officer after perusing the invoices submitted by the assessee, noticed that the assessee has mentioned the product sold as intellectual value . He, therefore, formed an opinion that what is received by the assessee is towards the right to use the intellectual property by the purchaser in India. The sum and substance and Assessing Officer s reasoning for not accepting assessee s claim are as under:- a) The invoices no. 1 to 56, indicate sale of intellectual value of Rs. 63,67,937. b) The intellectual property rights continue to remain with assessee. c) What is collected a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before us that the Tribunal in assessee s own case for the assessment year 2007-08, has decided the issue in assessee s favour by holding that the income from sale of software is a business receipt and not royalty and, hence, not taxable in India as the assessee has no P.E. in India. In this context, the learned Counsel for the assessee specifically drew our attention to the observation made by the Tribunal in Para-11 to 20 of the order passed in ITA no. 4368/Mum./2010, order dated 20th November 2011, reported in [2011] 16 Taxmann.com 186 (Mum.). He also relied upon the decision of the Tribunal, Hyderabad Bench, in ADIT (IT)-I, Hyderabad, v/s Locuz Enterprise Solutions, [2015] 61 Taxmann.com 47 (Hyd.). 8. The learned Departmental Representative on perusing order of the Tribunal, Mumbai Bench, in assessee s own case also agreed that the issue in dispute is covered in favour of the assessee by virtue of the order passed by the Tribunal. 9. We have considered the submissions of the parties and perused the material available on record. There is no dispute to the basic facts involved in the present case. The assessee has entered into two types of transactions with its Indian sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of original work an exclusive right to do certain specified acts in respect of its work such as 'to reproduce the work in any material form including the storing of it in any medium by electronic means or 'to issue copies of the work to the public etc. It is thus seen that in essence copyright means the right to copy the work which may be in the nature of intellectual property like patent, trademark, trade secret etc. Reproduction of the work or to issue copies of the work in the context of computer programmes is akin to making copies of it. Thus copyright of a computer programme means the exclusive right to reproduce it in any material form or copy it. When we read section 9(1)(vi) in the setting of royalty from copyright of computer programmes, it becomes manifest that the consideration paid assumes the character of royalty if it is for reproducing the same in any material form or issuing copies of it etc. As per agreement A, the assessee authorized NIPL to duplicate its computer software programme, which is the same thing as reproducing it in any material form or issuing copies of it. The duplicated products so made by NIPL were as a result of grant of exclusive r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows that by acquiring the Novell products from the assessee, neither the end users nor NIPL acquired any copyright over the computer software of the assessee. Since the consideration of Rs. 58.29 lakh in question is sale price of the copyrighted product and not a consideration for transfer of copyright in the software of the assessee, in our considered opinion, the authorities below were not justified in treating it as royalty income. 14. The learned Departmental Representative has placed strong reliance on the ruling given by the Authority for Advance Rulings in Millennium IT Software Ltd., In re [(2011) 338 ITR 391 (AAR)]. It was argued that in this case it has been held in para 41 that : When that right of user is given, the right to use the copyright is also given. On the terms of the Income-tax Act, read in the light of the Copyright Act, the right granted for use of a copyrighted article for consideration, would also be royalty since going by the relevant definition, the grant of right to use the copyrighted article would also be a licence by the owner of the copyright, though limited in nature, limited to the use of the other contracting party alone, without entitling th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration paid by ICEL to the applicant . . It is thus amply borne out that the facts of the instant case are materially different from those considered by the Authority for Advance Ruling in the case of Millennium IT Software (supra). Neither it is the case of the AO/CIT(A) nor any material has been brought to our notice by the ld. DR to disclose that the end users of the Novell Products were entitled to copy it and use it wherever needed. When the right to copy a product is assigned, the payment obviously assumes the character of royalty. But if it is consideration only for the use of a copyrighted product divorced from the right to copy the same, it, by no stretch of Imagination, can be construed as royalty for the obvious reason that the right to copy, which is sine qua non of copyright, is lacking. 15. It is observed that the assessee is a resident of USA. In that view of the matter, it would be apposite to consider the DTAA. The Assessing Officer has also considered Article 12 of the treaty which deals with Royalties and fees for included services. Clause 3 of Article 12 defines royalties as under:- 3. The term royalties as used in this article means: (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said sum of Rs. 58.29 lakh has been received by the assessee not as a consideration for the use of, or the right to use any copyright of a computer software but is a consideration for acquisition of the computer software meant for the exclusive use of the end users, it cannot be brought within the ambit of Article 12(3). 17. It would be relevant to note at this juncture that the authorities below appear to have been swayed by the nomenclature of 'Intellectual value given in the invoices raised by the assessee on NIPL. It is an elementary principle, which is fairly settled that in order to construe an agreement, one has to look at the essence of it rather than its form. No party can get rid of the consequences merely for describing a particular item in a particular form though in essence and in substance it may be a different transaction. Going by the same logic, if an item of expenditure is given the name of an asset, it shall remain expenditure and will not find its place in the balance sheet. Similarly if an item of income is given the name of liability, it shall not shed its character of income merely for the reason that the assessee described it as liability. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any income to the non-resident u/s 9(1)(i) of the Income-tax Act. But if the non-resident earns royalty income from India, it is chargeable to tax u/s 9(1)(vi) in his hands despite his status of non-resident. Once a payment made by an Indian to a non-resident is chargeable to tax in his hands, it becomes the duty of the Indian payer to deduct tax at source in terms of section 195. If the payer fails to deduct tax at source, the mandate of section 40(a)(i) is attracted and as such the payer suffers disallowance of the amount paid in its assessment. Clause (i) of section 40(a) specifically provides that any royalty etc. chargeable under this Act, which is payable outside India or in India to a non-resident, not being a company or a foreign company, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed u/s 200(1), shall be disallowed. Thus it follows that if royalty is paid by an assessee to a non-resident which is chargeable to tax in the hands of such nonresident, it is the duty of the payer to deduct tax at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference in the facts considered by the Tribunal in assessment year 2007 08 and the impugned assessment year, respectfully following the aforesaid order of the co-ordinate Bench, we accept assessee s claim that the amount received from sale of software product cannot be considered as royalty but is the business income of the assessee, hence, as per the provisions of India USA treaty it is not taxable in absence of a P.E.. We, therefore, delete the addition of Rs. 62,93,417. 10. In grounds no. 3 and 4, assessee challenged levy of interest under section 234A and 234B of the Act. 11. Both the parties agreed before us that levy of interest under section 234A and 234B is consequential in nature. Hence, the Assessing Officer is directed to give consequential effect in view of findings given as aforesaid and in accordance with law. 12. In ground no. 5, assessee has raised issue of short credit of TDS. 13. After considering the submissions of the parties, we remit this issue to the file of the Assessing Officer to verify and give effect to the TDS. 14. In the result, assessee s appeal stands partly allowed. We now take up assessee s appeal in ITA no. 6041/ Mum./2011, f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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