TaxTMI 
TaxTMI 
2010 (10) TMI 346
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....d disposed of by way of this common order. Both the parties submitted that the issues arising in all these appeals and the facts are similar and the arguments advanced in one case, should be adopted for all other cases. In view of the above submission, we consider the lead order of the learned CIT (Appeals)-XXXI, Mumbai in Appeal No. CIT(A)XXXI/DDIT(IT)2(1)IT-303/02-03/07-08, dated 29-10-2007. 2. The facts of the case are brought out in para 1.1 to 1.6 of the CIT (Appeals)' order which are extracted below for ready reference : "1.1 Reliance Industries Limited, a public limited company (hereinafter referred to as 'appellant') has entered into a license agreement dated 27-12-2001 with M/s TIBCO Software Inc., 3165 Port Drive, Palo Alto, California 94304, USA ("TIBCO") in terms of which M/s TIBCO has granted to the appellant and affiliates perpetual, non-exclusive, irrevocable, royalty-free, unlimited, non-transferable license in connection with the software maintained by M/s. TIBCO which allows internal operations including use of software as its backward infrastructure for ASP services and Web Hosting services Payments of license fees under the agreement were to be made gross ....
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....mentary of Klaus Vogel on 'Double Tax Conventions' wherein the Assessing Officer said it was stated that in Canada and USA payment for using of software by virtue of contract, where program is kept confidential amounts to payment for use of secret formula and hence amounts to Royalty the payment for software even for a fixed or unlimited period would constitute royalty. 1.6 Thus the Assessing Officer held that the software is an intellectual property and falls in the category of copyrights, patents, designs, trade marks, formula, process, commercial/scientific knowledge and therefore consideration received for the license to use the software would constitute royalty. The Assessing Officer thereafter referred to definition of royalty in Article 12(3) of the Indo-USA DTAA and held that that payment for the license of software would also amount to royalty within the provisions of said DTAA. The Assessing Officer also relied upon the decision of AAR's ruling in the case of ABC v. RE (154 CTR 246) and the decision of Hon'ble AAR in P.No. 30/1999 reported in 238 ITR 296. The Assessing Officer also relied upon the decision of PSI Data Systems Ltd. v. Collector of Central Excise [1997] ....
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.... agreed that the issue in question is covered by the following case laws : (i) Hewlett-Packard (India) (P.) Ltd. v. ITO (International Taxation) [2006] 5 SOT 660 (Bang.) (ii) Samsung Electronics Co. v. ITO (TDS) [2005] 94 ITD 91 (Bang.). (iii) Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB). (iv) Lucent Technologies Hindustan Ltd. v. ITO [2004] 3 SOT 757 (Bang.) (v) Airports Authority of India, In re 323 ITR 2111 (AAR - New Delhi). The learned DR, nevertheless relied upon the conclusions drawn by the Assessing Officer and submitted that the Department has not accepted the decisions of the Tribunal cited herein above. Mr. Sonde, on the other hand, filed the detailed charts and case laws in support of the contention that under identical facts and circumstances of the case, the Tribunal has held that the purchase of copyrighted article is different from purchase of copy right itself. 6. We have heard rival contentions. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, w....
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....he software was purchased for the internal use of the assessee and is operational software. The assessee was granted non-exclusive, perpetual,, irrevocable, royalty free, worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, including use of software for ASP Services and web housing services where a software is not directly accessible to third party. 8. The general terms and conditions and the restrictions under which the said software is provided to the assessee, under the license agreement are as follows : (i) The assessee is not entitled to use the software for ASP Services on behalf of third party. (ii) The assessee has no right to use, copy, duplicate or display the software except as specifically provided in the agreement. (iii) The assessee cannot make more copies of the software than what is specified in the agreement. (iv) The assessee cannot provide access to the software to any one, other than assessee's employees, contractors or consultants under a written contract by which all of them would be bound by the terms and conditions as are applica....
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....irectly, and in whole or in part): (a) make more copies of the TIBCO Software than the number of copies, except for a reasonable number of copies for backup and archival purposes; (b) provide access to the TIBCO Software to anyone other than Licensee's employees, contractors, or consultants under written contract with Licensee agreeing to be bound by terms at least as protective of TIBCO as those in this Agreement ("Authorized Users"; (c) sublicense, distribute pledge, lease, rent, or commercially share (including timeshare) the TIBCO Software or any of Licensee's rights herein; (d) except as provided in section 1 above, use the TIBCO Software for purposes of providing a service bureau, including without limitation, providing third party hosting, or third-party application integration or application service provider type services, or for any similar services; (e) use the TIBCO Software in connection with any ultra-hazardous activity, or any other activity for which its failure might result in serious property damage, or death or serious bodily injury; or (f) modify, translate, reverse engineer, decrypt, decompile, disassemble, crate derivative works based on, or otherwise attempt t....
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....ny right for transferring or modifying the software license or decompiling, reverse engineering, or disassembling it. The appellant has also got no power to decode the machine code of software. The appellant has got no power to make copies of software except for backup purposes. From a perusal of the terms of the agreement reproduced above, it is very apparent that the appellant has acquired the right solely in connection with its internal operations and right to use the software is confined for the express purpose of its business. With these facts in mind the taxability of payment received by M/s TIBCO is examined." 11. These factual conclusions of the first appellate authority have not been challenged before us by the learned CIT-DR. The interpretation and scope of the agreements in question, as understood by the learned CIT (Appeals) has not been disputed before us. Thus on this accepted factual matrix, we consider the legal position. 12. The Bangalore Bench of the Tribunal in the case of Samsung Electronic Co. Ltd. (supra) held as follows : "Held, allowing the appeals, that the provisions of the Income-tax Act would be applicable to the extent they were more beneficial....
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....royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue. 156. We must look into the meaning of the word "copyright" as given in the Copyright Act, 1957 section 14 of this Act defines "Copyright" as "the exclusive right subject to the Provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely : (a) in the case of a literary, dramatic or musical work, not being a computer programme,- (i) to reproduce the work in any material form including the storing of it in any medium by electronic means: (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts speci....
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....erence between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in sub-clause (ii) of clause (b) of section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in clauses (a) and (b) of section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the assessee. Further, the Delhi Special Bench of ITAT in paras 162, 168 and 169 held as follows : "162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not ....
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.... in para 168 of the decision when applied to the terms and conditions stated in para 8 of his order, we have to hold that the payment is for a copyrighted article and not for copyright itself. Similarly, the Assessing Officer's observation on which it is a Patent, invention etc. have been dealt in this order. Applying this binding order to the facts of the case, we have to hold that the payment made by the assessee in respect of the software cannot be considered a 'royalty' either under the Income-tax Act or under the DTAA. Once it is not "Royalty" under the Income-tax Act, the assessee has to succeed and it has to be held that no Tax need to be deducted at source, as the payment is "business income" of the party receiving the payment, as that non-resident party does not have a Permanent Establishment in India, as per the D.T.A.A.. The question of taxing the same in India does not arise. All the issues raised by the Assessing Officer have also been dealt with in these cases. Though we have held that the assessee has to succeed under the Indian Income-tax itself and hence there is no requirement of examining the term 'Royalty' under the Indo-US DTAA, as we have heard the parties ....
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....o utilize such copyright in the manner which is otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of a copyright of a copyrighted work is different from use of such work itself. The acquisition of a product, wherein the subject-matter of copyright is embedded, without 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 [Para 6]. Further, as per clause 13.1 of the OECD model commentary, payments made for acquisition of partial rights in copyright would represent a royalty where the consideration is for the right to use the programmes in a manner that would, without such license, constitute an infringement of the copyright. In other words, the payment can constitute royalty only if the transferor grants to the transferee the right to use the copyright of the product. If, on the other hand, the use of the programmes by the transferee (by acquiring a copy of such programme) is in a manner which does not constitute infringement of the copyright, the payment therefor would not amount to royalty. Therefore, under the OECD model commentary al....