TMI Blog2005 (2) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. 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 also placed reliance on the definition of the term 'Royalty', as mentioned in DTAA. Accordingly, it was held by the ITO that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (Ken); V.V.S. Alloys Ltd. v. Asstt. CIT [2000] 68 TTJ (All.) 516; Dy. CIT v. Tollygunj Club [1995] 52 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out right to exploit the copyright does not amount to use or 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 ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the above, the learned counsel 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andhra Pradesh 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: Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC); Associated Cement Companies Ltd. v. Commissioner of Customs 2001 (128) ELT 21 (SC); R.S. Bhagwat v. Asstt. CIT [2003] 78 TTJ (Mum.) 641; B.K. Roy (P.) Ltd. v. CIT [1995] 211 ITR 500 (Cal); CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC); Gestetner Duplications (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC); UCO Bank v. CIT [1999] 237 ITR 889 (SC); 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 copyright of any software. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latter's failure to deduct tax at source. In the said proceedings, the only contention putforth 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 consequently order under sections 201(1) and 201(1A) was passed by the ITO. (2.2) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions 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 negativing this plea, the Commissioner of Income-tax(A) has rightly adverted to the position that in the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation 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 software development and during the related periods, the appellant had imported software from countries such as USA, France and Sweden. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 is not correct in law in contending that their case is not covered by section 9(1)(vi) of the Act. (5.2) At this stage, it is relevant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing unit of the computer, all the various inputs and computation that are provided. Therefore, to summarise: (5.3) 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, application software etc., is procured, such type of software are recorded on CD ROM or Floppy Diskettes. In other words, the programs are recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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). It can be noticed on a perusal of the foregoing terms and conditions of the Software Licence Agreement entered into between the appellant and the exporter of the software that by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 character of royalty and therefore, the appellant was found to deduct the tax of source in terms of section 195 of the Act. The Commissioner of Income-tax(A) has dealt with the issue with a reasoned threadbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm '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 defined for the purposes of sales tax cannot be taken in a narrow sense. It was held that merely because electric energy was not tangible or would not be mover or touched like, for instance, a piece of wood or a book it would not cease to be movable property when it had all the attributes of such property. It was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on imported computer software loaded on a hard disk drive should be valued on the basis of hard disk simpliciter at 25% under head 84.71 of the Customs Tariff Act, 1975 or on the basis of computer software at 10% under Heading 85.24. It was held by the Supreme Court that hard disk is a refined form of floppy and serves the same purpose of recording mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 to be regarded as equally specific in relation of those goods, even if one of them (sic them) gives a more complete or precise description of the goods. Further, considering imported goods to be a mixture of two substances namely 'hard disk drive' and 'software' as per Rule 3(b) they can be classified under the heading which gives them their essential c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been quoted in the written submission filed by the assessee and the revenue at pages 9 and 25 respectively. The common definition of the term 'Royalty' as per DTAA is quoted below for ready reference: "Payment of any kind received as 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or distributor from which you obtained them for a full refund. 'The terms "Program" means the enclosed Telelogic software program, all whole or partial copies of it (including portions merged into other programs) and all subsequent updates to the software program legally received by you.' 'These general terms and conditions apply to each program licensed by Telelogic AB as well as maintenance and other serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SS 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.EXE): (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 final produce which the end user would use without relinking, rebuilding, or modification and (d) link the BER, PER and DER runtime static libraries (currently labelled *.LIB) into customer's complete application where the application adds significant function to the runtime libraries and is a final product which the end user would use without relinking, rebuilding or modification. All right, title and interest in and to the program(s) and all related ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-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 End User License Agreement constituting a binding agreement between the appellant and the developer of the copyrighted software, whereby, in terms of such agreement, the appellant has acquired the right to use the copyrighted article. At this stage, it is relevant to note the peculiarity of the computer software is that it is not sold in the ordinary sense like any traditional goods or article. By licensing the software and through the medium of the licensing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 becomes goods, which are susceptible to sales-tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become 'goods'. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 it is recorded, be that a disk, tape, hard drive, or other device. It has been held that the fact that the information can be transferred and then physically recorded on another medium does not make computer software any different from any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape or books. It has been held that by sale of the software programme the incorporeal right to the software is not transferred. It is held that the incorporeal right to software is the copyright, which remain ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
