9911796707
TMI Blog2005 (2) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... iances, for computer systems and for mobile devices etc. The software developed by the assessee is for in-house use by the parent company. In the assessment year 1999-2000, the assessee imported software products of Rs. 2,28,960 from Tektronix Inc., USA. Similarly, during the other two years, it imported software products from USA, France and Sweden. According to the assessee, the imported software product, namely, Telelogic Tau TTCN Suite, are readily available software in the market. Hence, payment made to the foreign companies cannot be treated as Royalty, as per the provision of section 9(1)(vi) read with Double Taxation Avoidance Agreements (DTAA for short) between India and USA, India and France respectively. The contention of the assessee was not accepted by the ITO (TDS). It was held by the Assessing Officer that the assessee was a defaulter by not deducting tax from the remittance made by the assessee for purchase of these softwares. The reply of the assessee was not accepted by the Assessing Officer and it was held that as per the provision of section 9(1)(vi) of the Act, the payment made by the assessee is Royalty. Hence, the assessee was bound to deduct the tax. The ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITD 166 (Cal.). 4. The learned counsel further submitted on merits of the case and also filed a written submission in this regard. We shall first deal with the matter on merit. It was submitted that the assessee had imported branded off-the-shelf software packages from different suppliers in the USA, Sweden and France. The relevant documents are placed at pages 4 to 54 of the paper book. The Assessing Officer held that the payments made by the assessee for the import of software packages were in the nature of Royalties being considerations for use of commercial/scientific/industrial equipments as software was in the nature of equipment. Accordingly, the Assessing Officer applied the provisions of Article 12(2)(b) of India-US, Article 12(2) of India-Sweden, and Article 13(2) of India-France treaties to the payments made to the respective suppliers. 5. It was submitted by the learned counsel for the assessee that internationally, as well as in India 'software', which in legal parlance known as 'computer programme' is covered under the broad category of 'literary, artistic or scientific work' which is a copyright. The copyright laws of different countries al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to use the copyright of such literary/artistic/scientific i.e., copyrighted work. (b) In this connection, he drew our attention to the contents in sections 101, 106, 117 and 202 of the Copyright law of USA, the relevant extracts are placed at pages 27 to 38 of the paper book, to the effect that the exclusive right enjoyed by the owner of copyright means the right to reproduce the copyrighted work or to prepare derivative works based upon the same or to distribute the copies of the copyrighted work to the public. Mere making of a copy of the computer programme which is a copyrighted work does not amount to use of the copyright provided such copy is necessary for utilization of the computer or is for archival purposes only. Also, transfer of such copies along with the originals without retaining any copies thereof does not amount to utilization of the copyright. He submitted that section 202 of the US copyright law itself provides that transfer of ownership of any material object including the copy in which the work is first fixed does not itself convey any rights in the copyrighted work embodied in the object as ownership of a copyright or of any of exclusive rights under a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the assessee submitted that under the Indo-France treaty also, income by way of royalty would arise in case of a copyrighted work only if the payer is allowed to commercially exploit such copyright in the copyrighted work. (f) In this connection, the learned counsel for the assessee drew our attention to sections 14(6), 52(1)(aa) to (ad) of the Indian Copyright Act, 1957. According to him, under the Indian copyright law also, unless the owner of the copyright of the computer programme authorizes any other person to do any of the acts mentioned in section 14(b), it cannot be said that he has allowed the other person the use of or right to use the copyright of the computer programme. He submitted that universally a computer programme is categorized as a 'copyrighted work' and transfer of a copy of such computer programme to another person does not amount to allowing the use of the copyright by such other person. He also submitted that the payment received for sale of such copyrighted article is not in the nature of royalty per se, as it does not amount to exploitation of the copyright by the buyer, but it amounts to sale of an article. (g) The learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h High Court in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, Which has been confirmed by the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. (j) The learned counsel in support of his submissions relied on the following decisions: (i) Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC); (ii) Associated Cement Companies Ltd. v. Commissioner of Customs 2001 (128) ELT 21 (SC); (iii) R.S. Bhagwat v. Asstt. CIT [2003] 78 TTJ (Mum.) 641; (iv) B.K. Roy (P.) Ltd. v. CIT [1995] 211 ITR 500 (Cal); (v) CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC); (vi) Gestetner Duplications (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC); (vii) UCO Bank v. CIT [1999] 237 ITR 889 (SC); (viii) State of Madhya Pradesh v. G.S. Dall & Flour Milk [1991] 187 ITR 478 (SC). 7. To sum up the aforesaid submission of the assessee, we find that according to the assessee, the payment made by it does not come within the purview of royalty, as defined in DTAA, which overrides section 9(1)(vi) of the Act. 8. The consideration was paid by the assessee for the acquisition of a copyrighted article. The assessee company had not obtained the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITO had taken up the proceedings in the appellant's case for the latter's failure to deduct tax at source. In the said proceedings, the only contention put forth by the appellant in justification of the non-deduction of tax at source was to the effect that inasmuch as 'software imported by the company is a shrink-wrap product and the same not being customized, no tax amount were deducted'. As referred to in the order itself, the ITO had given one more opportunity to the appellant to furnish written explanation if any. As there was no response, the ITO passed the order under sections 201 and 201(1A) of the IT Act holding that the consideration paid by the appellant for the import of the software partook the character of royalty in terms of the provisions of section 9(1)(vi) of the Act and also in terms of provisions of the DTAA between India and US, India and France and India and Sweden, and consequently, the same was a sum chargeable to tax in India rendering the appellant liable to deduct tax at source in terms of the provisions of section 195 of the IT Act. As there was failure to deduct such tax, the appellant was considered to be an assessee in default and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(1)(vi) of the Act read with the related relevant articles of the DTAA and thereby the provisions of section 195 of the IT Act is attracted in the appellant's case. (2.4) The appellant, aggrieved by the appellate order of the Commissioner of Income-tax(A), has preferred the present appeals assailing the legality of the said order. (3) The appellant has reiterated the two-fold contentions to the effect that (i) the ITO has passed the order without affording opportunity to the appellant and (ii) that the consideration paid by the appellant cannot be considered as royalty under the provisions of section 9(1)(vi) of the Act so as to apply the provisions of section 195 of the said Act to the appellant's case. (4) It is submitted that as elaborated hereafter, the two-fold grounds so urged by the appellant are untenable and unsustainable in law and that the appellate order is to be upheld as the same is in accordance with the related statutory provisions and the settled principles governing the applicability of the same. (4.1) It is submitted that the contention putforth by the appellant regarding the violation of principles of natural justice is not tenable. In negativi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urged that 'royalty' in respect of the subject-matter of copyright can only relate to such payments for the use i.e., exploitation of the copyright of such literary/artistic or scientific work and that in order to be classified as royalty, the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which are otherwise protected by the respective copyright law in favour of the owner of the copyright in that the acquisition of a product, wherein the subject-matter of copyright is embedded without right to exploit the copyright does not entail use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work. On such premise, it is claimed that the consideration paid by the appellant towards the import of software does not partake the character of royalty so as to apply the related provisions of the IT Act. The appellant has also strongly relied upon the recent Supreme Court decision in the case of Tata Consultancy Services. (4.4) The plea so put forth by the appellant is patently untenable and unsustainable in law. (5) As mentioned earlier, the appellant is in the business of sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the computer or computer based equipment under the approved scheme/policy there is a categorical legislative recognition of the position that when on the other hand, there is sale of computer software alone unaccompanied by sale of computer or computer based equipment, such sale of computer software involving transfer of all or any rights including the granting of licence, would come within the ambit of the provisions of section 9(1)(vi) of the Act. Thus, a transaction involving transfer of all or any right including granting of a licence would come within the ambit of section 9(1) of the Act. (5.1) In the present case, admittedly the appellant has purchased the software and such purchase is not along with supply of any computer or computer based equipment. It is also extremely relevant to note that the supply of such software by the nonresident and the corresponding consideration paid by the appellant herein for such software is towards transfer of rights in the software as contemplated in the End User Licence Agreement. The appellant's case is, therefore, governed by the provisions of section 9(1)(vi) of the Act read with relevant article of the DTAA. The appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commands. Once so called or invoked, the program will begin to issue all the instructions contained on the storage medium and process through the processing unit of the computer, all the various inputs and computation that are provided. Therefore, to summarise: (i) A software program is essentially a series of commands issued to the hardware of the computer that enables the computer to perform in a particular manner. (ii) The software program to be effective needs to be integrated with the hardware of the computer in such a manner so as to enable the series of commands to be initiated by the operator and in order that the computer can call upon any part of the series of commands at a given point of time. (iii) To render the foregoing phenomena the sequence of commands must be physically stored on a portion of the computer that can be readily accessed by the processing of the computer and as such the program should be reduced to a form to be capable of being stored and as such programs are, therefore, of a nature that they may be recorded on magnetic media such as a floppy drive or a hard drive. (iv) When computer software, be it of any type such as operation software, appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware as an intangible item has Intellectual Property Right (IPR) embedded therein belonging to the developer/author of the software and the Indian Copyright Law does recognise this position, as referred to above. (5.4) In the present case, it is submitted that, as mentioned earlier, it is an admitted fact that the appellant has imported software under 'End User Licence Agreement' which is a legal agreement entered into between the appellant-importer and the exporter of the software. Such a software licence agreement so entered into is the most common form of agreement entered into in respect of the software. Under such an agreement, the developer of the software licences its intellectual property in the software in favour of the licences. As a result of such agreement, the licensor-developer of the software retains ownership over the copyright in the software and licences out certain rights for use of such software in favour of the licences such as the appellant. The appellant has placed on record the software licence agreement with M/s. Telelogic and with M/s. OSS Nokalva inc. (The related and relevant terms of the agreement with M/s. Telelogic are reproduced elsewhere). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition hereof." It may be noticed that even as per the DTAA with USA, royalties would mean payment of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work etc., and this is similar to the meaning of the expression 'royalty' as contained in Explanation 2 to section 9(1)(vi) of the Act. The meaning assigned to the expression 'royalty' in the DTAA between India and France and India and Sweden, is akin to the meaning as envisaged in section 9(1)(vi) of the Act. (5.6) Thus, it can be noticed that looked from any angle, the consideration paid by the appellant acquires a ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax) Act, 1941, occasion to consider whether lottery tickets were goods. It has been submitted that the lottery tickets were an actionable claim as the essence of a lottery was a chance for a prize. This court noted that definition of 'goods' and held that the term 'movable property' for the purposes of sales-tax could not be taken in a narrow sense. It was held that incorporeal rights, like copyright or an intangible thing like electric energy, were regarded as goods exigible to sales-tax and, therefore, entitlement to a right to participate in a draw, which was beneficial interest in movable property, would fall within the definition of 'goods'. 19. The question whether electricity can be termed as 'goods' again arose before a Constitution bench of this Court in State of Andhra Pradesh v. National Thermal Power Corpn. Ltd. [2002] 127 STC 280. This court, noticing the earlier authorities, held that the definition of 'goods' in Article 366(12) of the Constitution of India was very wide and included all kinds of movable properties. It was held that the term 'movable property' when considered with reference to 'goods' as defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o upon the material on record. The position is analysed thus: "13. Secondly, that a computer and its software are distinct and separate is clear, both as a matter of commercial parlance as also upon the material on record. A computer may not be capable of effective functioning unless loaded with software such as discs, floppies and CD ROMSs. But that is not to say that these are a part of the computer or to hold that, if they are sold along with the computer, their value must form part of the assessable value of the computer for the purposes of excise duty. To give an example, a cassette-recorder will not function unless a cassette is inserted in it: but the two are well known and recognized to be different and distinct articles. The value of the cassette, if sold along with the cassette-recorder, cannot be included in the assessable value of the cassette-recorder. Just so, the value of software, if sold along with the computer, cannot be included in the assessable value of the computer for the purposes of excise duty." Again, in the case of Sprint RPG India Ltd. v. Commissioner of Customs [2002] 2 SCC 486, the Supreme Court was considering the issue as to whether customs duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oppy disk uses flexible plastic like carrier for magnetic recording medium. Information is stored in the hard disk drive using the magnetic recording method which is used to store songs on an audio tape or movies on a video tape. Therefore, hard disk is a refined form of floppy and serves the same purpose of recording material in a more efficient way. The moot difference between the hard disk and the software is that a hard disk is a hardware whereas software is a representation of any type of data and which can be stored in the hard disk. There is a no dispute that a floppy on which software is stored would be taxable under Tariff Heading 85.24. Instead of storing the software on the floppy if it is stored on a hard disk drive, it would not cease to be a software. As stated above, it is an information stored in the hard disk drive using the magnetic recording method. 11. Testing it from the aforesaid rules of interpretation, it would be clear that the disk or the floppy on which computer data is recorded, would be covered by Heading 85.24. Rule 3(a) inter alia provides that when two or more headings each refer to part only of the materials or composite goods, those headings are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, in view of section 90(2), the provisions of DTAA has to be followed. Reliance can be placed on the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 and the decision of A.P. High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 1462 According to the assessee, it had purchased copy righted articles or goods. Right to use any copyright was not transferred in its favour. From the reply filed by the learned standing counsel on behalf of the department, we find that this aspect has been accepted by the revenue that the assessee had received a copyrighted article and through the licence it has acquired the light to use such article. Reference can be made to page Nos. 23 and 24 of the reply at para 5.4 of the written submission filed by the revenue. For better appreciation of the circumstances of the case, let us see the relevant provisions of section 9(1)(vi) of the Act for the purpose of the definition of 'Royalty', which has already been extracted in the reply filed by the revenue at page 6. The definition of the term 'Royalty' as we find in different treaties is almost same. The aforesaid definition has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the definition as provided in the treaties. Apart from the provisions of the treaties, we have to consider the licence agreement entered into by the assessee with foreign companies which has been quoted at page 17 of the paper book filed by the revenue. It has been submitted by the revenue that under such an agreement, the developer of the software licences its intellectual property in the software in favour of the licensee. As a result of such agreement, the licensor of the software retains ownership over the copyright in the software and protects such copyright in the licence. The provisions of one of such licence agreement is quoted below: "This is a legal agreement between you, the end user, and Telelogic AB of Malmo, Sweden. If the terms of this agreement have not been previously accepted by you through order acknowledgement or otherwise the following applied: By opening this sealed disk package, you are agreeing to be bound by these terms and conditions. If you do not agree to the Telelogic general terms and conditions, promptly return the unopened disk package and the accompanying items (including written materials and binder or other containers) to the Telelogic office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30, M.G. Road, Bangalore - 560 001, India (Customer) and Customer accepts an individual, non-transferable and non-exclusive licence to use the licensed software program(s) [Program(s)] on the following terms and conditions. Licensed Program(s) shall include any error corrections, enhancements, or documentation updates related thereto that they be furnished by OSS to customer hereunder or under any Maintenance Agreement that OSS and Customer may enter into from time to time with respect to any Program(s) ('Revisions') LICENCE Customer may (a) If the Program(s) include the ASN. 1 Compilor, use solely for customer's internal business purpose on the single designated CPU at the designated site by no more than the designated maximum number of users ('Maximum Users') the OSS ASN.1 C++Compilor (currently labelled ASN1CPP): (b) use, copy and distribute for use by customer the OSS runtime "libraries (currently labeled. *DLL and* LIB:(c) distribute and sublicence the OSS runtime dynamic link libraries (currently labelled *.DLL) as part of the customer's complete application where the application adds significant function to the runtime libraries and is a fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomer shall not remove any copyright, confidentiality, or other proprietary rights notice provided by OSS in connection with Confidential Information and any copies thereof which customer may make. Customer shall ensure that, in distributing an application, it does not disclose the Application Programme Interface (API) to the OSS runtime libraries. Customer shall not (to the extent such actions may be prohibited by law) de-compile disassemble or otherwise reverse-engineer the program(s) or any portion thereof, and shall include a similar prohibition in all permitted external distribution." 13. It appears that the argument of the learned counsel appearing on behalf of the assessee that by acquiring the software, the assessee had only received a copy of the copyrighted article and this argument has been accepted by the revenue in its submission which is quoted below: "It can be noticed on a perusal of the foregoing terms and conditions of the Software License Agreement entered into between the appellant and the exporter of the software that by virtue of such license agreement, the appellant acquires the right to use the copyrighted software. Indeed, the software are imported under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided that software is 'goods', is different. 15. We have gone through the decision of the Supreme Court in Tata Consultancy Services case, it has been clearly laid down in that decision that the software is different from the computer and it is to be treated as goods. In this regard, we find that the Hon'ble Supreme Court has not only considered the issue from the angle that whether it is goods for the purpose of Andhra Pradesh Sales-tax Act, but the court has also considered that computer software is 'goods' under article 366(12) of the Constitution of India, holding as follows: "In our view, the term 'goods' as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. A software programme may consist of various commands, which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he physical manifestation of the information in binary form. It has been noticed that at least three program copies exist in a software transaction : (i) an original, (ii) a duplicate, and (iii) the buyer's final copy on a memory device. It has been noticed that the program is developed in the seller's computer then the seller duplicates the program copy on software and transports the duplicates to the buyer's computer. The duplicate is read into the buyer's computer and copied on a memory device. It has been held that the software is not merely knowledge, but rather is knowledge recorded in a physical form having a physical existence, taking up space on a tape, disc or hard drive, making physical things happen and can be perceived by the senses. It has been held that the purchaser does not receive mere knowledge but receives an arrangement of matter, which makes his or her computer perform a desired function. It has been held that this arrangement of matter recorded on tangible medium constitutes a corporeal body. It has been held that a software recorded in physical form becomes inextricably intertwined with, or part and parcel of the corporeal object upon which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed the definition of 'royalty' in the DTAA, which has been quoted above. The primary condition for bringing within the definition of 'royalty' in DTAA is that the payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc., Right to use of a copyright is totally different from right to use the programme embedded in a cassette or CD or it may be a software. 20. In this case, the assessee had acquired a ready made off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called 'software'. Looking to the circumstances of the case and considering the fact that the definition of 'royalty' as provided in the treaties does not apply to the facts of the case. We are of the view that the finding recorded by the authorities below cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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