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TMI Blog2024 (7) TMI 1480X X X X Extracts X X X X X X X X Extracts X X X X ..... s 6,05,56,914/- to MYCOM (UK) Ltd. on account of software licenses. It was also found that TDS u/s 195(1) of the Act was not deducted on these foreign remittances. 2.1. The AO, on perusal of details (agreements, etc.) submitted by the assessee during the course of verification of the said payments, found that these payments on account of software licenses to Mycom (UK) Ltd. were in the nature of royalty payments and are chargeable to tax as royalty u/s. 9(1)(vi) read with corresponding Articles of relevant DTAA. 2.1 2.2. The AO concluded that tax was required to be withheld as the payments are chargeable to tax u/s.9(1) (vi) r.w.s. 195 of the Act read with corresponding Articles of relevant DAA. 2.3. Therefore, the AO issued show-cause notice to the assessee as to why the assessee should not be treated as assessee in default for failure to deduct tax before making these payments to Mycom (UK). The details of payments are:- Sl. No(s). Financial Year Nature of remittance Amount (in Rs.) 1. 2012-13 Software license 3,00,65,010/- 2. 2012-13 Software license 3,04,91,904/- Total ..... 6,05,56,914/- 2.4. In response to the show-cause notice, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 2.8. The term "use or the right to use any copyright" has also been explained by international commentaries for the purpose of classification of royalty as under: * Payment made for acquiring rights to commercially exploit a copyright like right to reproduce the copyright, right to give copyright on commercial rental would be considered as payment for the use or right to use a copyright; * Payment made for acquiring limited rights to enable the user to operate the program cannot be considered as a right to use any copyright. 2.9. As per assessee, payment made by VWL is only towards use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yright Act,1957. The AO also referred the agreement entered into by Mycom with the assessee and reproduced the releant clauses of the agreement. 2.14. The AO also placed reliance on the judgement of Hon'ble Karnataka High Court in case of Samsung Electronics Co.Ltd. and others, 345 ITR 494(Kar.) wherein it was held that a right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back-up copy would itself amount to copyright work u/s 14(1) of the Copyright Act,1957. 2.15. He concluded that since the assessee is given license which falls in the category of copyright, payment fall in the category of royalty as per DTAA and therefore would be taxable. 2.16. The AO passed order u/s 201(1) of the Act and determined liability of TDS payable along with interest u/s 201(1A) of the Act. 3. Aggrieved by the order of AO, the assessee preferred an appeal before the Ld.CIT(A), who allowed the appeal of the assessee by deleting the demand raised by the AO. While passing his order, the Ld.CIT(A) noted following points: 1. The assessee has not provided any specifications or given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law and on facts in stating that as per the terms of agreement software purchased by the assessee is not a customized software but a standard off the shelf software. iii. The Ld. CIT(A) has erred in law and on facts in stating that payment has been made for acquisition of copyrighted article and has not been made for use of copyright and the same does not amount to transfer of right to use the copyright for internal business as per the terms of agreement and therefore should not be treated as royalty as per the relevant DTAA. iv. The Ld. CIT(A) has erred in law and on facts in stating that no right has been transferred to the assessee for making copies of software therefore the payment for the same does not constitute royalty as per relevant DTAA. v. The Ld. CIT(A) has erred in law and on facts in placing reliance on the judgment of Hon'ble Delhi High Court in the case of Infrasoft Ltd instead of judgment of Hon'ble Karataka High Court in the case of Samsung Electronics Co. Itd. & others of which the facts are more applicable to the case at hand. 2. Applicability of Section 195A of the Act: The Ld. CIT(A) has erred in law and on facts in not adjudicating the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the said judgement are reproduced hereunder: "117. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution agreements/EULAs in the facts of these cases do not create any interest 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 (section 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 manufacturers/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." 7. The Departmental Representative on the other hand relied on the order of AO. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of royalties. The EULAs do not create any interest or right in the distributors/end-users that would amount to the use of or right to use any copyright. Therefore, there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source. The provisions of section 9(1)(vi) and its explanations, not being more beneficial to the assessee than the DTAA, are not applicable in these cases. 8.4. The Revenue also argues that the amounts paid to non-resident computer software manufacturers/suppliers are taxable in India as they constitute income arising from the use of copyright, which should be taxed as royalties. 8.5. The amounts paid by resident Indian end-users to non-resident computer software manufacturers/suppliers, as consideration for the use of the computer software through EULAs, do not constitute the payment of royalties for the use of copyright in the computer software. Consequently, these payments do not give rise to any income taxable in India. Therefore, the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS on these payments. 8.6. Thus, the decisions of the Ld.CIT(A) are upheld. Therefore, Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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